<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 000-21193
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SUNTERRA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MARYLAND 95-4582157
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
</TABLE>
1781 PARK CENTER DRIVE
ORLANDO, FLORIDA 32835
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
(407) 532-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Number of shares of common stock outstanding of the issuer's Common Stock,
par value $0.01 per share as of November 1, 1998: 35,902,671.
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SUNTERRA CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three and nine 3
months ended September 30, 1998 and September 30, 1997......
Consolidated Balance Sheets as of September 30, 1998 and 4
December 31, 1997...........................................
Consolidated Statements of Cash Flows for the nine months 5
ended September 30, 1998 and September 30, 1997.............
Notes to the Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations...................................
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 16
Signatures........................................................... 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUNTERRA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Vacation ownership sales............................ $ 103,292 $ 79,915 $ 260,834 $ 210,261
Interest income..................................... 14,208 11,488 38,979 29,529
Gain on sale of receivables......................... 1,032 -- 1,032 --
Other income........................................ 8,520 2,831 22,207 9,495
----------- ----------- ----------- -----------
Total revenues............................... 127,052 94,234 323,052 249,285
----------- ----------- ----------- -----------
COSTS AND OPERATING EXPENSES:
Vacation ownership cost of sales.................... 24,291 19,579 61,928 54,317
Advertising, sales and marketing.................... 45,472 35,718 117,849 94,757
Loan portfolio:
Interest expense -- treasury.................... 1,743 2,939 5,919 10,877
Other expenses.................................. 727 1,145 2,930 4,457
Provision for doubtful accounts................. 3,252 2,278 9,412 6,013
General and administrative.......................... 13,182 10,231 37,247 30,793
Depreciation and amortization....................... 3,409 1,604 8,219 4,269
Merger and acquisition costs........................ -- 4,077 -- 9,973
----------- ----------- ----------- -----------
Total costs and operating expenses........... 92,076 77,571 243,504 215,456
----------- ----------- ----------- -----------
Income from operations.............................. 34,976 16,663 79,548 33,829
Interest expense -- other, net of capitalized
interest.......................................... 11,416 4,304 28,014 7,160
Equity loss on investment in joint ventures......... 38 6 7 126
Minority interest in income of consolidated limited
partnership....................................... -- -- -- 123
----------- ----------- ----------- -----------
Income before provision for income taxes and
extraordinary item................................ 23,522 12,353 51,527 26,420
Provision for income taxes.......................... 9,173 4,941 20,095 10,387
----------- ----------- ----------- -----------
Income before extraordinary item.................... 14,349 7,412 31,432 16,033
Extraordinary item, net of income taxes............. -- 248 129 766
----------- ----------- ----------- -----------
Net income.......................................... $ 14,349 $ 7,164 $ 31,303 $ 15,267
=========== =========== =========== ===========
Earnings per share:
Basic:
Income before extraordinary item................ $ 0.40 $ 0.21 $ 0.88 $ 0.46
Extraordinary item, net of taxes................ -- (0.01) (0.01) (0.02)
----------- ----------- ----------- -----------
Net income...................................... $ 0.40 $ 0.20 $ 0.87 $ 0.44
=========== =========== =========== ===========
Diluted:
Income before extraordinary item................ $ 0.38 $ 0.20 $ 0.85 $ 0.45
Extraordinary item, net of taxes................ -- -- (0.01) (0.03)
----------- ----------- ----------- -----------
Net income...................................... $ 0.38 $ 0.20 $ 0.84 $ 0.42
=========== =========== =========== ===========
Weighted average number of common shares
outstanding....................................... 35,888,000 35,562,000 35,888,000 35,081,000
Weighted average number of common and potentially
dilutive common shares outstanding................ 40,793,100 36,480,000 41,357,000 35,853,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
SUNTERRA CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ 58,180 $ 38,487
Cash in escrow.............................................. 27,440 9,485
Mortgages receivable, net of an allowance of $26,110 and
$22,916 at September 30, 1998 and December 31, 1997,
respectively.............................................. 386,889 331,735
Due from related parties.................................... 22,929 25,576
Other receivables, net...................................... 32,741 17,669
Income tax refund receivable................................ -- 4,719
Prepaid expenses and other assets........................... 22,832 13,047
Investments in joint ventures............................... 21,942 15,657
Real estate and development costs........................... 303,350 219,299
Property and equipment, net................................. 68,939 35,024
Intangible assets, net...................................... 95,556 50,447
---------- --------
Total assets...................................... $1,040,798 $761,145
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 18,814 $ 25,196
Accrued liabilities......................................... 75,566 68,047
Due to related parties...................................... -- 1,032
Income taxes payable........................................ 9,000 --
Deferred taxes.............................................. 28,585 23,752
Notes payable............................................... 668,755 435,208
---------- --------
Total liabilities................................. 800,720 553,235
---------- --------
Stockholders' equity:
Preferred stock (25,000,000 shares authorized and none
issued or outstanding).................................... -- --
Common stock ($0.01 par value, 100,000,000 shares authorized
and 35,902,671 outstanding at September 30, 1998 and
50,000,000 shares authorized and 35,875,287 outstanding at
December 31, 1997)........................................ 359 359
Additional paid-in capital.................................. 163,290 162,969
Retained earnings........................................... 75,100 43,797
Cumulative currency translation adjustments................. 1,329 785
---------- --------
Total stockholders' equity........................ 240,078 207,910
---------- --------
Total liabilities and stockholders' equity........ $1,040,798 $761,145
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
SUNTERRA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 31,303 $ 15,267
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization............................. 8,219 4,269
Provision for doubtful accounts........................... 9,412 6,013
Equity loss on investment in joint ventures............... 7 126
Minority interest in income of consolidated limited
partnership............................................. -- 123
(Gain) on sale of mortgages receivable.................... (1,032) --
Changes in operating assets and liabilities:
Cash in escrow............................................ (17,949) (6,019)
Due from related parties.................................. (2,500) (10,809)
Prepaid expenses and other assets......................... (8,615) (3,149)
Investment in real estate and development costs........... (126,146) (86,438)
Vacation ownership and point cost of sales................ 61,928 54,317
Other receivables, net.................................... (13,038) (3,232)
Accounts payable and accrued liabilities.................. (978) (12,360)
Income taxes.............................................. 13,461 1,087
Deferred income taxes..................................... 4,833 (152)
Due to related parties.................................... (1,032) (773)
--------- ---------
Net cash used in operating activities....................... (42,127) (41,730)
--------- ---------
INVESTING ACTIVITIES:
Cash paid for acquisition of subsidiaries................. (88,115) (6,787)
Property and equipment.................................... (32,688) (17,108)
Intangible assets......................................... (19,997) (7,400)
Mortgages receivable...................................... (88,522) (83,315)
Proceeds from sale of mortgages receivable................ 99,700 --
Investment in joint venture............................... (828) --
--------- ---------
Net cash used in investing activities..................... (130,450) (114,610)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from notes payable............................... 117,851 24,294
Payments on notes payable................................. (213,586) (152,552)
Proceeds from publicly issued debentures.................. 140,000 338,000
Proceeds from mortgage-backed securities, net of cash
reserve................................................. 99,940 --
Proceeds from equity offering............................. -- 52,926
Net proceeds from bank line of credit..................... 47,200 --
Other..................................................... 321 (287)
--------- ---------
Net cash provided by financing activities................... 191,726 262,381
--------- ---------
Net increase in cash equivalents............................ 19,149 106,041
Effect of exchange rates on cash and cash equivalents....... 544 (429)
Cash and cash equivalents, beginning of period.............. 38,487 20,757
--------- ---------
Cash and cash equivalents, end of period.................... $ 58,180 $ 126,369
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 31,671 $ 13,476
Cash paid for taxes......................................... $ 2,662 $ 9,452
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
SUNTERRA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BACKGROUND
Sunterra Corporation and its wholly-owned subsidiaries (the "Company")
generate revenues from (i) marketing and selling vacation ownership interests at
its resort locations, which entitle the buyer to use a fully-furnished vacation
residence, generally for a one-week period each year, in perpetuity ("Vacation
Intervals"), and vacation points, which may be redeemed for occupancy rights at
participating resort locations ("Vacation Points," and together with Vacation
Intervals, "Vacation Ownership Interests"), (ii) acquiring, developing and
operating vacation ownership resorts and (iii) providing consumer financing to
individual purchasers for the purchase of Vacation Ownership Interests at its
resort locations. The Company also provides resort management and maintenance
services at resorts for which it receives fees paid by the resorts' homeowners'
associations.
In the third quarter of 1998, the Company began the rollout of its
points-based Club Sunterra exchange system. The Club Sunterra system provides
flexibility to the Company's customers by allowing them to redeem points for
occupancies of varying lengths at a unit type of their choice (studio, one-,
two-, three-bedroom) within a network of resorts, rather than a week long stay
at the same resort. The rollout is expected to be completed by the end of the
second quarter of 1999.
In the opinion of management, all adjustments considered necessary for a
fair presentation have been included and are of a normal recurring nature.
Operating results for the three and nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
NOTE 2 -- EARNINGS PER SHARE
Basic earnings per share were calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share were calculated by dividing net income available to common
stockholders after assumed conversion of dilutive securities by the sum of the
weighted average number of common shares outstanding plus all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued. The following table reconciles the number of shares utilized in
the earnings per share calculations for the three and nine months ended
September 30, 1998 and 1997 (amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net income................................ $14,349 $ 7,164 $31,303 $15,267
------- ------- ------- -------
Net income available to common
stockholders after assumed conversion of
dilutive securities(a).................. $15,559 $ 7,164 $34,933 $15,267
------- ------- ------- -------
Weighted average number of common shares
outstanding used in basic earnings per
share (EPS)............................. 35,888 35,562 35,888 35,081
Effect of dilutive stock options.......... 368 918 932 772
Effect of convertible debentures.......... 4,537 -- 4,537 --
------- ------- ------- -------
Weighted average number of common and
potentially dilutive common shares
outstanding used in diluted EPS(a)...... 40,793 36,480 41,357 35,853
======= ======= ======= =======
</TABLE>
- ---------------
(a) The potential effect on net income and on common shares outstanding from the
potential conversion of the Company's 5 3/4% Convertible Subordinated Notes
due 2007 have been included in the calculation of net income, weighted
average number of common shares, and potentially dilutive common shares
6
<PAGE> 7
outstanding used in diluted EPS for the three and nine months ended
September 30, 1998. The Convertible Subordinated Notes may be converted into
shares of common stock at a conversion price of $30.417 per share at any
time prior to maturity
NOTE 3 -- SALES OF MORTGAGES RECEIVABLE
During the third quarter, the Company completed the sale of $101.9 million
of gross mortgages receivable for $99.7 million in cash, in three separate
transactions. After utilizing $66.3 million of the proceeds to purchase the
Harich Tahoe Developments ("HTD") portfolio (Note 4), which was simultaneously
sold, the Company used the remaining proceeds of the sales to repay $17.5
million of debt secured by these receivables and added the remaining $15.9
million in cash to the Company's assets.
In July, as part of the HTD transaction described in Note 4, the Company
sold $69.1 million face value of HTD's mortgages receivable for $66.3 million
and retained a majority interest in the portfolio's excess spread.
On September 30, 1998, the Company sold $21.5 million of mortgages
receivables at their face amount (100% of par), retaining a majority interest in
the receivables' excess spread (defined as the difference between the mortgages
receivable coupon rate and the interest rate on the underlying investment by the
purchaser). Also on September 30, 1998, the Company sold $11.3 million in
mortgages receivable at 105% of their face amount to a separate purchaser. The
Company retained no residual interest in these receivables.
All of these sales were without recourse to the Company for defaults
experienced by the portfolios. As a result of these sales, the Company
recognized a gain on sale of $1.0 million, consisting of a $0.6 million cash
gain and a $0.4 million non-cash gain. The cash portion of the gain resulted
from the sale of receivables at 105% of par value, in which the Company has no
continuing interest in the sold receivables. The non-cash gain resulted from the
Company's sale of mortgages receivable at 100% of par value, in which the
company retained a majority of the excess spread. The gain was calculated based
on the net present value of the Company's portion of the excess spread income
over the life of the mortgages receivable, adjusted for expected prepayments and
defaults.
NOTE 4 -- ACQUISITIONS
In July 1998, the Company acquired HTD, the developer of The Ridge at Lake
Tahoe, for a purchase price of approximately $77.5 million. As part of the
acquisition, the Company concurrently sold $69.1 million face value of HTD's
mortgages receivable portfolio for its $66.3 million book value. The net
purchase price, after giving effect to the concurrent sale of the mortgages
receivable, was $11.2 million.
NOTE 5 -- COMPREHENSIVE INCOME
On January 1, 1998 the Company adopted SFAS No. 130, Reporting
Comprehensive Income ("SFAS 130"). SFAS 130 establishes new standards for the
reporting and display of comprehensive income and its components. Comprehensive
income, as defined, includes all changes in equity (net assets) during a period
from non-owner sources. Adoption of this Statement had no impact on the
Company's consolidated financial position, results of operations or cash flows.
The reconciliation of net income to comprehensive net income is as follows
(amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
1998 1997 1998 1997
------------- ------ ------- -------------
<S> <C> <C> <C> <C>
Net income.......................................... $14,349 $7,164 $31,303 $15,267
Foreign currency translation adjustments............ 737 (216) 544 (429)
------- ------ ------- -------
Total comprehensive income................ $15,086 $6,948 $31,847 $14,838
======= ====== ======= =======
</TABLE>
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Comparison of the three months ended September 30, 1998 to the three months
ended September 30, 1997
Total revenues for the three months ended September 30, 1998 were $127.1
million compared with $94.2 million in the three months ended September 30,
1997, an increase of $32.9 million, or 35%. Vacation ownership revenues
increased 29% in the third quarter of 1998, to $103.3 million from $79.9 million
in the third quarter of 1997. The increase in vacation ownership revenues
reflects increased prices for both points and intervals at the Company's
resorts, increased sales activities at certain of the Company's resorts, the
recording of Vacation Points sales at the Company's Vacation Internationale
("VI") and Global Development Ltd.'s ("Global") points-based vacation clubs,
both of which were acquired in the fourth quarter of 1997, and the recording of
Vacation Interval sales at resorts previously owned by MMG Development Corp.
("MMG"), which were acquired in February 1998.
Interest income increased 23% to $14.2 million in the third quarter of 1998
from $11.5 million in the third quarter of 1997, reflecting the increase in net
mortgages receivable to $386.9 million at September 30, 1998, from $294.8
million at September 30, 1997. The average mortgage receivable note carries a
14.4% interest rate and is fully amortizing over a weighted average period of
nine-years. Gain on the sale of mortgages receivable totaled $1.0 million, which
included a cash gain of $0.6 million and a non-cash gain of $0.4 million. There
were no sales of mortgages receivable in the comparable period of 1997.
Other income increased 204% during the third quarter of 1998 to $8.5
million from $2.8 million in the third quarter of 1997, reflecting a significant
increase in recurring resort management fee revenues paid by the Company's
growing member base. Other income includes rental income, commissions paid for
the origination of European mortgages receivable for a U.K. based financial
institution, and interest income from short-term investments. Other income was
6.7% of total revenues for the third quarter of 1998, compared with 7.1% in the
second quarter of 1998 and 3.0% in the third quarter of 1997.
As a percentage of total revenues, total costs and operating expenses,
excluding merger costs incurred in 1997, improved to 72% during the third
quarter of 1998 from 78% during the third quarter of 1997. The overall
improvement in margins reflects increased economies of scale, higher-margin
sales to current owner families and improving operations at acquired companies
and locations. Total costs and operating expenses, excluding merger costs
incurred in 1997, increased 25% to $92.1 million during the third quarter of
1998 from $73.5 million during the third quarter of 1997.
As a percentage of vacation ownership sales, vacation ownership cost of
sales improved to 23.5% during the third quarter of 1998 from 24.5% in the third
quarter of 1997. This improvement was largely the result of favorable product
cost reductions at some of the Company's more mature resorts, along with a
greater percentage of revenue coming from the Company's comparatively lower
product cost European operations. Vacation ownership cost of sales increased 24%
to $24.3 million in the third quarter of 1998 from $19.6 million in the third
quarter of 1997.
As a percentage of vacation ownership sales, advertising, sales and
marketing expenses improved to 44.1% during the third quarter of 1998 from 44.7%
during the third quarter of 1997, reflecting the continued reduction of
advertising, sales and marketing costs at many of the Company's mature resorts,
offset partially by higher startup costs at the Company's more recently acquired
resorts. Advertising, sales and marketing expenses increased 27% to $45.5
million during the third quarter of 1998 from $35.7 million in the third quarter
of 1997.
Interest expense -- treasury improved to $1.7 million during the third
quarter of 1998, or 1.3% of total revenues, from $2.9 million, or 3.1%, during
the third quarter of 1997, reflecting the Company's continued practice of
financing its mortgages receivable portfolio with the proceeds from securities
offerings, borrowings under the Company's bank credit facilities, and proceeds
from various sales of the Company's receivables rather than with higher cost
hypothecated debt. Interest expense relating to these offerings is classified as
interest expense -- other.
8
<PAGE> 9
Other loan portfolio expenses, which are primarily costs incurred in
servicing the Company's loan portfolio, decreased to $0.7 million in the third
quarter of 1998, from $1.1 million in the third quarter of 1997, due largely to
continued cost savings associated with centralizing the servicing efforts of
Plantation Resorts Group, Inc. ("PRG") and AVCOM International, Inc. ("AVCOM"),
acquired by merger during the first half of 1997.
The provision for doubtful accounts increased $1.0 million to $3.3 million
during the third quarter of 1998, from $2.3 million in the third quarter of
1997. As a percentage of total revenues, the provision for doubtful accounts was
2.6% for the third quarter of 1998, compared with 2.4% for the third quarter of
1997.
The allowance for doubtful accounts as a percentage of gross mortgages
receivable remained at 6.3% at September 30, 1998, unchanged from June 30, 1998,
and down from 6.5% at September 30, 1997. As of September 30, 1998,
approximately 4.4% of the Company's consumer loans were delinquent (scheduled
payment past due by 60 days or more), compared with 4.2% at June 30, 1998, and
4.5% at September 30, 1997. In addition, the Company had commenced deed-in-lieu
of foreclosure action on approximately 2.5% of its consumer loans as of
September 30, 1998, compared with 2.4% at June 30, 1998, and 2.1% at September
30, 1997.
As a percentage of total revenues, general and administrative expenses
improved to 10.4% in the third quarter of 1998 from 10.8% in the third quarter
of 1997, reflecting the continued elimination of duplicative overhead costs in
consolidating acquisitions and greater efficiencies resulting from the Company's
larger size. General and administrative expenses increased 29% to $13.2 million
during the third quarter of 1998 from $10.2 million during the third quarter of
1997. The increase in general and administrative expenses was due primarily to
the acquisition of new resorts, offset partially by savings resulting from
increased efficiencies.
Depreciation and amortization increased $1.8 million, or 113%, to $3.4
million in the third quarter of 1998 from $1.6 million in the third quarter of
1997. As a percentage of revenues, depreciation and amortization increased to
2.7% for the third quarter of 1998 from 1.7% during the third quarter of 1997.
The increase in depreciation and amortization was driven by the amortization of
goodwill associated with the Company's purchases of VI, Global, Marc Hotels &
Resorts ("Marc") and MMG, as well as additional depreciation expense reflecting
a larger base of depreciable assets from the prior year period, including
hardware and software costs related to the development of the Company's Club
Sunterra exchange system.
Interest expense -- other, reported net of capitalized interest, increased
$7.1 million, to $11.4 million for the third quarter of 1998 from $4.3 million
for the third quarter of 1997. The increase was due primarily to increases in
debt from public securities offerings and borrowings under the Company's bank
credit facilities, and from the Company's privately placed, mortgage-backed
securities issued in June 1998.
Income before provision for income taxes increased 43% to $23.5 million in
the third quarter of 1998 from $16.4 million in the third quarter of 1997.
Income before provision for income taxes in the third quarter of 1997 excludes
merger costs of $2.4 million and extraordinary charges of $0.2 million, both net
of taxes.
The Company's income tax rate was 39% and 40% for the three month periods
ending September 30, 1998 and 1997, respectively, resulting in net income of
$14.3 million and $7.2 million.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
Total revenues for the nine months ended September 30, 1998 were $323.1
million compared with $249.3 million in the nine months of 1997, an increase of
$73.8 million, or 30%. Vacation ownership revenues increased 24% to $260.8
million from $210.3 million. The increase in vacation ownership revenues
reflects increased prices for both points and intervals at the Company's
resorts, increased sales activities at certain of the Company's resorts, the
recording of Vacation Points sales at the Company's VI and Global points-based
vacation clubs, both of which were acquired in the fourth quarter of 1997, and
the recording of Vacation Interval sales at MMG, which was acquired in February
1998.
Interest income increased 32% to $39.0 million in the first nine months of
1998 from $29.5 million in the first nine months of 1997, reflecting the
increase in net mortgages receivable to $386.9 million at
9
<PAGE> 10
September 30, 1998 from $294.8 million at September 30, 1997. The average
mortgage receivable note carries a 14.4% interest rate and is fully amortizing
over a weighted average period of nine years. Gain on the sale of mortgages
receivable totaled $1.0 million, which included a cash gain of $0. 6 million and
a non-cash gain of $0.4 million.
Other income increased 134% to $22.2 million in the first nine months of
1998 from $9.5 million in the first nine months of 1997, reflecting a
significant increase in recurring resort management fee revenues paid by the
Company's growing member base. Other income also includes rental income,
commissions paid for the origination of European mortgages receivable for a U.K.
based financial institution, and interest income from short-term investments. As
a percentage of total revenue, other income increased to 6.9% in the first nine
months of 1998, as compared with 3.8% in the first nine months of 1997.
As a percentage of total revenues, total costs and operating expenses,
excluding merger costs incurred in 1997, improved to 75% during the first nine
months of 1998, from 82% during the first nine months of 1997. The overall
improvement in margins reflects increased economies of scale, higher-margin
sales to current owner families, and improving operations at acquired companies
and locations. Total costs and operating expenses, excluding merger costs in
1997, increased 18% to $243.5 million in the first nine months of 1998 from
$205.5 million in the first nine months of 1997.
As a percentage of vacation ownership sales, vacation ownership cost of
sales improved to 23.7% during the first nine months of 1998 from 25.8% during
the first nine months of 1997. This improvement was largely the result of
favorable product cost reductions at some of the Company's more mature resorts,
along with a greater percentage of revenue coming from the Company's
comparatively lower product cost European operations. Vacation ownership cost of
sales increased 14% to $61.9 million in the first nine months of 1998 from $54.3
million in the first nine months of 1997.
As a percentage of vacation ownership sales, advertising, sales and
marketing expenses increased slightly to 45.2% from 45.1%, due to higher
marketing expenses incurred to increase sales at VI, acquired during the fourth
quarter of 1997. In addition, the Company is building infrastructure in offsite
sales centers in the U.S. and Europe, the costs of which were expensed during
the first nine months of 1998, as well as other marketing initiatives to support
the transition to a points-based club product. Advertising, sales and marketing
expenses increased 24% to $117.8 million during the first nine months of 1998
from $94.8 million in the first nine months of 1997.
Interest expense -- treasury improved to $5.9 million during the first nine
months of 1998, or 1.8% of total revenues, from $10.9 million, or 4.4% in the
first nine months of 1997, reflecting the Company's continued practice of
financing the mortgages receivable portfolio with the proceeds from securities
offerings, borrowings under the Company's bank credit facilities, and proceeds
from various sales of the Company's receivables, rather than with higher cost
hypothecated debt. Interest expense relating to these offerings is classified as
interest expense -- other. Other loan portfolio expenses decreased to $2.9
million from $4.5 million, due largely to the cost savings associated with
centralizing the servicing efforts of PRG and AVCOM.
The provision for doubtful accounts increased $3.4 million to $9.4 million
for the first nine months of 1998 from $6.0 million in the first nine months of
1997. As a percentage of total revenues, the provision for doubtful accounts was
2.9% for the first nine months of 1998, compared with 2.4% in the first nine
months of 1997. The increase in the provision as a percentage of revenues, as
compared with the prior period, is related primarily to the Company's internal
review of the aging and collectability of accrued interest at certain of its
properties during the second quarter of 1998.
As a percentage of total revenues, general and administrative expenses
improved to 11.5% in the first nine months of 1998 from 12.4% in the first nine
months of 1997, reflecting the continued elimination of duplicative overhead
costs in consolidating acquisitions and greater efficiencies resulting from the
Company's larger size. General and administrative expenses increased 21% to
$37.2 million during the first nine months of 1998 from $30.8 million during the
first nine months of 1997. The increase in general and administrative expenses
was due primarily to the acquisition of additional resorts in the past year.
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Depreciation and amortization increased $3.9 million, or 91%, to $8.2
million in the first nine months of 1998 from $4.3 million in the first nine
months of 1997. As a percentage of revenues, depreciation and amortization
increased to 2.5% for the first nine months of 1998 from 1.7% for the first nine
months of 1997. The increase in depreciation and amortization was driven by the
amortization of goodwill associated with the Company's purchases of VI, Global,
Marc, and MMG, as well as additional depreciation expense reflecting a larger
base of depreciable assets from the prior period, including hardware and
software costs related to the development of the Company's Club Sunterra
exchange system.
Interest expense -- other, reported net of capitalized interest, increased
$20.8 million, or 289%, to $28.0 million for the first nine months of 1998 from
$7.2 million in the first nine months of 1997. The increase was due primarily to
increases in debt from public securities offerings and borrowings under its bank
credit facilities, and from the Company's privately placed mortgage-backed
securities issued in June 1998.
Income before provision for income taxes increased 41% to $51.5 million for
the nine months ended September 30, 1998 from $36.4 million for the nine months
ended September 30, 1997. Income before provision for income taxes for the first
nine months of 1997 excludes merger costs of $6.0 million and extraordinary
charges of $0.8 million, both net of taxes.
The Company's income tax rate was 39% for both nine month periods ending
September 30, 1998 and 1997, resulting in net income of $31.3 million for the
nine months ending September 30, 1998 and $15.2 million for the nine months
ended September 30, 1997.
YEAR 2000
Background
The Company uses software that will be affected by the date change in the
year 2000 and recognizes that the arrival of the year 2000 poses challenges that
will require modifications of portions of its software to enable it to function
properly. As the year 2000 approaches, date sensitive systems will recognize the
year 2000 as 1900, or not at all. This may cause systems to process critical
financial and operational information incorrectly. This is generally referred to
as the Year 2000 issue. If this situation occurs, the potential exists for
computer system failures or miscalculations by computer programs, which could
disrupt operations.
APPROACH
The Company has named a Year 2000 project director, reporting to the
Company's Vice President and Chief Information Officer, to coordinate the
Company's response to the Year 2000 issue. The Company has established a Year
2000 program office at its headquarters in Orlando, Florida, to handle all
customer requests for compliance, survey, and other general information related
to its Year 2000 programs. The Company has initiated a Year 2000 project (the
"Project") designed to identify and assess the risks associated with its
information systems, products, operations and infrastructure, suppliers and
customers that are not Year 2000 compliant, and to develop, implement, and test
remediation and contingency plans to mitigate these risks throughout the
Company's offices and resort locations. The Project encompasses the following
phases:
PHASE 1 -- PLANNING AND AWARENESS
Key tasks in the Planning and Awareness Phase include defining Year 2000
compliance throughout the Company, developing an initial project plan and
budget, ensuring organizational awareness of Year 2000 compliance, and assessing
the Project's potential impact and resource requirements on the Company. The
Company is in the process of developing an Enterprise Schematic showing
relationships for all computer systems and networks. The Company will accomplish
this by conducting a complete inventory of all sites and resorts worldwide.
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PHASE 2 -- INVENTORY
In the Inventory Phase, the Company will establish a Year 2000 repository,
which will contain all automated systems or inventory elements and every
electronic partner and interface. The Company will assess known business and
technical risks associated with each system and will assign a business priority
to each system or inventory element. The Company will also develop plans, costs
and schedules for the Detailed Assessment Phase.
PHASE 3 -- DETAILED ASSESSMENT
The Detailed Assessment Phase will identify and classify all Year 2000
problems the Company has had and will group these problems into logical
partitions for movement through the correction cycle (resolution, test and
deployment). The Company will assess whether or not to repair, replace or retire
specific affected systems.
PHASE 4 -- RESOLUTION
In the Resolution Phase, the Company will implement resolution decisions
and define system level go/no go decision criteria. The Company will obtain and
apply any needed commercial off the shelf (COTS) Year 2000 resolution products
and/or will develop and execute required customized solutions.
PHASE 5 -- TEST PLANNING
The Test Planning Phase will include developing comprehensive test plans to
prevent non-compliant solutions from reaching production operations. In
addition, the Company will coordinate with third parties and electronic partner
interfaces, formulate contingency plans, and obtain and construct mirror test
environments and data.
PHASE 6 -- TEST EXECUTION
In the Test Execution Phase, the Company will verify that all related
development and test preparations are completed. The Company will fully test
each partition or deployment entity, including bridges and data conversions.
Included in this phase is the involvement of end users in test execution and
user signoff for each compliant partition.
PHASE 7 -- DEPLOYMENT
The Deployment Phase will ensure that contingency plans are in place. The
Company will conduct final coordination with third parties and electronic
partners, stage appropriate bridges and data conversion for deployment, deploy
systems into the production environment, and execute final system validation.
PHASE 8 -- FOLLOW-UP
In the Follow-up Phase, the Company will regulate continued Year 2000
compliance throughout its worldwide operations and will develop procedures to
minimize the impact of compliance efforts on its business operations.
STATUS
As part of an enterprisewide process reengineering commenced in 1997, the
Company is replacing a substantial portion of its existing information systems
with a fully integrated, enterprise information system, the financial portion of
which its vendor warrants to be Year 2000 compliant, and warrants it to be able
to support the majority of the Company's worldwide financial operations. The
Company has been reviewing and will continue to review its financial and
operating systems at each of its offices and resort locations and anticipates
that this review will be completed by the end of 1998. Phase 1 is substantially
complete and Phase 2 is in process, with the Company beginning to make inquiries
of significant third parties as to their Year 2000 readiness.
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The remaining phases are in initial stages and are expected to be ongoing
throughout the first half of 1999. It is the Company's goal to have the Project
completed by the third quarter of 1999. Based upon the analyses conducted to
date, the Company believes the major critical systems at the Company's offices
and resort locations are either currently compliant or will be compliant by the
third quarter of 1999.
COSTS
The Company has not yet quantified the total costs of making its systems
Year 2000 compliant. The Company is in the process of preparing a budget for the
Project. The Company expects that the majority of costs incurred will relate to
repairing certain software, testing systems and retrofitting or replacing some
systems throughout the Company's offices and resort locations. The Company will
capitalize and depreciate the cost of any replacement equipment and software
over the expected useful life of the assets. The Company is expensing as
incurred all costs related to software modification, as well as all costs
associated with the Company's administration of the Project.
RISKS
The Company utilizes computer systems in many aspects of its business and
is continuing to evaluate Year 2000-related risks and to design and implement
corrective actions. The risks associated with the Year 2000 problem are complex
and can be difficult to identify and to address. Even if the Company, in a
timely manner, completes all of its assessments, identifies and tests plans it
believes to be adequate, and develops contingency plans believed to be adequate,
some problems may not be identified or corrected in time to prevent material
adverse consequences to the Company.
The Company's Year 2000 project is currently in the Planning and Awareness
and Inventory Phases, and, with respect to certain information systems and
products, in the Detailed Assessment Phase. The Company believes that its
greatest potential risks for Year 2000 issues are associated with its
information systems and systems embedded in its operations and infrastructure.
The Company has not yet determined the extent of contingency planning that may
be required. The Company has not yet completed its assessments, developed
remediation plans for all problems, developed contingency plans, or completely
implemented or tested any of its remediation plans; therefore, the Company is
not yet in a position to state the total cost of remediation of all Year 2000
issues. As the Year 2000 project continues, the Company may discover additional
Year 2000 problems, may not be able to develop, implement, or test remediation
or contingency plans, or may find that the costs of these activities exceed
current expectations and become material.
In many cases, the Company is relying on assurances from vendors and
service providers that their systems will be Year 2000 compliant. The Company is
exposed to the risk that one or more of its vendors or service providers could
experience Year 2000 problems that impact the ability of such vendor or service
provider to provide goods and services. To date, the Company is not aware of any
vendor or service provider Year 2000 issue that the Company believes would have
a material adverse impact on the Company's operations. However, the Company has
no means of ensuring that its vendors or service providers will be Year 2000
ready. The inability of vendors or service providers to complete their Year 2000
resolution processes in a timely manner could adversely affect the Company's
business or results of operations.
Widespread disruptions in the national or international economy, including
disruptions affecting the financial markets, resulting from Year 2000 issues, or
in certain industries, such as commercial or investment banks, could also have
an adverse impact on the Company. The likelihood and effect of such disruptions
is not determinable at this time.
Readers are cautioned that forward-looking statements contained in this
Year 2000 discussion should be read in conjunction with the Company's
disclosures regarding forward-looking statements contained in the final
paragraph of Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from (i) cash sales and cash down payments from
sales of Vacation Ownership Interests, (ii) interest from its mortgages
receivable portfolio, (iii) rental of unsold Vacation Ownership Interests, (iv)
receipt of management, reservations and club fees, (v) commissions paid for the
origination of European mortgages receivable, where the Company is paid a
commission of 14% of the face value of certain mortgages originated for a third
party U.K. financial institution, and (vi) sales of certain of the Company's
mortgages receivable. In the first nine months of 1998, approximately 50% of
total reported revenues were comprised of cash revenues from these sources.
Additionally, financed vacation ownership sales provide the Company with a
substantial stream of scheduled principal payments and customer prepayments of
principal from its mortgages receivable portfolio.
For the nine months ended September 30, 1998 and 1997, the Company used
$42.1 million and $41.7 million in cash flows from operations, respectively.
Excluding investment in real estate and development costs, the Company generated
cash flows from operations of $84.0 million and $44.7 million for the nine
months ended September 30, 1998 and September 30, 1997, respectively.
Approximately 80% of the Company's total revenues in the first nine months of
1998 were from vacation ownership sales during which period the Company financed
approximately 65% of its vacation ownership sales, with the 35% balance being
cash sales. The Company finances vacation ownership sales and holds the related
mortgages receivable to generate profit from such financing activities. The
Company's significant financing activity typically results in its operating
costs exceeding the initial cash proceeds received from sales of Vacation
Ownership Interests.
The Company has a number of alternatives to raise cash from its mortgages
receivable portfolio. For example, the Company may sell mortgages receivable for
cash, as the Company recently did with its sales of $101.9 million in
receivables in the third quarter of 1998; originate them for a third party
financial institution, and receive a fee, which the Company does in its European
operations; convert them into cash through securitizations such as that recently
completed by the Company in the second quarter of 1998; pledge them against its
bank credit facility; or pursue other alternatives.
When the Company draws on various credit facilities to meet its operating
cash outlays, the Company borrows against or otherwise pledges its mortgages
receivable. Such facilities enable the Company to generate positive cash flows
from financed sales. The Company repays its credit facilities through cash flows
from operations, the sale of mortgages receivable, the principal and interest
payment stream on its mortgages receivable portfolio, or proceeds from the
issuance of pass-through mortgage-backed securities in which the Company sells
certain mortgages receivable and their related principal and interest payments.
Consistent with its growth-oriented strategy, the Company also requires
funds to finance the development of its vacation ownership properties and the
acquisition of additional vacation ownership assets. Such assets include, but
are not limited to, developed and undeveloped vacation ownership resorts,
vacation ownership mortgages receivable portfolios, vacation ownership operating
companies and management contracts. Capital to fund this acquisition and
development activity typically has been provided from the proceeds of public and
private securities offerings and borrowings under its various credit facilities.
During the first quarter of 1998, the Company entered into a $117.5 million
senior bank credit facility (the "Senior Credit Facility"). The Senior Credit
Facility has a variable borrowing rate based on the percentage of the Company's
mortgages receivable pledged under such facility and the amount of funds
advanced thereunder. The interest rate will vary between LIBOR plus 7/8% and
LIBOR plus 1 3/8%, depending on the amount advanced against mortgages
receivable. The Senior Credit Facility has a three-year term and contains
customary covenants, representations and warranties and conditions to borrow. As
of September 30, 1998, $68.0 million was available on the Senior Credit
Facility.
In April 1998, the Company completed its offering of $140 million aggregate
principal amount of its 9 1/4% Senior Notes due 2006. The Company used most of
the proceeds to retire existing indebtedness under the Senior Credit Facility.
The Company used the balance of the net proceeds primarily to finance the
acquisition and development of additional resorts and vacation ownership-related
assets, and for working capital and other general corporate purposes.
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In June, the Company completed its securitization of $100.3 million
aggregate principal amount of vacation ownership receivables -- backed notes
(the "Securitized Notes"). The issue is structured as three classes of fixed
rate notes rated as "AAA" "A" and "BBB". The Securitized notes are secured by
first-mortgage liens bearing an average interest rate of 14.3% on Vacation
Ownership Interests at 14 of the Company's resorts in the United States. At the
time of issuance, the principal balance of the mortgages receivable securing the
Securitized Notes was $106.3 million. The average rate of interest on the
Securitized Notes is approximately 6.7%. The Company issued the Securitized
Notes through a bankruptcy remote subsidiary, with no recourse to the Company
for any defaults experienced by the portfolio. The Company treated the
securitization as a financing transaction for accounting purposes. The mortgages
receivable and the Securitized Notes remain on the Company's balance sheet and
the Company recognized no gain or loss on the transaction. The Company
recognizes both the interest income on the mortgages receivable and interest
expense on the Securitized Notes. The Company used the proceeds primarily to
finance the acquisition and development of additional resorts and vacation
ownership-related assets, and for working capital and other general corporate
purposes. Pending any such additional uses, the Company invests the excess
proceeds in commercial paper, bankers' acceptances, other short-term
investment-grade securities and money-market accounts.
During the third quarter, the Company completed the sale of $101.9 million
of gross mortgages receivable for $99.7 million in cash, in three separate
transactions. After utilizing $66.3 million of the proceeds to purchase the
Harich Tahoe Developments ("HTD") portfolio (Note 4), which was simultaneously
sold, the Company used the remaining proceeds of the sales to repay $17.5
million of debt secured by these receivables and added the remaining $15.9
million in cash to the Company's assets.
In July, as part of the HTD transaction described in Note 4, the Company
sold $69.1 million face value of HTD's mortgages receivable for $66.3 million
and retained a majority interest in the portfolio's excess spread.
On September 30, 1998, the Company sold $21.5 million of mortgages
receivables at their face amount (100% of par), retaining a majority interest in
the receivables' excess spread (defined as the difference between the mortgages
receivable coupon rate and the interest rate on the underlying investment by the
purchaser). Also on September 30, 1998, the Company sold $11.3 million in
mortgages receivable at 105% of their face amount to a separate purchaser. The
Company retained no residual interest in these receivables.
All of these sales were without recourse to the Company for defaults
experienced by the portfolios. As a result of these sales, the Company
recognized a gain on sale of $1.0 million, consisting of a $0.6 million cash
gain and a $0.4 million non-cash gain. The cash portion of the gain resulted
from the sale of receivables at 105% of par value, in which the Company has no
continuing interest in the sold receivables. The non-cash gain resulted from the
Company's sale of mortgages receivable at 100% of par value, in which the
company retained a majority of the excess spread. The gain was calculated based
on the net present value of the Company's portion of the excess spread income
over the life of the mortgages receivable, adjusted for expected prepayments and
defaults.
As of September 30, 1998, the Company had approximately $68.0 million of
additional borrowing capacity available under the Senior Credit Facility at
rates ranging from LIBOR plus 7/8% to LIBOR plus 1 3/8%. The Company also had
approximately $89 million of additional borrowing capacity under its
hypothecated debt lines at prime plus 2%. These hypothecated lines expire
between October 1998 and April 1999. As of September 30, 1998, excluding the
Senior Credit Facility and the Securitization, the Company had $45.5 million
outstanding under its notes payable collateralized by mortgages receivable and
$5.2 million outstanding under its notes payable collateralized by unsold
Vacation Ownership Interest inventory or other assets. Additionally, the Company
had approximately $200 million of mortgages receivable which were unpledged to
any financial institutions and which could be sold or pledged to raise
additional cash as needed.
The Company believes that, with respect to its current operations, the
Senior Credit Facility and borrowing capacity under certain third-party lending
agreements, together with cash on hand and cash generated from operations,
future borrowings, or the sale of receivables, will be sufficient to meet the
Company's working capital and capital expenditure needs for the next twelve
months. However, depending upon conditions in the capital and other financial
markets, the Company's growth, development and expansion
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plans, and other factors, the Company may from time to time consider the
issuance of other debt or equity securities, the proceeds of which would be used
to finance acquisitions, refinance debt, finance mortgages receivable or meet
other operational needs. Any debt incurred or issued by the Company may be
secured or unsecured, may bear interest at fixed or variable rates and may be
subject to such terms, as management deems prudent. As of September 30, 1998,
the Company was in compliance with all applicable covenants in its debt
agreements.
The preceding discussion should be read in conjunction with the financial
statements and notes included elsewhere in this Form 10-Q. The preceding
Management's Discussion and Analysis of Financial Condition and Results of
Operations may contain forward looking statements, which include the Company's
growth and expansion plans, financing plans, future prospects and other
forecasts and statements of expectations. Actual results might differ materially
from those expressed in any forward looking statements due to, among other
things, factors related to the timing and terms the company's new product
development, mortgages receivable financing, integration of acquired properties
and companies, future acquisitions and those factors identified in the Company's
filings with the Securities and Exchange Commission, including those set forth
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997, as amended.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement dated as of September 11, 1998 between the
Company and L. Steven Miller.
10.2 Indemnification Agreement dated as of September 11, 1998 between the
Company and L. Steven Miller.
10.3 Amendment No. 1 to Employment Agreement dated as of March 1, 1998
between the Company and Osamu Kaneko.
10.4 Amended and Restated Employment Agreement dated as of July 27, 1998
between the Company and Michael A. Depatie.
10.5 Form of Option Agreement under 1996 Equity Participation Plan of the
Company, as amended.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
(1) Current Report on Form 8-K, dated July 15, 1998, filed with the
Commission on July 21, 1998, announcing the change in the Company's name from
Signature Resorts, Inc. to Sunterra Corporation.
(2) Current Report on Form 8-K, dated September 9, 1998, filed with the
Commission on September 10, 1998, announcing the appointment of L. Steven Miller
as the Company's Chief Executive Officer and President, effective October 1,
1998, the appointment of Andrew Jody Gessow and Steven C. Kenninger as
Co-Chairmen of the Board of Directors, the appointment of Osamu Kaneko to the
Executive Committee of the Board of Directors, and the consolidation of all
corporate functions into the Company's Orlando, Florida headquarters by
mid-1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
Dated: November 16, 1998 By: /s/ MICHAEL A. DEPATIE
----------------------------------------------
Michael A. Depatie
Director, Executive Vice President,
And Chief Financial Officer
(Principal Financial Officer)
Dated: November 16, 1998 By: /s/ JAMES D. WHEAT
----------------------------------------------
James D. Wheat
Vice President and
Corporate Controller
</TABLE>
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EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of
September 11, 1998, between Sunterra Corporation, a Maryland corporation (the
"Company"), and L. Steven Miller (the "Executive").
1. Employment. The Company hereby agrees to employ the Executive, and
the Executive hereby agrees to be employed by the Company, on the terms and
conditions set forth herein, subject to the approval of and ratification by the
Company's Board of Directors as soon as practicable.
2. Term. The employment of the Executive by the Company as provided in
Section 1 will commence on the first day of Executive's employment with the
Company, which shall occur on or before September 30, 1998 (the "Effective
Date") and will terminate at 12:01 a.m. on the second anniversary of the
Effective Date (the "Expiration Date") unless automatically extended or sooner
terminated as hereinafter provided (such period, the "Employment Period").
Unless terminated by the Executive or the Company prior to June 1, 2000, this
Agreement shall automatically renew on the terms set forth herein for a second
two-year period. If so renewed, no later than June 1, 2002, the Company shall
notify the Executive with written notice as to whether the Company intends to
further renew or extend the Agreement (including proposals for such further
renewal which the Executive may accept, reject or negotiate, at his discretion).
Between the date of this Agreement and the Effective Date, Executive shall act
as a consultant to the Company on various matters as needed by the Company, in
an amount of time not to exceed ten (10) hours per week.
3. Position, Duties and Responsibilities.
(a) Position. The Executive hereby agrees to serve as Chief
Executive Officer and President of the Company. In addition, for so long as the
Executive is an employee of the Company and is elected by the Company's
stockholders, the Executive hereby agrees to serve as a member of the Company's
Board of Directors (the "Board"). The Executive understands that his position as
a member of the Board is subject to the nomination by the Company and to the
election of the Executive to the Board by the Company's stockholders at the next
regularly scheduled annual meeting of stockholders. The Executive shall devote
his best efforts and substantially full business time and attention to the
performance of services to the Company in his capacity as an officer thereof and
as may reasonably be requested by the Board. The Company shall retain full
direction and control of the means and methods by which the Executive performs
the above services.
In no order of priority, the following are the responsibilities and
duties that the Executive would have:
1. To conceptualize, crystallize and recommend in detail for the
Board the strategies for Company development and growth,
implementation and modification of complete and integrated
courses of business action, human and financial resource
allocation, diversification, profit, sourcing capital,
maintenance of positive
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external relations and internal generation of an innovative and
adaptive operating climate.
2. To direct the development of short and long-term objectives,
strategies, policies, budgets and operating plans. As approved by
the Board, oversee their consistent interpretation,
implementation and achievement.
3. To lead and coordinate the efforts of the senior executives of
the Company to achieve the desired business results and maximize
shareholder value.
4. To direct the growth of the Company as it relates to new products
and acquisitions, including such activities as:
(a) Formulation of acquisition policies and plans, subject to
Board approval;
(b) Evaluation of potential acquisitions and products;
(c) Recommendations to the Board;
(d) Negotiations and commitments, subject to Board approval; and
(e) Approval of plans for the integration and operation of the
acquired companies.
5. To assume responsibility for the financial condition of the
Company and take adequate measures to satisfy its financial
needs. Activities will include:
(a) The review and submission to the Board for approval, the
annual consolidated operating budget and forecast and the
proposed capital expenditures program;
(b) Insuring that each division and department develops and
submits operating budgets and forecasts in keeping with
policy requirements; and
(c) The establishment and adherence to procedures governing the
authorization of capital expenditures.
6. To direct the public relations, institutional advertising and
brand building programs for the Company , including such
activities as:
(a) The formulation of public relations policies and plans;
(b) The use of various advertising media;
(c) Communications to shareholders, employees, industry and the
public; and
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(d) Representation of the Company in public and shareholder
relations matters.
7. To direct the shareholder relations program.
8. To provide the strategic conceptual framework and obtain Board
approval for expansion of the Company through acquisition,
diversification, and internal business development.
9. To develop an effective organizational structure and ensure the
development of an innovative internal climate in which management
development is achieved.
10. To provide strategic and tactical reviews of the Company's
performance on a regular basis for initiation or approval of
required adjustments of short and long-term planning based upon
operating results.
11. To develop and implement, in concert with other senior officers,
policies, procedures, criteria and controls for the measurement
of performance against established goals.
12. To represent the Company to its customers, the financial
community, governmental and regulatory agencies, industry groups
and the general public.
13. To establish the organizational hierarchy and delegate authority
to the executive team regarding policies, contractual
commitments, expenditures and personnel matters.
14. To counsel collectively and individually with the members of the
Board, utilizing their capacities to the fullest extent to secure
optimum benefits for the Company.
15. To keep the Board informed on the condition of the business and
on all the important factors influencing it.
16. To refer promptly to the Board such matters as may require its
decision.
(b) Place of Employment. During the term of this Agreement, the
Executive shall perform the services required by this Agreement at the Company's
place of business in Orlando, Florida, provided, however, that the Company will
require the Executive to travel extensively to other locations on the Company's
business.
(c) Other Activities. Except with the prior written approval of
the Board (which the Board may grant or withhold in its sole and absolute
discretion), the Executive, during the Employment Period, will not (i) accept
any other employment, (ii) serve on the board of directors or similar body of
any other business entity (except as otherwise set forth below), or (iii)
engage, directly or indirectly, in any other business activity (whether or not
pursued for pecuniary advantage) that is or may be competitive with, or that
might place him in a competing
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position to, that of the Company or any of its affiliates. Notwithstanding the
foregoing, the Company agrees that the Executive (or affiliates of the
Executive) shall be permitted (i) to undertake the activities set forth in
Section 8 and (ii) to make any other passive personal investment that is not in
a business activity that is directly or indirectly competitive with the Company.
4. Compensation and Related Matters.
(a) Salary. During the Employment Period, the Company shall pay
the Executive a salary of not less than $350,000 during the first full year and
at such salary as determined by the Compensation Committee of the Board during
the second and subsequent years of the Executive's employment with the Company
(the "Base Salary"). All salary is to be paid consistent with the standard
payroll practices of the Company (e.g., timing of payments and standard employee
deductions, such as income tax withholdings, social security, etc.). The
Executive's performance and salary shall be subject to review at the end of each
fiscal year and increase consistent with the standard practices of the Company.
(b) Business Expenses. The Company shall reimburse the Executive
in connection with the conduct of the Company's business upon presentation of
sufficient evidence of such expenditures consistent with the Company's policies
as in place from time to time, including the reimbursement of reasonable and
necessary expenses incurred by the Executive in connection with the conduct of
the Company's business in traveling to and from his residence(s) and the venues
where the Company conducts business.
(c) Other Benefits. The Executive shall be entitled to
participate in or receive health, welfare, life insurance, long-term disability
insurance, bonus plan and similar benefits as the Company provides generally
from time to time to its executives. Such benefits are all subject to change in
the Company's sole and absolute discretion. Currently, those benefits include a
Company paid participation of $175 per month for the Executive only in (i) an
HMO (with the right to upgrade to a PPO health provider at the Executive's
expense in accordance with the terms of the Company's agreement with its current
carrier, Blue Shield) and (ii) an HMO dental provider (with the right to upgrade
to a PPO dental provider at the Executive's expense in accordance with the terms
of the Company's agreement with its current carrier). There is a waiting period
on the effectiveness of the Executive's and, if paid by the Executive, his
dependents' medical coverage which may be as long as three months after
commencement of the Executive's employment with the Company. During this waiting
period, the Company's health plan would not cover the Executive and his
dependents. However, the Company has agreed to cover the Executive's COBRA costs
to maintain the Executive's current health coverage for this three month waiting
period, subject to a maximum contribution by the Company each month equal to
what the Company would have paid on behalf of the Executive for health coverage
had he been an employee of the Company eligible for the Company's plan during
this three month period (currently, $175 per month). In addition, the Executive
will be able to participate at the Executive's own expense in any life and
disability policies available for purchase, in accordance with the terms of the
Company's plan with its carrier, and in the Company 401K retirement plan. The
cost of any medical or dental or other insurance benefits selected by the
Executive in excess of the benefits provided by the Company for either the
Executive or the Executive's dependents
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<PAGE> 5
will be paid by the Executive personally from payroll deductions. The Company
acknowledges that within a reasonable time following the execution of this
Agreement, it will execute an option agreement substantially in the form
attached as Exhibit "A" hereto (the "Option Agreement") and will grant the
Executive the benefits under the equity participation plan in the form attached
as Exhibit "B" hereto (the "Option Plan"). In addition, the Company agrees to
issue to the Executive options to purchase 45,000 shares of the Common Stock of
the Company at Fair Market Value on the date of issuance of such option grant,
through an option agreement substantially in the form attached as Exhibit "A"
hereto, with such 45,000 shares vesting over a four year period at the rate of
11,250 per year. Except as otherwise set forth in this Section 4 and except with
respect to the Company's obligations under this Agreement with respect to the
Option Agreement and the Option Plan, nothing herein is intended, or shall be
construed to require the Company to institute or continue any, or any
particular, plan or benefits. The Executive shall have the right to participate
at Company expense in industry related trade groups, conventions, etc. in
furtherance of enhancing the Executive's visibility in and leadership of the
time share and resort industry.
(d) Merit Bonus. The Compensation Committee of the Board shall
establish, monitor, and oversee an incentive bonus program for the Executive
which will provide for payment of a cash bonus to the Executive of up to one
hundred percent (100%) of the Executive's then fiscal year Base Salary if
certain performance objectives established by the Compensation Committee for the
Executive are achieved during the applicable fiscal year (e.g., successful
implementation of Club Sunterra, hospitality management and rental programs,
specified targets of growth in revenues and earnings per share) (the "Merit
Bonus"). With respect to the Company's review of the Executive's performance
during the 1998 fiscal year, the Compensation Committee of the Board shall
evaluate and determine the Merit Bonus as though the Executive's employment with
the Company had commenced on January 1, 1998 (rather than the Effective Date)
and continued through December 31, 1998. Such incentive program would provide
for specific partial bonus achievement hurdles in connection with this program.
The Executive shall have the opportunity to be considered for additional
performance-based bonus compensation at the sole and absolute discretion of the
Board; however, the Company makes no commitment to the Executive that any
performance-based bonus compensation will be paid to the Executive.
(e) Fringe Benefits. The Executive will be entitled to fringe
benefits as may be determined or granted from time-to-time by the Board.
(f) Vacation. The Executive shall be entitled to four vacation
weeks (20 days) in each calendar year on a pro-rated basis in accordance with
the Company's vacation policy. The Executive will be entitled to all Company
holidays.
(g) Performance Reviews. At the end of each fiscal year, the
Board will review the Executive's job performance and will provide the Executive
a written review of the Executive's job performance during the prior year and
implement any Board determined revisions to the Executive's Base Salary, the
Executive's Merit Bonus, the Executive's prospective incentive compensation
package (including the Executive's participation in the Option Plan), the
Executive's title and/or the Executive's responsibility at the Company;
provided, however, that
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<PAGE> 6
the provisions set forth in this Agreement with respect to the Executive's
compensation, the Option Agreement and the terms and conditions of the
Executive's employment at the Company cannot be modified by the Board in a
manner which would result in less favorable or beneficial terms or conditions
being imposed on the Executive than those provided for in the applicable
provisions of this Agreement without the Executive's full concurrence and
consent.
(h) Moving Expenses. The Company agrees to reimburse the
Executive for his reasonable and necessary moving expenses incurred in moving
his personal, family and household belongings from Indianapolis, Indiana to the
Orlando, Florida area. Such reimbursements will include reasonable and necessary
expenses incurred by the Executive and his spouse to identify a new residence
and the travel and lodging expenses incurred in connection therewith for up to a
six month period after the Effective Date. Moreover, the Company will reimburse
the Executive and his spouse for all travel and living expenses incurred by them
in Orlando, Florida (except for any direct costs incurred to purchase a new
residence) for the six month period following the Effective Date. Such
reimbursements will not include costs incurred by the Executive in either
selling his current residence or purchasing a new residence and will not include
any brokerage, closing, or incremental gains or losses incurred by Executive in
selling and/or purchasing such residential real estate.
5. Termination. The Executive's employment hereunder shall be, or may
be, as the case may be, terminated under the following circumstances:
(a) Death. The Executive's employment hereunder shall terminate
upon his death.
(b) Disability. The Executive's employment hereunder shall
terminate on the Executive's physical or mental disability or infirmity which,
in the opinion of a competent physician selected by the Board, renders the
Executive unable to perform his duties under this Agreement for more than 120
days during any 180-day period.
(c) Cause. The Company may terminate the Executive's employment
hereunder for "Cause." Cause shall mean (i) Employee's material breach of any of
the terms of this Agreement, (ii) his conviction of a crime involving moral
turpitude or constituting a felony under the laws of any state, the District of
Columbia or of the United States, or (iii) his gross negligence, willful
misconduct or fraud in the performance of his duties hereunder.
(d) Employment-At-Will/Termination for Any Reason.
Notwithstanding the term of this Agreement having a duration of two years and
Sections 2 and 4 hereof referring to extensions of this Agreement and the annual
salary to be paid to the Executive during each year of his employment with the
Company, nothing in this Agreement should be construed as to confer any right of
the Executive to be employed by the Company for a fixed or definite term.
Subject to Section 6 hereof, the Executive hereby agrees that the Company may
dismiss him under this Section 5(d) without regard (i) to any general or
specific policies (whether written or oral) of the Company relating to the
employment or termination of its employees, or (ii) to any statements made to
the Executive, whether made orally or contained in any document, pertaining to
the Executive's relationship with the Company. Notwithstanding anything to the
contrary
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<PAGE> 7
contained herein, including Sections 2 and 4, the Executive's employment with
the Company is not for any specified term, is at will and may be terminated by
the Company at any time by delivery of a notice of termination to the Executive,
for any reason, with or without cause, without liability except with respect to
the payments provided for by Section 6.
(e) Voluntary Resignation. The Executive may voluntarily resign
his position and terminate his employment with the Company at any time by
delivery of a written notice of resignation to the Company (the "Notice of
Resignation"). The Notice of Resignation shall set forth the date such
resignation shall become effective (the "Date of Resignation"), which date
shall, in any event, be at least ten (10) days and no more than thirty (30) days
from the date the Notice of Resignation is delivered to the Company. At its
option, the Company may reduce such notice period to any length, upon thirty
(30) days written notice to the Executive.
(f) Notice. Any termination of the Executive's employment by the
Company shall be communicated by written Notice of Termination to the Executive.
For purposes of this Agreement, a "Notice of Termination" shall mean a notice
that shall indicate the specific termination provision in this Agreement relied
upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated.
(g) "Date of Termination" shall mean (i) if the Executive's
employment is terminated by his death, the date of his death, (ii) if the
Executive's employment is terminated by reason of his disability, the date of
the opinion of the physician referred to in Section 5(b), above, (iii) if the
Executive's employment is terminated by the Company for Cause pursuant to
subsection 5(c) above, or without Cause by the Company pursuant to subsection
5(d) above, the date specified in the Notice of Termination and (iv) if the
Executive voluntarily resigns pursuant to subsection 5(e) above, the date of the
Notice of Resignation.
(h) Termination Obligations.
(i) The Executive hereby acknowledges and agrees that all
personal property and equipment furnished to or prepared by the
Executive in the course of or incident to his employment, belongs to
the Company and shall be promptly returned to the Company upon
termination of the Employment Period. "Personal property" includes,
without limitation, all books, manuals, records, reports, notes,
contracts, lists, blueprints, and other documents, or materials, or
copies thereof (including computer files), and all other proprietary
information relating to the business of the Company. Following
termination, the Executive will not retain any written or other
tangible material containing any proprietary information of the
Company.
(ii) Upon termination of the Employment Period, the Executive
shall be deemed to have resigned from all offices and directorships
then held with the Company or any affiliate.
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(iii) The representations and warranties contained herein and the
Executive's obligations under Sections 5(h), 7, 8, 9 and 15 through 18
shall survive termination of the Employment Period and the expiration
of this Agreement.
(i) Release. In exchange for the Company entering into the
Agreement, the Executive agrees that, at the time of his resignation or
termination from the Company, he will resign from the Board and will execute a
release acceptable to the Company of all liability of the Company and its
officers, shareholders, employees and directors to the Executive in connection
with or arising out of his employment with the Company, except with respect to
any then-vested rights under the Company's Option Plan and except with respect
to any Severance Payments which may be payable to him under the terms of the
Agreement. Nothing herein shall modify Executive's mediation and other rights
under this Agreement.
6. Compensation Upon Termination.
(a) Death. If the Executive's employment shall be terminated
pursuant to Section 5(a), the Company shall pay the Executive's estate the
Executive's monthly base salary payable pursuant to Section 4(a) and one-twelfth
of any bonus payable pursuant to Section 4(d) at the most recent annual amount
received, or entitled to be received, by the Executive (the "Severance Payment")
for a period of two years following the Date of Termination. At the Executive's
estate's own expense, the Executive's dependents shall also be entitled to any
continuation of health insurance coverage rights under any applicable law.
(b) Disability. If the Executive's employment shall be terminated
by reason of disability pursuant to Section 5(c), the Executive shall receive
the Severance Payment for the lesser of two years or the duration of such
disability; provided that payments so made to the Executive during the
disability shall be reduced by the sum of the amounts, if any, payable to the
Executive at or prior to the time of any such payment under any disability
benefit plan of the Company. At the Executive's own expense, the Executive and
his dependents shall also be entitled to any continuation of health insurance
coverage rights under any applicable law.
(c) Cause. If the Executive's employment shall be terminated for
Cause pursuant to Section 5(c) hereof, the Company shall pay the Executive his
salary and any bonus then payable pursuant to Section 4(d)) through the Date of
Termination. At the Executive's own expense, the Executive and his dependents
shall also be entitled to any continuation of health insurance coverage rights
under any applicable law.
(d) Other Terminations by the Company. If the Company shall
terminate the Executive's employment without cause pursuant to Section 5(d)
hereof, the Company shall pay the Executive the Severance Payment for a period
of two (2) years from the Date of Termination. The Executive and his dependents
shall also be entitled to any continuation of health insurance coverage rights
under any applicable law.
(e) Voluntary Resignation. If the Executive terminates his
employment with the Company pursuant to Section 5(g) hereof for "Good Cause",
the Company shall pay the Executive the Severance Payment for a period of two
years from the Date of Resignation. If the
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Executive terminates his employment with the Company pursuant to Section 5(g)
hereof without "Good Cause," the Company shall have no obligation to compensate
the Executive following the Date of Resignation. In any event, at the
Executive's own expense, the Executive and his dependents shall be entitled to
any continuation of health insurance coverage rights under any applicable law.
For purposes of this Agreement, "Good Cause" shall mean, without
the express written consent of Executive, the occurrence of any of the following
events unless such events are substantially corrected within 30 days following
written notification by Executive to the Company that he intends to terminate
his employment hereunder for one of the reasons set forth below:
(i) Any material alteration, reduction or diminution in the
duties, responsibilities and status of Executive's position;
(ii) a material breach by the Company of any provision of this
Agreement; and
(iii) the occurrence of a "Change in Control."
As used in this Agreement, "Change of Control" means the
occurrence of any of the following: (i) the adoption of a plan relating to the
liquidation or dissolution of the Company, (ii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any person or group, other than any of Osamu Kaneko,
Andrew J. Gessow and Steven C. Kenninger or their affiliates (the "Principals"),
becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Securities Exchange Act of 1934), directly or indirectly, of
more than 50% of the total voting power of the total outstanding voting stock of
the Company on a fully diluted basis or (iii) the consummation of the first
transaction (including, without limitation, any merger or consolidation) the
result of which is that any person or group, other than the Principals, becomes
the beneficial owner (as defined above), directly or indirectly, of more than
50% of the total voting power of the total outstanding voting stock of the
Company.
The Executive understands that any voluntary resignation by him
as a result of any personal or family reasons not otherwise set forth in this
Section 6(e) shall not constitute "Good Cause."
(f) The Company will be entitled to offset and reduce each month
the amount of the monthly Severance Payment otherwise payable to the Executive
hereunder by the amount of the Executive's prior month's earnings (if any) from
post-Company full time employment (including both salary, bonus and other cash
or cash equivalent compensation) at a subsequent full time employer or in
connection with a full time consulting practice or other self-employment or any
full time venture founded by the Executive; provided, however, that the Company
shall not be entitled to any Severance Payment offset or reduction as a result
of any earnings or income generated by the Executive from part-time consulting
work, unless and until such consulting work becomes a full time endeavor.
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(g) In the event of any Termination pursuant to Section 5, the
Executive shall be entitled to retain (i) any and all options to purchase
capital stock of the Company granted to the Executive pursuant to the terms and
conditions of the Option Agreement attached as Exhibit "A" hereto that have
vested as of the date of such Termination; and (ii) any and all options to
purchase capital stock of the Company granted to the Executive pursuant to the
terms and conditions of the Option Agreement to be entered into by and between
the Executive and the Company in January 1999 with respect to the issuance of
45,000 options to purchase the Company's common stock that have vested as of the
date of such Termination.
(h) Any Severance Payment made pursuant to this Section 6 shall
be payable in equal monthly installments over the required duration set forth in
Sections 6(a) through 6(e).
(i) The continuing obligation of the Company to make the
Severance Payment to the Executive is expressly conditioned upon the Executive
complying and continuing to comply with his obligations and covenants under
Sections 7 and 8 of this Agreement following termination of employment with the
Company.
7. Confidentiality and Non-Solicitation Covenants.
(a) Confidentiality. In addition to the agreements set forth in
Section 5(h)(i), the Executive hereby agrees that the Executive will not, during
the Employment Period or at any time thereafter directly or indirectly disclose
or make available to any person, firm, corporation, association or other entity
for any reason or purpose whatsoever, any Confidential Information (as defined
below). The Executive agrees that, upon termination of his employment with the
Company, all Confidential Information in his possession that is in written or
other tangible form (together with all copies or duplicates thereof, including
computer files) shall be returned to the Company and shall not be retained by
the Executive or furnished to any third party, in any form except as provided
herein; provided, however, that the Executive shall not be obligated to treat as
confidential, or return to the Company copies of any Confidential Information
that (i) was publicly known at the time of disclosure to the Executive, (ii)
becomes publicly known or available thereafter other than by any means in
violation of this Agreement or any other duty owed to the Company by any person
or entity or (iii) is lawfully disclosed to the Executive by a third party. As
used in this Agreement the term "Confidential Information" means: information
disclosed to the Executive or known by the Executive as a consequence of or
through his relationship with the Company, about the owners, customers,
employees, business methods, public relations methods, organization, procedures
or finances, including, without limitation, information of or relating to owner
or customer lists of the Company and its affiliates.
(b) Non-Solicitation. In addition, the Executive hereby agrees
that during the Employment Period and at all times thereafter, regardless of the
reason or circumstances of termination of employment with the Company, the
Executive will not, either on his own account or jointly with or as a manager,
agent, officer, employee, consultant, partner, joint venturer, owner or
shareholder or otherwise on behalf of any other person, firm or corporation, (i)
carry on or be engaged or interested directly or indirectly in, or solicit, the
manufacture or sale of goods or provision of services to any person, firm or
corporation which, at any time during the Employment Period has been or is a
customer of or in the habit of dealing with the Company in
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its business, (ii) endeavor directly or indirectly to canvas or solicit in
competition with Company or to interfere with the supply of orders for goods or
services from or by any person, firm or corporation which during the Employment
Period has been or is a supplier of goods or services to Company or (iii)
directly or indirectly solicit or attempt to solicit away from Company any of
its officers or employees or offer employment to any person who, on or during
the 6 months immediately preceding the date of such solicitation or offer, is or
was an officer or employee of Company.
8. Covenant Not to Compete.
(a) The Executive agrees that the provisions of this Section 8
shall apply during the Employment Period and during the period beginning after
the Executive's Date of Termination and ending on the second anniversary
thereof, regardless of whether the Executive is terminated for Cause or without
Cause or otherwise (the "Noncompete Period"). During the Noncompete Period, the
Executive will not engage in any competitive businesses, and the Executive
agrees that he shall not (i) invest in, manage, consult or participate in any
way in any other timeshare or vacation ownership business (in either an active
or passive manner), (ii) participate in or advise any business wherein timeshare
or vacation ownership is a material business segment or (iii) act for or on
behalf of any business that intends to enter or participate in the timeshare or
vacation ownership business, in each case unless the independent members of the
Company's Board of Directors determine that such action is in the best interest
of the Company. Subject to the restrictions set forth in Section 3(a), Section
3(c) and in this Section 8 , the Executive shall be permitted to continue his
existing business investments and activities and may pursue additional business
investments; provided that the Executive shall not serve as an officer or
director of any public company resulting from such business investments or
activities, provided, however, the Executive may act as a consultant to either
Cendant Corporation or any of its subsidiaries ("Cendant") for not more than ten
hours each month during the term of this Agreement so long as (1) the Executive
does not reveal any Confidential Information concerning the Company to Cendant;
(2) the subject matter of any such consulting by the Executive does not involve
giving any advice to Cendant with respect to any business which overlaps (or
could overlap) with any core business of the Company; and (3) any time which the
Executive consults for Cendant must be the Executive's personal time and not the
Company's time and must be scheduled around the Executive's commitments and
duties to the Company so that any such consulting by the Executive does not have
an adverse effect on the Company.
(b) Notwithstanding the foregoing, during the Noncompete Period:
(i) the Executive may purchase stock as a stockholder in any publicly
traded company, including any company which is involved in the
timeshare and vacation ownership business; provided that the
Executive does not beneficially own (together or separately or
through his affiliates) more than 5% of any company (other than
the Company) in the timeshare or vacation ownership business;
(ii) the Executive shall not invest (directly or indirectly) in any
timeshare or vacation ownership property in the hospitality
business (including any
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condominium project) or any property where the business plan
includes an intention to convert the property to timeshare or
vacation ownership, unless the independent members of the
Company's Board of Directors determine that such an investment is
in the best interest of the Company.
(iii) in the event that a Change of Control occurs which causes an
acceleration in the vesting of the Executive's options and, the
Executive is terminated for Cause or without Cause by the Company
within six (6) months before or after the effective date of the
Change of Control, then the noncompete provisions contained in
Section 8(a) shall not be applicable and the following shall
apply instead: the Executive agrees that during the two year
period following the Executive's Date of Termination, he will not
(i) manage, consult or participate in any way in any other public
timeshare or vacation ownership business (in either an active or
passive manner), (ii) participate in or advise any public company
wherein timeshare or vacation ownership is a material business
segment or (iii) act for or on behalf of any business that
intends to enter or participate in the timeshare or vacation
ownership business as a public company.
9. Injunctive Relief and Enforcement. In the event of breach by the
Executive of the terms of Sections 5(h)(i), 7 or 8, and only following mediation
or attempted mediation as set forth in Section 16 below (unless the Company is
suffering irreparable injury, in which case Section 16 will not prevent the
Company from seeking injunctive relief against the Executive in any court or
forum), the Company shall be entitled to institute legal proceedings to enforce
the specific performance of this Agreement by the Executive and to enjoin the
Executive from any further violation of Sections 5(h)(i), 7 or 8 and to exercise
such remedies cumulatively or in conjunction with all other rights and remedies
provided by law and not otherwise limited by this Agreement. The Executive
acknowledges, however, that the remedies at law for any breach by him of the
provisions of Sections 5(h)(i), 7 or 8 may be inadequate. In addition, in the
event the agreements set forth in Sections 5(h)(i), 7 or 8 shall be determined
by any court of competent jurisdiction to be unenforceable by reason of
extending for too great a period of time or over too great a geographical area
or by reason of being too extensive in any other respect, each such agreement
shall be interpreted to extend over the maximum period of time for which it may
be enforceable and to the maximum extent in all other respects as to which it
may be enforceable, and enforced as so interpreted, all as determined by such
court in such action.
10. Notice. For the purposes of this Agreement, notices, demands and
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered when
transmitted by telecopy with receipt confirmed, or one day after delivery to an
overnight air courier guaranteeing next day delivery, addressed as follows:
If to the Executive: L. Steven Miller
841 Alverna
Indianapolis, IN 46260
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If to the Company: Sunterra Corporation
5933 W. Century Blvd., Suite 210
Los Angeles, California 90045
Attention: Steven C. Kenninger
With a copy to: Latham & Watkins
633 West Fifth Street, Suite 4000
Los Angeles, California 90071-2007
Attention: John Newell, Esq.
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
11. Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force and
effect; provided, however, that if any one or more of the terms contained in
Sections 5(h), 7 or 8 hereto shall for any reason be held to be excessively
broad with regard to time, duration, geographic scope or activity, that term
shall not be deleted but shall be reformed and constructed in a manner to enable
it to be enforced to the extent compatible with applicable law.
12. Assignment. This Agreement may not be assigned by the Executive,
but may be assigned by the Company to any successor to its business and will
inure to the benefit and be binding upon any such successor.
13. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
14. Headings. The headings contained herein are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.
15. Choice of Law. This Agreement and the representation letter from
the Executive to the Company dated as of the date hereof (the "Letter") shall be
construed, interpreted and the rights of the parties determined in accordance
with the laws of the State of Maryland (without reference to the choice of law
provisions of Maryland), except with respect to matters of law concerning the
internal corporate affairs of any corporate entity which is a party to or the
subject of this Agreement, and as to those matters the law of the jurisdiction
under which the respective entity derives its powers shall govern.
16. Mediation. Subject to any irreparable injury being suffered by the
Company giving rise to the right of the Company to seek injunctive relief
against the Executive pursuant to Section 9 hereof, in the event that there
shall be a dispute among the parties arising out of or relating to this
Agreement or the Letter, or the breach thereof, the parties agree that such
dispute shall be resolved by final and binding mediation in Orlando, Florida,
before a mediator and on terms and conditions mutually acceptable to the
parties; provided, however, that if the parties
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cannot agree on the terms and conditions of such mediation, such terms and
conditions shall be established by the mediator. Any award issued as a result of
such mediation shall be final and binding between the parties thereto, and shall
be enforceable by any court having jurisdiction over the party against whom
enforcement is sought. The fees and expenses relating to such mediation (with
the exception of the Executive's attorneys' fees, if any) or any action to
enforce a mediation award shall be paid by the Company.
17. LIMITATION ON LIABILITIES. IF EITHER THE EXECUTIVE OR THE COMPANY
IS AWARDED ANY DAMAGES AS COMPENSATION FOR ANY BREACH OR ACTION RELATED TO THIS
AGREEMENT, A BREACH OF ANY COVENANT CONTAINED IN THIS AGREEMENT (WHETHER EXPRESS
OR IMPLIED BY EITHER LAW OR FACT), OR ANY OTHER CAUSE OF ACTION BASED IN WHOLE
OR IN PART ON ANY BREACH OF ANY PROVISION OF THIS AGREEMENT, SUCH DAMAGES SHALL
BE LIMITED TO CONTRACTUAL DAMAGES AND SHALL EXCLUDE (I) PUNITIVE DAMAGES, AND
(II) CONSEQUENTIAL AND/OR INCIDENTAL DAMAGES (E.G., LOST PROFITS AND OTHER
INDIRECT OR SPECULATIVE DAMAGES). THE MAXIMUM AMOUNT OF DAMAGES THAT THE
EXECUTIVE MAY RECOVER FOR ANY REASON SHALL BE THE AMOUNT EQUAL TO ALL AMOUNTS
OWED (BUT NOT YET PAID) TO THE EXECUTIVE PURSUANT TO THIS AGREEMENT THROUGH ITS
NATURAL TERM OR THROUGH ANY SEVERANCE PERIOD, PLUS INTEREST ON ANY DELAYED
PAYMENT AT THE MAXIMUM RATE PER ANNUM ALLOWABLE BY APPLICABLE LAW FROM AND AFTER
THE DATE(S) THAT SUCH PAYMENTS WERE DUE.
18. WAIVER OF JURY TRIAL. TO THE EXTENT APPLICABLE, EACH OF THE
PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR THE LETTER OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT
MATTER OF THIS AGREEMENT.
19. Entire Agreement. This Agreement and the Letter contain the entire
agreement and understanding between the Company and the Executive with respect
to the employment of the Executive by the Company as contemplated hereby and
thereby, and no representations, promises, agreements or understandings, written
or oral, not herein or therein contained shall be of any force or effect.
Neither this Agreement nor the Letter shall be changed unless in writing and
signed by both the Executive and an authorized representative of the Company.
20. The Executive's Acknowledgment. The Executive acknowledges (a)
that he has had the opportunity to consult with independent counsel of his own
choice concerning this Agreement and the Letter, and (b) that he has read and
understands the Agreement and the Letter, is fully aware of their legal effect,
and has entered into each of them freely based on his own judgment.
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IN WITNESS WHEREOF, the parties have executed this Employment
Agreement as of the date and year first above written.
SUNTERRA CORPORATION
/s/ STEVEN C. KENNINGER
------------------------------------
By: Steven C. Kenninger
Its: President
EXECUTIVE
/s/ L. STEVEN MILLER
------------------------------------
By: L. Steven Miller
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Exhibit "A"
Form of Option Agreement
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Exhibit "B"
Form of Option Plan
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EXHIBIT 10.2
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the "Agreement") is made and entered into
as of September 11, 1998, by and between Sunterra Corporation, a Maryland
corporation (the "Company"), and L. Steven Miller ("Miller").
RECITALS
A. Miller has served heretofore as Chief Executive Officer of Resort
Condominiums International, LLC ("RCI"), and is a party to a Management
Confidentiality, Non-Competition and Consultancy Agreement with RCI dated
January 21, 1991 (the "RCI Consulting Agreement").
B. The Company seeks to employ Miller as Chief Executive Officer and
President of the Company, and in connection therewith Miller has been advised
by RCI that RCI intends to enforce its rights under the RCI Consulting
Agreement.
C. As an inducement to Miller to accept the Company's offer of
employment, the Company has offered to indemnify Miller to the extent and
subject to the conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the premises and the covenants in this
Agreement, and intending to be legally bound, the Company and Miller do hereby
covenant and agree as follows.
Section 1. Indemnification. Company shall indemnify Miller and hold Miller
harmless to the fullest extent permitted by applicable law in effect on the
date hereof or as such laws may from time to time be amended (but, in the case
of any such amendment and subject to applicable law, only to the extent that
such amendment permits the Company to provide broader indemnification rights
than the Company was permitted to provide prior to the amendment) with respect
to any and all claims relating to or arising from the RCI Consulting Agreement
("Covered Claims"). The indemnification provided herein shall include all
Expenses and Liabilities actually and reasonably incurred by Miller or on his
behalf in connection with the investigation, defense, settlement or appeal of a
Proceeding.
Section 2. Advancement of Expenses and Costs. To the fullest extent
permitted by applicable law, all reasonable Expenses incurred by or on behalf
of Miller in connection with any Covered Claim shall be advanced by the Company
to Miller within 20 days after the receipt by the Company of a written request
for an advance or advances of Expenses from time to time, whether prior to or
after final disposition of a Proceeding (unless there has been a final
determination that Miller is not entitled to be indemnified for such Expenses),
including without limitation any Proceeding brought by or in the right of the
Company. Miller's entitlement to
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advancement of Expenses shall include those incurred in connection with any
Proceeding by Miller seeking an adjudication or award in arbitration pursuant
to this Agreement. The requests shall reasonably evidence the Expenses incurred
by Miller in connection therewith. If required by law at the time of such
advance, Miller hereby undertakes to repay the amounts advanced if it is
ultimately determined that Miller is not entitled to be indemnified pursuant to
the terms of this Agreement.
Section 3. Defense of Claims.
(a) After receipt by Miller of notice of the assertion or commencement of
any claim against Miller that Miller believes to be a Covered Claim, Miller
shall give the Company reasonably prompt notice thereof, but in any event no
later than 10 days after the receipt of that notice; provided, that the failure
to give the notice within the time specified shall not relieve the Company of
any obligation hereunder except to the extent that the Company is prejudiced
thereby. The notice shall describe the claim in reasonable detail and be
accompanied by copies of any documents delivered to Miller in connection with
the claim. The Company shall have 10 days following the delivery of the notice
to notify Miller (i) whether the Company disputes Miller's right of
indemnification with respect to the claim, and (ii) if the Company does not
dispute such right of indemnification, whether or not it desires to defend
Miller against that claim.
(b) If the Company notifies Miller that (i) the Company does not dispute
Miller's right of indemnification and (ii) the Company desires to defend
against the claim, then the Company shall have the right to assume and control
the defense of the claim by appropriate proceedings with counsel reasonably
acceptable to Miller at the Company's sole cost and expense. Miller may
participate in, but not control, any such defense at his sole cost and expense.
(c) If the Company (i) disputes Miller's right of indemnification with
respect to a claim, (ii) does not dispute such right but fails to promptly
assume and prosecute the defense of the claim, or (iii) does not dispute such
right but, in the sole reasonable judgment of Miller, a conflict or potential
conflict exists between the Company and Miller, then Miller shall be entitled
to assume and control the defense of the claim with counsel reasonably
acceptable to the Company. If the Company does not assume the defense of the
claim for any reason, it may still participate in, but not control, the defense
of the claim at its sole cost and expense.
(d) Miller and the Company shall render to each other such assistance and
access to records as the other may reasonably request in connection with the
defense of any claim.
(e) Neither Miller nor the Company shall enter into any settlement of any
Covered Claim without the prior written consent of the other party, which
consent shall not be reasonably withheld.
Section 4. Presumptions and Effect of Certain Proceedings. Miller shall be
presumed to be entitled to indemnification and the other benefits under this
Agreement and the Company shall
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have the burden of proof to overcome that presumption in reaching any contrary
determination. The termination of any Proceeding by judgment, order,
settlement, arbitration award or conviction, or upon a plea of nolo contendere
or its equivalent, shall not of itself (a) adversely affect the rights of
Miller to indemnification, or (b) create a presumption that Miller did not meet
any standard of conduct required by applicable law as a condition to
indemnification.
Section 5. Remedies of Miller in Cases of Determination Not to
Indemnify or to Advance Expenses
(a) in the event that (i) an initial determination is made that
Miller is not entitled to indemnification, (ii) advances are not made pursuant
to this Agreement, (iii) payment has not been timely made following a
determination of entitlement to indemnification pursuant to this Agreement or
(iv) Miller otherwise seeks enforcement of this Agreement, Miller shall be
entitled to a final adjudication in an appropriate court of the State of Florida
of his entitlement to such indemnification, advance or other rights under this
Agreement or otherwise. Alternatively, Miller may seek an award in arbitration
to be conducted by a single arbitrator pursuant to the commercial arbitration
rules of the American Arbitration Association now in effect, which award is to
be made within sixty (60) days following the filing of the demand for
arbitration. The Company shall not oppose Miller's right to seek any such
adjudication or arbitration award. In any such proceeding or arbitration Miller
shall be presumed to be entitled to indemnification under this Agreement and the
Company shall have the burden of proof to overcome that presumption.
(b) In the even an initial determination has been made, in whole or
in part, that Miller is not entitled to indemnification or other benefit
hereunder, the decision in the judicial proceeding or arbitration provided in
paragraph (a) of this Section shall be made de novo and Miller shall not be
prejudiced by reason of a determination that he is not entitled to
indemnification or other benefit hereunder.
(c) If an initial determination is made or deemed to have been made
pursuant to the terms of this Agreement that Miller is entitled to
indemnification or other benefit hereunder (unless, by its terms, that initial
determination is an interim determination only), the Company shall be bound by
such determination in the absence of (i) a misrepresentation of a material fact
by Miller or (ii) a specific finding (which has become final) that all or any
part of such indemnification or other benefit hereunder is prohibited by law.
(d) Expenses reasonably incurred by Miller in connection with his
request for indemnification or other benefit hereunder, or for seeking
enforcement of or to recover damages for breach of this Agreement, shall be
borne by the Company.
Section 6. Not Exclusive. Miller's rights of indemnification,
exculpation and advancement of expenses provided by this Agreement shall not be
deemed exclusive of any other rights to which Miller may now or in the future be
entitled under applicable law, the Charter or
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By-laws of the Company, or any agreement, vote of stockholders, resolution of
directors or otherwise.
Section 7. Limitation on Indemnity. The Company shall not be liable under
this Agreement to make any payment to Miller to the extent that Miller has
already been reimbursed with respect to the subject of a claim for
indemnification pursuant to any director and officer liability insurance as the
Company may maintain for Miller's benefit. Notwithstanding the availability of
insurance, Miller also may claim indemnification from the Company pursuant to
this Agreement by assigning to the Company any insurance claims to the extent
Miller is paid by the Company.
Section 8. Duration and Scope of Agreement; Binding Effect. This Agreement
shall continue so long as Miller shall be subject to any possible Proceeding
and shall be applicable to Proceedings commenced or continued after execution
of this Agreement, whether arising from acts or omissions occurring before and
after execution. This Agreement shall be binding upon the Company and its
successors and assigns and shall inure to the benefit of Miller and his spouse,
assigns, heirs, devisees, executors, administrators and other legal
representatives.
Section 9. Severability. If any provision or provisions of this Agreement
(or any portion thereof) shall be held to be invalid, illegal or unenforceable
for any reason whatsoever: (a) the validity, legality and enforceability of the
remaining provisions of this Agreement shall not in any way be affected or
impaired thereby; and (b) to the fullest extent possible, the provisions of
this Agreement shall be construed so as to give effect to the intent manifested
by the provision(s) held invalid, illegal or unenforceable.
Section 10. Identical Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Only one counterpart signed by the party against whom enforceability is sought
needs to be produced to evidence the existence of this Agreement.
Section 11. Interpretation of Agreement. It is understood that the parties
hereto intend this Agreement to be interpreted and enforced so as to provide
indemnification to Miller to the fullest extent now and hereafter permitted by
law (but, in the case of any changes in the law and subject to applicable law,
only to the extent that such changes permit the Company to provide broader
indemnification or exculpation). Therefore, to the maximum extent permitted by
applicable law, Miller shall be entitled to indemnification, exculpation and
other benefits hereunder irrespective of the nature of the legal or equitable
basis or theory upon which a claim is made, including, without limitation,
negligence, breach or duty, mismanagement, waste, breach of contract, breach of
warranty, strict liability, violation of federal or state securities laws, ERISA
or any other federal or state law.
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Section 12. Headings. The headings of the Section and paragraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction thereof.
Section 13. Definitions. For purposes of this Agreement:
(a) "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
(b) "Expenses" shall include all direct and indirect costs
(including, without limitation, attorneys' fees, retainers, court costs,
transcripts, fees of experts, witness fees, travel expenses, duplicating costs,
printing and binding costs, telephone charges, postage, delivery service fees,
all other disbursements or out-of-pocket expense and reasonable compensation for
time spent by Miller for which he is otherwise not compensated by the Company
or any third party) actually and reasonably incurred in connection with either
the investigation, defense, settlement or appeal of a Proceeding or establishing
or enforcing a right to indemnification, advancement of expenses or other
benefit under this Agreement, applicable law or otherwise.
(c) "Liabilities" shall mean liabilities of any type whatsoever,
including, but not limited to, judgments, fines, excise taxes and penalties
(including ERISA taxes and penalties), and amounts paid in settlement.
(d) "Proceeding" shall mean any threatened, pending or completed
action, claim, suit, arbitration, alternate dispute resolution mechanism,
investigation, administrative hearing or any other proceeding whether civil,
criminal, administrative or investigative, in each case relating to a Covered
Claim.
Section 14. Pronouns. Use of the masculine pronoun shall be deemed to
include usage of the feminine pronoun whenever appropriate.
Section 15. Modification and Waiver. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties to this Agreement. No waiver of any provision of this Agreement
shall be deemed to constitute a waiver of any other provision hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
Section 16. Notices. All notices, request, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom said
notice or other communication shall have been directed or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:
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(a) If to Miller, to:
841 Alverna
Indianapolis, Indiana 46260
(b) If to the Company, to:
Sunterra Corporation
5933 W. Century Blvd.
Los Angeles, California 90045
Attn: Steven C. Kenninger, Chairman of the Board
or to such other address as may have been furnished to Miller by the Company or
to the Company by Miller, as the case may be.
SECTION 17. Governing Law. The parties agree that this Agreement shall be
governed by and construed and enforced in accordance with, the laws of the
State of Maryland, as applied to contracts between Maryland residents entered
into and to be performed entirely within Maryland.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
/s/ L. STEVEN MILLER
-------------------------------------
L. Steven Miller
Sunterra Corporation
By: /s/ STEVEN C. KENNINGER
---------------------------------
Steven C. Kenninger,
President
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'
EXHIBIT 10.3
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (the "Amendment") is
dated as of March 1, 1998, between Signature Resorts, Inc., a Maryland
corporation (the "Company"), and Osamu Kaneko (the "Executive").
WHEREAS, the Company and the Executive previously have entered into
that Employment Agreement, dated August 20, 1996 (the "Agreement"), pursuant to
which the Company currently employs the Executive pursuant to the terms and
conditions of the Agreement; and
WHEREAS, the Company and the Executive each have determined that it
would be to the advantage and best interest of the Company and the Executive to
enter into the Amendment and modify certain of the Executive's and the Company's
obligations and responsibilities under the Agreement; and
WHEREAS, this Amendment amends and restates the Agreement in its
entirety and shall supersede the Agreement in all respects;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
1. Employment. The Company hereby agrees to employ the Executive, and the
Executive hereby agrees to be employed by the Company, on the terms and
conditions set forth herein.
2. Term. The employment of the Executive by the Company as provided in
Section 1 will commence on March 1, 1998 and will terminate at 12:01 a.m. on
March 1, 2000 (the "Expiration Date") unless automatically extended or sooner
terminated as hereinafter provided (such period, the "Employment Period").
Unless terminated by the Executive or the Company prior to February 1, 2000,
this Agreement shall automatically renew on the terms set forth herein for a
second two-year period. If so renewed, no later than February 1, 2002, the
Company shall notify the Executive with written notice as to whether the Company
intends to further renew or extend the Agreement (including proposals for such
further renewal which the Executive may accept, reject or negotiate, at his
discretion).
3. Position, Duties and Responsibilities.
(a) Position. The Executive hereby agrees to serve as Chief Executive
Officer of the Company's wholly-owned Japanese subsidiary, created or to be
created by the Company to conduct the Company's resort acquisition, development
and operations business in Japan and other Asian countries. The Executive shall
devote his best efforts and at least 50% of his full business time and attention
to the performance of services to the Company in his capacity as Chief Executive
Officer of the Company's wholly-owned Japanese subsidiary and as may
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reasonably be requested by the Company's Board of Directors. The Company shall
retain full direction and control of the means and methods by which the
Executive performs the above services.
(b) Place of Employment. During the term of this Agreement, the
Executive shall perform the services required by this Agreement at the Company's
place of business in the Tokyo, Japan and/or the Los Angeles, California
metropolitan area; provided, however, that the Company will require the
Executive to travel extensively to other locations on the Company's business.
(c) Other Activities. Except with the prior written approval of the
Board (which the Board may grant or withhold in its sole and absolute
discretion), the Executive during the Employment Period, will not (i) accept any
other employment, (ii) serve on the board of directors or similar body of any
other business entity (except as otherwise set forth below), or (iii) engage,
directly or indirectly, in any other business activity (whether or not pursued
for pecuniary advantage) that is or may be competitive with, or that might place
him in a competing position to, that of the Company or any of its affiliates.
Notwithstanding the foregoing, the Company agrees that the Executive (or
affiliates of the Executive) shall be permitted (i) to undertake the activities
set forth in Section 8 and (ii) to make any other passive personal investment
that is not in a business activity that is directly or indirectly competitive
with the Company.
4. Compensation and Related Matters.
(a) Salary. During the Employment Period, the Company shall pay the
Executive a salary of not less than $140,000 during the first full year and at
such salary as determined by the Compensation Committee of the Board during the
second and subsequent years of the Executive's employment with the Company. All
salary is to be paid consistent with the standard payroll practices of the
Company (e.g., timing of payments and standard employee deductions, such as
income tax withholdings, social security, etc.). The Executive's performance and
salary shall be subject to review at the end of each fiscal year and increase
consistent with the standard practices of the Company.
(b) Business Expenses. The Company shall reimburse the Executive in
connection with the conduct of the Company's business upon presentation of
sufficient evidence of such expenditures consistent with the Company's policies
as in place from time to time.
(c) Other Benefits. The Executive shall be entitled to participate in
or receive health, welfare, life insurance, long-term disability insurance,
bonus plan and similar benefits as the Company provides generally from time to
time to its executives. Except as otherwise set forth in this Section 4 and
except with respect to the Company's obligations under any stock option
agreements previously entered into with the Executive, nothing herein is
intended, or shall be construed to require the Company to institute or continue
any, or any particular, plan or benefits.
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(d) Bonus. The Compensation Committee of the Board shall establish,
monitor, and oversee an incentive bonus program for the Executive which will
provide for payment of a cash bonus to the Executive in an amount up to 100% of
the Executives then current base annual salary if certain performance objectives
established by the Compensation Committee for the Executive (such as specified
targets of growth in revenues and earnings per share) are achieved. The
Executive shall have the opportunity to be considered for additional
performance-based bonus compensation at the sole and absolute discretion of the
Board, upon notification to the Executive; however, the Company makes no
commitment to the Executive that any performance-based bonus compensation will
be paid to the Executive.
(e) Fringe Benefits. The Executive will be entitled to fringe benefits
as may be determined or granted from time-to-time by the Board.
(f) Vacation. The Executive shall be entitled to four vacation weeks
(20 days) in each calendar year on a pro-rated basis. The Executive will be
entitled to all Company holidays.
(g) Performance Reviews. At the end of each fiscal year, the Board
will review the Executive's job performance and will provide the Executive a
written review of the Executive's job performance during the prior year and
implement any Board determined revisions to the Executive's base salary, the
Executive's merit bonus, the Executive's title and/or the Executive's
responsibility at the Company; provided, however, that the provisions set forth
in this Agreement with respect to the Executive's compensation and the terms and
conditions of the Executive's employment at the Company cannot be modified by
the Board in a manner which would result in less favorable or beneficial terms
or conditions thereof being imposed on the Executive without the Executive's
full concurrence and consent.
5. Termination. The Executive's employment hereunder shall be, or may
be, as the case may be, terminated under the following circumstances:
(a) Death. The Executive's employment hereunder shall terminate
upon his death.
(b) Disability. The Executive's employment hereunder shall
terminate on the Executive's physical or mental disability or infirmity which,
in the opinion of a competent physician selected by the Board, renders the
Executive unable to perform his duties under this Agreement for more than 120
days during any 180-day period.
(c) Cause. The Company may terminate the Executive's employment
hereunder for "Cause." Cause shall mean (i) Employee's material breach of any of
the terms of this Agreement, (ii) his conviction of a crime involving moral
turpitude or constituting a felony under the laws of any state, the District of
Columbia or of the United States, or (iii) his gross negligence, willful
misconduct or fraud in the performance of his duties hereunder.
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(d) Employment-At-Will/Termination for Any Reason.
Notwithstanding the term of this Agreement having a duration of two years and
Sections 2 and 4 hereof referring to extensions of this Agreement and the annual
salary to be paid to the Executive during each of the first five full years of
his employment with the Company, nothing in this Agreement should be construed
as to confer any right of the Executive to be employed by the Company for a
fixed or definite term. Subject to Section 6 hereof, the Executive hereby agrees
that the Company may dismiss him under this Section 5(d) without regard (i) to
any general or specific policies (whether written or oral) of the Company
relating to the employment or termination of its employees, or (ii) to any
statements made to the Executive, whether made orally or contained in any
document, pertaining to the Executive's relationship with the Company.
Notwithstanding anything to the contrary contained herein, including Sections 2
and 4, the Executive's employment with the Company is not for any specified
term, is at will and may be terminated by the Company at any time by delivery of
a notice of termination to the Executive, for any reason, with or without cause,
without liability except with respect to the payments provided for by Section 6.
(e) Voluntary Resignation. The Executive may voluntarily resign
his position and terminate his employment with the Company at any time by
delivery of a written notice of resignation to the Company (the "Notice of
Resignation"). The Notice of Resignation shall set forth the date such
resignation shall become effective (the "Date of Resignation"), which date
shall, in any event, be at least ten (10) days and no more than thirty (30) days
from the date the Notice of Resignation is delivered to the Company. At its
option, the Company may reduce such notice period to any length, upon thirty
(30) days written notice to the Executive.
(f) Notice. Any termination of the Executive's employment by the
Company shall be communicated by written Notice of Termination to the Executive.
For purposes of this Agreement, a "Notice of Termination" shall mean a notice
that shall indicate the specific termination provision in this Agreement relied
upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated.
(g) "Date of Termination" shall mean (i) if the Executive's
employment is terminated by his death, the date of his death, (ii) if the
Executive's employment is terminated by reason of his disability, the date of
the opinion of the physician referred to in Section 5(b), above, (iii) if the
Executive's employment is terminated by the Company for Cause pursuant to
subsection 5(c) above, or without Cause by the Company pursuant to subsection
5(d) above, the date specified in the Notice of Termination and (iv) if the
Executive voluntarily resigns pursuant to subsection 5(e) above, the date of the
Notice of Resignation.
(h) Termination Obligations.
(i) The Executive hereby acknowledges and agrees that all
personal property and equipment furnished to or prepared by the
Executive in the course of or
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incident to his employment, belongs to the Company and shall be
promptly returned to the Company upon termination of the Employment
Period. "Personal property" includes, without limitation, all books,
manuals, records, reports, notes, contracts, lists, blueprints, and
other documents, or materials, or copies thereof (including computer
files), and all other proprietary information relating to the business
of the Company. Following termination, the Executive will not retain
any written or other tangible material containing any proprietary
information of the Company.
(ii) Upon termination of the Employment Period, the Executive
shall be deemed to have resigned from all offices and directorships
then held with the Company or any affiliate.
(iii) The representations and warranties contained herein and the
Executive's obligations under Sections 5(h), 7, 8, 9 and 15 through 18
shall survive termination of the Employment Period and the expiration
of this Agreement.
(i) Release. In exchange for the Company entering into the
Agreement, the Executive agrees that, at the time of his resignation or
termination from the Company, he will resign from the Board and will execute a
release acceptable to the Company of all liability of the Company and its
officers, shareholders, employees and directors to the Executive in connection
with or arising out of his employment with the Company, except with respect to
any then-vested rights under any stock option agreement and except with respect
to any Severance Payments which may be payable to him under the terms of the
Agreement.
6. Compensation Upon Termination.
(a) Death. If the Executive's employment shall be terminated pursuant
to Section 5(a), the Company shall pay the Executive monthly his base salary
payable pursuant to Section 4(a) and one-twelfth of any bonus payable pursuant
to Section 4(d) at the most recent annual amount received, or entitled to be
received, by the Executive (the "Severance Payment") for a period of two years
following the Date of Termination. At the Executive's own expense, the
Executive's dependents shall also be entitled to any continuation of health
insurance coverage rights under any applicable law.
(b) Disability. If the Executive's employment shall be terminated by
reason of disability pursuant to Section 5(c), the Executive shall receive the
Severance Payment for the lesser of two years or the duration of such
disability; provided that payments so made to the Executive during the
disability shall be reduced by the sum of the amounts, if any, payable to the
Executive at or prior to the time of any such payment under any disability
benefit plan of the Company. At the Executive's own expense, the Executive and
his dependents shall also be entitled to any continuation of health insurance
coverage rights under any applicable law.
(c) Cause. If the Executive's employment shall be terminated for Cause
pursuant to Section 5(c) hereof, the Company shall pay the Executive his salary
and any bonus
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then payable pursuant to Section 4(d)) through the Date of Termination. At the
Executive's own expense, the Executive and his dependents shall also be entitled
to any continuation of health insurance coverage rights under any applicable
law.
(d) Other Terminations by the Company. If the Company shall
terminate the Executive's employment without cause pursuant to Section 5(d)
hereof, the Company shall pay the Executive the Severance Payment for a period
of two (2) years from the Date of Termination. The Executive and his dependents
shall also be entitled to any continuation of health insurance coverage rights
under any applicable law.
(e) Voluntary Resignation. If the Executive terminates his
employment with the Company pursuant to Section 5(g) hereof for "Good Cause",
the Company shall pay the Executive the Severance Payment for a period of two
years from the Date of Resignation. If the Executive terminates his employment
with the Company pursuant to Section 5(g) hereof without "Good Cause," the
Company shall have no obligation to compensate the Executive following the Date
of Resignation. In any event, at the Executive's own expense, the Executive and
his dependents shall be entitled to any continuation of health insurance
coverage rights under any applicable law.
For purposes of this Agreement, "Good Cause" shall mean, without
the express written consent of Executive, the occurrence of any of the following
events unless such events are substantially corrected within 30 days following
written notification by Executive to the Company that he intends to terminate
his employment hereunder for one of the reasons set forth below:
(i) Any material alteration, reduction or diminution in the
duties, responsibilities and status of Executive's position;
(ii) a material breach by the Company of any provision of this
Agreement; and
(iii) the occurrence of a "Change in Control."
As used in this Agreement, "Change in Control" means the
occurrence of any of the following: (i) the adoption of a plan relating to the
liquidation or dissolution of the Company, (ii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any person or group, other than any of Osamu Kaneko,
Andrew J. Gessow and Steven C. Kenninger or their affiliates (the "Principals"),
becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Securities Exchange Act of 1934), directly or indirectly, of
more than 50% of the total voting power of the total outstanding voting stock of
the Company on a fully diluted basis or (iii) the consummation of the first
transaction (including, without limitation, any merger or consolidation) the
result of which is that any person or group, other than the Principals, becomes
the beneficial owner (as defined above), directly or indirectly, of more than
50% of the total voting power of the total outstanding voting stock of the
Company.
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The Executive understands that any voluntary resignation by him
as a result of any personal or family reasons not otherwise set forth in this
Section 6(e) shall not constitute "Good Cause."
(f) The Company will be entitled to offset and reduce each month
the amount of the monthly Severance Payment otherwise payable to the Executive
hereunder by the amount of the Executive's prior month's earnings (if any) from
post-Company full time employment (including both salary, bonus and other cash
or cash equivalent compensation) at a subsequent full time employer or in
connection with a full time consulting practice or other self-employment or any
full time venture founded by the Executive; provided, however, that the Company
shall not be entitled to any Severance Payment offset or reduction as a result
of any earnings or income generated by the Executive from part-time consulting
work, unless and until such consulting work becomes a full time endeavor.
(g) In the event of any Termination pursuant to Section 5, the
Executive shall be entitled to retain any and all options to purchase capital
stock of the Company granted to the Executive pursuant to the terms and
conditions of any stock option agreement between the Company and the Executive
that have vested as of the date of such Termination.
(h) Any Severance Payment made pursuant to this Section 6 shall
be payable in equal monthly installments over the required duration set forth in
Sections 6(a) through 6(e).
(i) The continuing obligation of the Company to make the
Severance Payment to the Executive is expressly conditioned upon the Executive
complying and continuing to comply with his obligations and covenants under
Sections 7 and 8 of this Agreement following termination of employment with the
Company.
7. Confidentiality and Non-Solicitation Covenants.
(a) Confidentiality. In addition to the agreements set forth in
Section 5(h)(i), the Executive hereby agrees that the Executive will not, during
the Employment Period or at any time thereafter directly or indirectly disclose
or make available to any person, firm, corporation, association or other entity
for any reason or purpose whatsoever, any Confidential Information (as defined
below). The Executive agrees that, upon termination of his employment with the
Company, all Confidential Information in his possession that is in written or
other tangible form (together with all copies or duplicates thereof, including
computer files) shall be returned to the Company and shall not be retained by
the Executive or furnished to any third party, in any form except as provided
herein; provided, however, that the Executive shall not be obligated to treat as
confidential, or return to the Company copies of any Confidential Information
that (i) was publicly known at the time of disclosure to the Executive, (ii)
becomes publicly known or available thereafter other than by any means in
violation of this Agreement or any other duty owed to the Company by any person
or entity or (iii) is lawfully disclosed to the Executive by a third party. As
used in this Agreement the term "Confidential Information" means: information
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disclosed to the Executive or known by the Executive as a consequence of or
through his relationship with the Company, about the owners, customers,
employees, business methods, public relations methods, organization, procedures
or finances, including, without limitation, information of or relating to owner
or customer lists of the Company and its affiliates.
(b) Non-Solicitation. In addition, the Executive hereby agrees
that during the Employment Period and at all times thereafter, regardless of the
reason or circumstances of termination of employment with the Company, the
Executive will not, either on his own account or jointly with or as a manager,
agent, officer, employee, consultant, partner, joint venturer, owner or
shareholder or otherwise on behalf of any other person, firm or corporation, (i)
carry on or be engaged or interested directly or indirectly in, or solicit, the
manufacture or sale of goods or provision of services to any person, firm or
corporation which, at any time during the Employment Period has been or is a
customer of or in the habit of dealing with the Company in its business, (ii)
endeavor directly or indirectly to canvas or solicit in competition with Company
or to interfere with the supply of orders for goods or services from or by any
person, firm or corporation which during the Employment Period has been or is a
supplier of goods or services to Company or (iii) directly or indirectly solicit
or attempt to solicit away from Company any of its officers or employees or
offer employment to any person who, on or during the 6 months immediately
preceding the date of such solicitation or offer, is or was an officer or
employee of Company.
8 Covenant Not to Compete.
(a) The Executive agrees that during the Employment Period he
will devote at least 50% of his full business time to the business of the
Company and not engage in any competitive businesses. Subject to such full-time
requirement and the restrictions set forth below in this Section 8 and Section
3(c) above, the Executive shall be permitted to continue his existing business
investments and activities and may pursue additional business investments;
provided that the Executive not serve as officer of any public company resulting
from such business investments. The Executive agrees that he shall not (i)
invest in, manage, consult or participate in any way in any other timeshare
business (in either an active or passive manner), (ii) participate in or advise
any business wherein timeshare is a relevant business segment or (iii) act for
or on behalf of any business that intends to enter or participate in the
timeshare business, in each case unless the independent members of the Company's
Board of Directors determine that such action is in the best interest of the
Company. Notwithstanding the foregoing, the Executive may purchase stock as a
stockholder in any publicly traded company, including any company which is
involved in the timeshare business; provided that the Executive does not own
(together or separately or through his affiliates) more than 5% of any company
(other than the Company) in the timeshare business. In addition, the Executive
shall not invest (directly or indirectly) in any timeshare property in the
hospitality business (including any condominium project) or any property where
the business plan therefor includes an intention to convert the property to
timeshare, unless the independent members of the Company's Board of Directors
determine that such an investment is in the best interest of the Company.
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(b) Notwithstanding anything to the contrary in this Section 8 or
elsewhere in this Agreement, the Executive and/or affiliates thereof is
permitted, at his option, to pursue the development of a timeshare resort on
that certain property located on Harbor Island, San Diego, California, owed by
the Port of San Diego. In the event the Executive or affiliate thereof so
acquires such an interest, the Company has the option, at its election (which
the Company may exercise at any time), to require the Executive or affiliate
thereof to sell such interest to the Company at a price not to exceed 50% of the
cumulative actual, direct cost incurred by the Executive or affiliate thereof in
pursuing the development or acquisition of such property. In addition, at the
direction of the independent members of the Company's Board of Directors, at any
time following the decision by the Company not to acquire such interest, the
Executive agrees to sell his interest in such property, and to divest himself of
any interest in any affiliate possessing any controlling or managing interest
therein, within six months after receipt of notice from the Company to do so,
unless the independent members of the Board determine that such investment by or
interest held by the Executive is in the best interest of the Company.
(c) The provisions of this Section 8 shall survive for two years
following any termination of employment, regardless of whether the termination
is for "Good Cause" or otherwise.
9 Injunctive Relief and Enforcement. In the event of breach by the
Executive of the terms of Sections 5(h)(i), 7 or 8, and only following mediation
or attempted mediation as set forth in Section 16 below (unless the Company is
suffering irreparable injury, in which case Section 16 will not prevent the
Company from seeking injunctive relief against the Executive in any court or
forum), the Company shall be entitled to institute legal proceedings to enforce
the specific performance of this Agreement by the Executive and to enjoin the
Executive from any further violation of Sections 5(h)(i), 7 or 8 and to exercise
such remedies cumulatively or in conjunction with all other rights and remedies
provided by law and not otherwise limited by this Agreement. The Executive
acknowledges, however, that the remedies at law for any breach by him of the
provisions of Sections 5(h)(i), 7 or 8 may be inadequate. In addition, in the
event the agreements set forth in Sections 5(h)(i), 7 or 8 shall be determined
by any court of competent jurisdiction to be unenforceable by reason of
extending for too great a period of time or over too great a geographical area
or by reason of being too extensive in any other respect, each such agreement
shall be interpreted to extend over the maximum period of time for which it may
be enforceable and to the maximum extent in all other respects as to which it
may be enforceable, and enforced as so interpreted, all as determined by such
court in such action.
10 Notice. For the purposes of this Agreement, notices, demands and
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered when
transmitted by telecopy with receipt confirmed, or one day after delivery to an
overnight air courier guaranteeing next day delivery, addressed as follows:
If to the Executive: Osamu Kaneko
c/o Signature Resorts, Inc.
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5933 West Century Boulevard, Suite 210
Los Angeles, California 90045
If to the Company: Signature Resorts, Inc.
1875 South Grant Street, Suite 650
San Mateo, California 94402
Attention: Andrew D. Hutton
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
11 Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force and
effect; provided, however, that if any one or more of the terms contained in
Sections 5(h), 7 or 8 hereto shall for any reason be held to be excessively
broad with regard to time, duration, geographic scope or activity, that term
shall not be deleted but shall be reformed and constructed in a manner to enable
it to be enforced to the extent compatible with applicable law.
12 Assignment. This Agreement may not be assigned by the Executive,
but may be assigned by the Company to any successor to its business and will
inure to the benefit and be binding upon any such successor.
13 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
14 Headings. The headings contained herein are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.
15 Choice of Law. This Agreement shall be construed, interpreted and
the rights of the parties determined in accordance with the laws of the State of
Maryland (without reference to the choice of law provisions of Maryland), except
with respect to matters of law concerning the internal corporate affairs of any
corporate entity which is a party to or the subject of this Agreement, and as to
those matters the law of the jurisdiction under which the respective entity
derives its powers shall govern.
16 Mediation. Subject to any irreparable injury being suffered by the
Company giving rise to the right of the Company to seek injunctive relief
against the Executive pursuant to Section 9 hereof, in the event that there
shall be a dispute among the parties arising out of or relating to this
Agreement, or the breach thereof, the parties agree that such dispute shall be
resolved by final and binding mediation in Los Angeles, California, before a
mediator and on terms and conditions mutually acceptable to the parties;
provided, however, that if the parties
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cannot agree on the terms and conditions of such mediation, such terms and
conditions shall be established by the mediator. Any award issued as a result of
such mediation shall be final and binding between the parties thereto, and shall
be enforceable by any court having jurisdiction over the party against whom
enforcement is sought. The fees and expenses relating to such mediation (with
the exception of the Executive's attorneys' fees, if any) or any action to
enforce a mediation award shall be paid by the Company.
17 LIMITATION ON LIABILITIES. IF EITHER THE EXECUTIVE OR THE COMPANY
IS AWARDED ANY DAMAGES AS COMPENSATION FOR ANY BREACH OR ACTION RELATED TO THIS
AGREEMENT, A BREACH OF ANY COVENANT CONTAINED IN THIS AGREEMENT (WHETHER EXPRESS
OR IMPLIED BY EITHER LAW OR FACT), OR ANY OTHER CAUSE OF ACTION BASED IN WHOLE
OR IN PART ON ANY BREACH OF ANY PROVISION OF THIS AGREEMENT, SUCH DAMAGES SHALL
BE LIMITED TO CONTRACTUAL DAMAGES AND SHALL EXCLUDE (I) PUNITIVE DAMAGES, AND
(II) CONSEQUENTIAL AND/OR INCIDENTAL DAMAGES (E.G., LOST PROFITS AND OTHER
INDIRECT OR SPECULATIVE DAMAGES). THE MAXIMUM AMOUNT OF DAMAGES THAT THE
EXECUTIVE MAY RECOVER FOR ANY REASON SHALL BE THE AMOUNT EQUAL TO ALL AMOUNTS
OWED (BUT NOT YET PAID) TO THE EXECUTIVE PURSUANT TO THIS AGREEMENT THROUGH ITS
NATURAL TERM OR THROUGH ANY SEVERANCE PERIOD, PLUS INTEREST ON ANY DELAYED
PAYMENT AT THE MAXIMUM RATE PER ANNUM ALLOWABLE BY APPLICABLE LAW FROM AND AFTER
THE DATE(S) THAT SUCH PAYMENTS WERE DUE.
18 WAIVER OF JURY TRIAL. TO THE EXTENT APPLICABLE, EACH OF THE PARTIES
TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL
OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR
ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT.
19 Entire Agreement. This Agreement contains the entire agreement and
understanding between the Company and the Executive with respect to the
employment of the Executive by the Company as contemplated hereby, and no
representations, promises, agreements or understandings, written or oral, not
herein contained shall be of any force or effect. This Agreement shall not be
changed unless in writing and signed by both the Executive and the Board of
Directors of the Company.
20 The Executive's Acknowledgment. The Executive acknowledges (a) that
he has had the opportunity to consult with independent counsel of his own choice
concerning this Agreement, and (b) that he has read and understands the
Agreement, is fully aware of its legal effect, and has entered into it freely
based on his own judgment.
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IN WITNESS WHEREOF, the parties have executed this Amendment to the
Agreement as of the date and year first above written.
SIGNATURE RESORTS, INC.
/s/ STEVEN C. KENNINGER
------------------------------------
Name: Steven C. Kenninger
Title: President
EXECUTIVE
/s/ OSAMU KANEKO
------------------------------------
Osamu Kaneko
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EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of July
27, 1998 (the "Agreement"), between Sunterra Corporation (f.k.a. Signature
Resorts, Inc.), a Maryland corporation (the "Company"), and Michael A. Depatie
(the "Executive"), amends and restates that Employment Agreement, dated
September 27, 1996 (the "1996 Agreement"), between the Company and the
Executive.
RECITALS
WHEREAS, the initial two (2) year term of the Agreement expires on
November 18, 1998, and unless terminated by the Executive or the Company prior
to September 1, 1998, the Agreement automatically renews on the terms set forth
therein for a second two-year period commencing November 18, 1998; and
WHEREAS, the Company wishes to retain the services of the Executive as
Chief Financial Officer, extend the term of the 1996 Agreement and amend and
restate the 1996 Agreement as set forth herein; and
WHEREAS, the Executive wishes to continue his employment with the
Company, extend the term of the 1996 Agreement and amend and restate the 1996
Agreement as set forth herein; and
WHEREAS, this Agreement amends and restates the 1996 Agreement in its
entirety and, upon the execution hereof by the Company and the Executive, the
1996 Agreement shall be, as of the date of this Agreement, immediately
terminated, of no further force or effect and replaced in its entirety by this
Agreement.
THE PARTIES HEREBY AGREE AS FOLLOWS,
1. Employment. The Company hereby agrees to employ the Executive, and
the Executive hereby agrees to be employed by the Company, on the terms and
conditions set forth herein.
2. Term. The employment of the Executive by the Company commenced on
November 18, 1996 and will continue until 12:01 a.m. on November 18, 2000 (the
"Expiration Date") unless automatically extended or sooner terminated as
hereinafter provided (such period, the "Employment Period"). Unless terminated
by the Executive or the Company pursuant to the terms of the Agreement prior to
September 1, 2000, this Agreement shall automatically renew on the terms set
forth herein for an additional two-year period. If so renewed, no later than
September 1, 2002, the Company shall notify the Executive with written notice as
to whether the Company intends to further renew or extend the Agreement
(including proposals for such further renewal which the Executive may accept,
reject or negotiate, at his discretion).
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3. Position, Duties and Responsibilities.
(a) Position. The Executive hereby agrees to serve as Executive
Vice President and Chief Financial Officer of the Company, reporting directly to
the President of the Company, or such other senior executive officer of the
Company as determined by the Company Board of Directors (the "Board"). The
Executive shall devote his best efforts and substantially full business time and
attention to the performance of services to the Company in his capacity as an
officer thereof and as may reasonably be requested by the Board of Directors of
the Company. The Company shall retain full direction and control of the means
and methods by which the Executive performs his services thereto. Both the
Executive and the Company agree that the nature and scope of the Executive's
responsibility and authority will be consistent with being the Executive Vice
President and Chief Financial Officer of a public company, as described in more
detail herein. In no order of priority, the following are the Executive's
primary responsibilities and duties:
1. To work closely with the Company's executive level senior-most
officers to structure strategic initiatives, including
acquisitions, and to analyze the financial impact of such
initiatives; and to participate actively in the negotiations
thereof and oversee the completion of such initiatives.
2. To maintain a current understanding of the Company's progress
in achieving stated financial goals and objectives (i.e.,
internal and Wall Street estimates) relative to applicable
Company projections and budgets prepared by others.
3. To serve as the primary point of contact for investor
relations and investment banking, research and analyst
communications; to participate in investor and analyst meetings
and conferences; to coordinate press releases, quarterly and
annual filings; and to coordinate the design and preparation of
the Company's annual shareholders' report; and to be involved in
such other similar matters with the assistance of Company
counsel.
4. To analyze and structure the Company's capital base,
including, without limitation, coordinating and implementing
equity and debt initiatives such as follow-on offerings, lines of
credit and securitization programs; and, generally, to manage the
Company's commercial banking relationships and lines of credit.
5. To develop and oversee cash management policies.
6. To oversee the Company's policies and procedures respecting
employee purchases and sales of the Company's stock and the
exercise of its stock options.
7. To oversee the Company's treasury function, with the
assistance of appropriate personnel.
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8. To oversee the Company's insurance and risk management
program, with the assistance of appropriate personnel.
9. To cooperate with and assist the Company in the search for and
training of a to-be-hired member of the Company's management team
who will report to the Executive and will have primary
responsibility of overseeing the Company's internal accounting,
administration, and financial reporting and control functions,
including systems, SEC financial reporting, internal audits,
corporate budgeting, tax planning, and risk management functions
(the "Administration Executive") . Commencing on the date that
the Administration Executive commences employment at the Company
(the "Administration Executive Employment Date"), the Executive
shall cooperate with the Company's management to introduce such
newly hired individual to each of the Company's Wall Street
analysts, the Company's auditors, major shareholders and other
important individuals or entities determined by the Company, by
means of either mini road show(s), one on one meetings and/or
conference calls.
10. To carry out such other customary duties and responsibilities
of an executive vice president and chief financial officer of a
public company.
The Company recognizes that to accomplish these responsibilities, the Executive
will require full cooperation and extensive interaction with Company's executive
level senior-most officers, the Company's controller and accounting department,
as well as the use of reasonably necessary staff resources dedicated exclusively
to assisting the Executive in discharging his duties.
(b) Place of Employment. During the term of this Agreement, the
Executive shall perform the services required by this Agreement at the Company's
place of business in the San Francisco Bay area; provided, however, that the
Company will require the Executive to travel extensively to other locations on
the Company's business.
(c) Other Activities. Except with the prior written approval of
the Board (which the Board may grant or withhold in its sole and absolute
discretion), the Executive, during the Employment Period, will not (i) accept
any other employment, (ii) serve on the board of directors or similar body of
any other business entity (except as otherwise set forth below), or (iii)
engage, directly or indirectly, in any other business activity (whether or not
pursued for pecuniary advantage) that is or may be competitive with, or that
might place him in a competing position to, that of the Company or any of its
affiliates, (iv) formally search for or formally explore post-Company employment
opportunities, or (v) entertain inquiries or offers for post-Company employment
opportunities; however, by way of example, the Executive may answer and return
phone calls or participate in contacts generated in the ordinary course of
business during which unsolicited employment opportunities may be presented to
him or discussed; provided that the Executive shall not indicate his
availability, then-current willingness or interest in exploring or accepting any
post-Company employment. Notwithstanding the foregoing, the Company agrees that
the Executive (or affiliates of the Executive) shall be permitted to make any
other passive personal investment that is not in a business activity that is
directly or indirectly competitive with the Company.
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(d) Board of Directors. The Executive shall serve on the Board of
Directors of the Company without additional compensation through the earlier to
occur of ten (10) days after receiving a written notice from the Company to
resign from the Board (which the Executive agrees to do immediately), or the
expiration of the Executive's current term as a Director of the Company.
4. Compensation and Related Matters.
(a) Salary. During the Employment Period, the Company shall pay
the Executive a salary of not less than $280,000 per year. All salary is to be
paid consistent with the standard payroll practices of the Company (e.g., timing
of payments and standard employee deductions, such as income tax withholdings,
social security, etc.). The Executive's performance and salary shall be subject
to review at the end of each fiscal year and increase consistent with the
standard practices of the Company.
(b) Business Expenses. The Company shall reimburse the Executive
in connection with the conduct of the Company's business upon presentation of
sufficient evidence of such expenditures consistent with the Company's policies
as in place from time to time. Such benefits are all subject to change in the
Company's sole and absolute discretion. Currently, those benefits include a
Company paid participation for the Executive only in (i) an HMO (with the right
to upgrade to a PPO health provider at the Executive's expense in accordance
with the terms of our agreement with our current carrier, Blue Shield) and (ii)
an HMO dental provider (with the right to upgrade to a PPO dental provider at
the Executive's expense in accordance with the terms of the Company's agreement
with its current medical benefits provider). In addition, the Executive will be
able to participate at the Executive's own expense in any life and disability
policies available for purchase, in accordance with the terms of the Company's
plan with its carrier, and in the Company 401K retirement plan. The cost of any
medical or dental or other insurance benefits selected by the Executive in
excess of the benefits provided by the Company for either the Executive or the
Executive's dependents will be paid by the Executive personally from payroll
deductions.
(c) Other Benefits. The Executive shall be entitled to
participate in or receive health, welfare, life insurance, long-term disability
insurance, bonus plan and similar benefits as the Company provides generally
from time to time to its executives. The Executive shall have the right to
participate at the Company's expense in industry related trade groups,
conventions, etc. in furtherance of enhancing the Executive's visibility in and
knowledge of the timeshare and resort industry. Except as otherwise set forth in
this Section 4 and except with respect to the Company's obligations under its
Option Agreements with the Executive, nothing herein is intended, or shall be
construed to require the Company to institute or continue any, or any
particular, plan or benefits for the benefit of the Executive.
(d) Bonus Compensation.
(i) The Executive will be eligible to receive annual bonus
compensation of up to 100% of his annual base salary paid during each fiscal
year. The Compensation Committee of the Board shall determine the Executive's
annual bonus
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compensation, based primarily on two criteria. The first will be the nature of
the Executive's performance in excess of the high level of reasonably achievable
performance which the Company requires of all of its employees, including the
quality and level of the Executive's performance; the value which the Executive
has contributed to or created for the Company; and the Executive's compliance
with the terms of the Agreement. The second will be based on the overall
profitability and level of increased profitability (e.g., reduced cost of funds,
off-balance sheet financing, and other similar issues) in each of the Company's
activities in which the Executive has either bottom-line responsibility or in
which the Executive has been materially involved, as well as the overall
financial performance of the Company and its publicly-traded stock.
(ii) Notwithstanding Section 4(d)(i) hereof, provided that
the Executive complies with the terms and conditions of Section 5(e) of the
Agreement and of the terms and conditions of the Agreement entitling him to
receive the payments set forth in Section 6(j) hereof, the Company (i) shall pay
the Executive $280,000 as calendar year 1998 bonus compensation, and (ii) shall
pay the Executive as calendar year 1999 bonus compensation an amount equal to
(A) $280,000 multiplied by the number of full months in 1999 that the Executive
is employed by the Company divided by twelve (12), plus, (B) with respect to any
remaining partial month in 1999 that the Executive is employed by the Company,
$5,400 times the number of full or partial weeks in such remaining partial month
in 1999 that the Executive is employed by the Company. Should the Executive be
entitled to receive, and the Company satisfies its obligation to pay, the
amounts set forth in Section 6(j) hereof, the Company shall have no obligation
to consider the Executive for, or to pay, any additional bonus compensation to
the Executive for the 1998 and 1999 calendar years under Section 4(d)(i) hereof
or otherwise. Provided that the Executive complies with the provisions of this
Agreement, the Company will have the obligation to pay the Executive any
required bonus payments on or before the earlier to occur of (a) March 15 of the
fiscal year following the year in which the Executive earned such bonus or (b)
ten days after the Executive's last day of employment at the Company.
(e) Fringe Benefits. The Executive will be entitled to fringe
benefits as may be determined or granted from time-to-time by the Board.
(f) Vacation. The Executive shall be entitled to four vacation
weeks (20 days) in each calendar year on pro-rated basis. The Executive will be
entitled to all Company holidays. On the Executive's last day of employment with
the Company, the Company will pay the Executive $1,217 per day for all accrued
and, up to that point, unused vacation time with the Company. The Executive may
use accrued vacation days through his last day of employment with the Company,
provided that such does not unreasonably interfere with the Executive's duties
and responsibilities.
(g) Performance Reviews. At the end of each fiscal year, the
Company (through the Compensation Committee of the Board) will review the
Executive's job performance and implement any Company determined revisions to
the Executive's base salary, the Executive's merit bonus, the Executive's
incentive compensation package (including the Executive's option grants), the
Executive's title and/or the Executive's responsibility at the
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Company; provided, however, that neither of Executive's title, base salary,
merit bonus potential, position or responsibilities at the Company shall be
reduced.
5. Termination. The Executive's employment hereunder shall be, or may
be, as the case may be, terminated under the following circumstances:
(a) Death. The Executive's employment hereunder shall terminate
upon his death.
(b) Disability. The Executive's employment hereunder shall
terminate on the Executive's physical or mental disability or infirmity which,
in the opinion of a competent physician selected by the Board, renders the
Executive unable to perform his duties under this Agreement for more than 120
days during any 180-day period.
(c) Cause. The Company may terminate the Executive's employment
hereunder for "Cause." Cause shall mean (i) Employee's material breach of any of
the terms of this Agreement, (ii) his conviction of a crime involving moral
turpitude or constituting a felony under the laws of any state, the District of
Columbia or of the United States, or (iii) his gross negligence, willful
misconduct or fraud in the performance of his duties hereunder.
(d) Notice by the Company. At any time following December 1,
1998, the Company may (i) give the Executive thirty (30) days written notice of
its intention to terminate the Executive's employment ("Notice of Termination")
with the Company, for any reason, with or without cause, without liability
except with respect to the payments provided for by Section 6 and otherwise in
the Agreement, and (ii) thereafter retain the Executive as a consultant for five
(5) years pursuant to Section 5(j) of the Agreement. Except as set forth in this
Section 5(d) of the Agreement, notwithstanding the term of this Agreement having
a duration through November 18, 2000 and Section 2 and Section 4 referring to
extensions of this Agreement and the annual salary to be paid to the Executive
during his employment with the Company, nothing in this Agreement should be
construed as to confer any right of the Executive to be employed by the Company
for a fixed or definite term.
(e) Voluntary Resignation. Provided that the Executive has
complied with the terms of the Agreement, at any time following the later of (i)
December 1, 1998 and (ii) the Administration Executive Employment Date (which
shall be not later than March 1, 1999), the Executive may voluntarily resign his
position, terminate his employment with the Company and become a consultant to
the Company for five (5) years pursuant to Section 5(j) of the Agreement by
delivery of a written notice of resignation to the Company (the "Notice of
Resignation"). The Notice of Resignation shall set forth the date such
resignation shall become effective (the "Date of Resignation"), which date
shall, in any event, be at least thirty (30) days from the date the Notice of
Resignation is delivered to the Company. At its option, the Company may reduce
such notice period to any length, upon thirty (30) days written notice to the
Executive.
(f) Notice. Any termination of the Executive's employment by the
Company shall be communicated by written Notice of Termination to the Executive.
For purposes of this Agreement, a "Notice of Termination" shall mean a notice
that shall indicate the specific
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termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated.
(g) "Date of Termination" shall mean (i) if the Executive's
employment is terminated by his death, the date of his death, (ii) if the
Executive's employment is terminated by reason of his disability, the date of
the opinion of the physician referred to in Section 5(b), above, (iii) if the
Executive's employment is terminated by the Company for Cause pursuant to
subsection 5(c) above, or without Cause by the Company pursuant to subsection
5(d) above, the date specified in the Notice of Termination and (iv) if the
Executive voluntarily resigns pursuant to subsection 5(e) above, the date of the
Notice of Resignation.
(h) Termination Obligations.
(i) The Executive hereby acknowledges and agrees that all
personal property and equipment furnished to or prepared by the
Executive in the course of or incident to his employment, belongs to
the Company and shall be promptly returned to the Company upon
termination of the Employment Period; provided that the Executive may
retain as his personal property the Company computer and related
equipment currently located at the Executive's home as well as the
Star Tac mobile telephone provided to the Executive by the Company
(the Executive's account will be switched over to a non-Company
account at the end of the Employment Period). "Personal property"
includes, without limitation, all books, manuals, records, reports,
notes, contracts, lists, blueprints, and other documents, or
materials, or copies thereof (including computer files), and all other
proprietary information relating to the business of the Company.
Following termination, the Executive will not retain any written or
other tangible material containing any proprietary information of the
Company.
(ii) Upon termination of the Employment Period, the Executive
shall be deemed to have resigned from all offices and directorships
then held with any of the Company's affiliates.
(iii) The representations and warranties contained herein and the
Executive's obligations under Sections 5(h), 7, 8, 9 and 15 through 18
shall survive termination of the Employment Period and the expiration
of this Agreement.
(i) Release. In exchange for the Company entering into the
Agreement, the Executive agrees that, at the time of his resignation or
termination from the Company, he will execute a release acceptable to the
Company of all liability of the Company and its officers, shareholders,
employees and directors to the Executive in connection with or arising out of
his employment with the Company, except with respect to any then-vested rights
under the Company's Option Plan and except with respect to any Severance
Payments or consulting or other benefit payments which may be payable to him
under the terms of the Agreement. Nothing herein shall modify Employee's
mediation and other rights under this Agreement.
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(j) Executive Consultancy. Following any termination of the
Executive's employment with the Company pursuant to Section 5(d) or (e) hereof
or following any termination by the Executive for "Good Cause" pursuant to
Section 6(e) hereof (which termination date shall be referred to as the
"Consulting Commencement Date"):
(i) the Executive irrevocably agrees to act as a consultant
to the Company for a period of sixty (60) months thereafter (the "Consulting
Period"), and the Company irrevocably agrees to retain the Executive as a
consultant on the terms and conditions set forth herein; and
(ii) in the event the Executive continues to serve on the
Board of Directors of the Company following any such termination of employment,
the Executive shall be entitled to receive non-employee directors fees and
expense reimbursements, to the extent provided to other non-employee directors;
provided the Executive shall not be entitled to receive any additional stock
option grants as a result of being a non-employee director.
6. Compensation Upon Termination.
(a) Death. If the Executive's employment shall be terminated
pursuant to Section 5(a), the Company shall pay the Executive monthly his base
salary payable pursuant to Section 4(a) and one-twelfth of any bonus payable
pursuant to Section 4(d) at the most recent annual amount received, or entitled
to be received, by the Executive (the "Severance Payment") for a period of two
years following the Date of Termination. At the Executive's own expense, the
Executive's dependents shall also be entitled to any continuation of health
insurance coverage rights under any applicable law.
(b) Disability. If the Executive's employment shall be terminated
by reason of disability pursuant to Section 5(b), the Executive shall receive
the Severance Payment for the lesser of two years or the duration of such
disability; provided that payments so made to the Executive during the
disability shall be reduced by the sum of the amounts, if any, payable to the
Executive at or prior to the time of any such payment under any disability
benefit plan of the Company. At the Executive's own expense, the Executive and
his dependents shall also be entitled to any continuation of health insurance
coverage rights under any applicable law.
(c) Cause. If the Executive's employment shall be terminated for
Cause pursuant to Section 5(c) hereof, the Company shall pay the Executive his
salary, but no bonus, through the Date of Termination, and the Company shall
have no obligation to make any of the other payments set forth in Sections 4, 5
or 6 of the Agreement. At the Executive's own expense, the Executive and his
dependents shall also be entitled to any continuation of health insurance
coverage rights under any applicable law.
(d) Other Terminations by the Company. If the Company shall
terminate the Executive's employment without cause pursuant to Section 5(d)
hereof, the Company shall pay the Executive (i) his salary and any bonus then
payable through the Date of Termination pursuant to Section 4(d)(ii) of the
Agreement, and (ii) the consulting payments set forth in Section 6(j) of
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<PAGE> 9
the Agreement. The Executive and his dependents shall also be entitled to any
continuation of health insurance coverage rights under any applicable law.
(e) Voluntary Resignation. If the Executive terminates his
employment with the Company for "Good Cause", the Company shall pay the
Executive (i) his salary and any bonus then payable through the Date of
Termination pursuant to Section 4(d)(ii) of the Agreement, and (ii) the
consulting payments set forth in Section 6(j) of the Agreement. If the Executive
terminates his employment with the Company without "Good Cause" at a time which
is not permitted under Section 5(e) hereof, the Company shall pay the Executive
his salary, but no bonus, through the Date of Termination, and the Company shall
have no obligation to make any of the other payments set forth in Sections 4, 5
or 6 of the Agreement. In any event, at the Executive's own expense, the
Executive and his dependents shall be entitled to any continuation of health
insurance coverage rights under any applicable law.
For purposes of this Agreement, "Good Cause" shall mean, without
the express written consent of the Executive, the occurrence of any of the
following events unless such events are substantially corrected within 30 days
following written notification by the Executive to the Company that he intends
to terminate his employment hereunder for one of the reasons set forth below:
(i) Any material alteration, reduction or diminution in the
duties, responsibilities or compensation of the Executive or
required relocation of the Executive from the Company's San
Francisco Bay area office;
(ii) a material breach by the Company of any provision of this
Agreement; and
(iii) the occurrence of a "Change in Control."
As used in this Agreement, "Change of Control" means the
occurrence of any of the following: (i) the adoption of a plan relating to the
liquidation or dissolution of the Company, (ii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any person or group, other than any of Osamu Kaneko,
Andrew J. Gessow and Steven C. Kenninger or their affiliates (the "Principals"),
becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Securities Exchange Act of 1934), directly or indirectly, of
more than 50% of the total voting power of the total outstanding voting stock of
the Company on a fully diluted basis or (iii) the consummation of the first
transaction (including, without limitation, any merger or consolidation) the
result of which is that any person or group, other than the Principals, becomes
the beneficial owner (as defined above), directly or indirectly, of more than
50% of the total voting power of the total outstanding voting stock of the
Company.
The Executive understands that any voluntary resignation by him
as a result of any personal or family reasons not otherwise set forth in this
Section 6(e) shall not constitute "Good Cause."
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<PAGE> 10
(f) The Company will be entitled to offset and reduce each month
the amount of the monthly Severance Payment otherwise payable to the Executive
hereunder by seventy-five percent (75%) of the amount of the Executive's prior
month's earnings (if any) from post-Company employment (including both salary,
bonus and other cash or cash equivalent compensation) at a subsequent employer
or in connection with any consulting practice or other self-employment or
venture founded by the Executive.
(g) The Executive's rights, if any, to retain and/or exercise any
and all options to purchase capital stock of the Company granted to the
Executive under the Option Agreements, dated as of September 10, 1996 and
September 27, 1996, each as amended as of July 27, 1998 (the "Option
Agreements"), upon or following termination of this Agreement are as set forth
in the amended Option Agreements.
(h) Any Severance Payment made pursuant to Section 6(a) or
Section 6(b) shall be payable in equal monthly installments over the required
duration set forth in Section 6(a) or 6(b).
(i) The continuing obligation of the Company to make any
Severance Payment or other payment to the Executive is expressly conditioned
upon the Executive complying and continuing to comply with his obligations and
covenants under Sections 7 and 8 of this Agreement following termination of
employment with the Company.
(j) Executive Consultancy. Provided that (i) the Executive has
complied with the terms of the Agreement, and (ii) the early termination of the
Agreement occurred as a result of one of the circumstances expressly described
in Section 5(j) hereof, the Company shall make the following payments to the
Executive. Such payments shall be in lieu of and shall satisfy any and all
obligations of the Company to pay the Executive any other Severance Payments
under Section 6 of this Agreement:
(i) Initial Consulting Period. On the first day of each of
the first five (5) months of the Consulting Period (the "Initial Consulting
Period"), the Company will pay the Executive a monthly consulting fee of
$25,000. Provided that the Executive has not yet commenced post-Company full
time employment during such five (5) month period, the Executive will make
himself available for up to ten (10) hours each month of consultation with the
Company for no additional consideration. In the event the Executive has
commenced post-Company full time employment during such five month period, the
Executive will make himself available for up to five (5) hours each month of
consultation with the Company for no additional consideration. In the event the
Company requires additional consulting time from the Executive during the
Initial Consulting Period, the Executive will make himself available for an
additional reasonable amount of time, given his other professional and personal
commitments, for an additional charge to the Company of $250 per hour.
(ii) Extended Consulting Period. As compensation for further
consulting services to be provided by the Executive during the last fifty five
(55) months of the Consulting Period (the "Extended Consulting Period"), the
Company will pay the Executive a prepaid, lump sum consulting fee equal to
$108,000 (the "Lump Sum Consulting Fee"). The
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Company agrees to pay the Lump Sum Consulting Fee on or before ten (10) days
following the end of the Initial Consulting Period. During the Extended
Consulting Period, the Executive agrees to make himself available for
consultation with the Company for up to five (5) hours per month at an hourly
rate of $500 for each hour spent on the Company's activities.
(iii) Subject to the Executive's substantial compliance with
the terms of this Agreement, the Company shall pay to the Executive the
consulting fees set forth above, without reduction or offset, regardless of
other post-Company employment income the Executive earns as an employee,
consultant or principal.
(iv) During the Consulting Period, the Company will allow
the Executive to reasonably juggle his personal matters and/or his other work or
employment with Company-requested consulting work.
(v) During the Consulting Period, the Company will reimburse
the Executive for all reasonable expenses incurred by him in connection with his
consulting for the Company.
(vi) During the Initial Consulting Period, the Company will
make available to the Executive under COBRA the medical benefits currently
received by him as a result of being an employee of the Company. The Company
shall reimburse to the Executive the cost to him of such COBRA benefits up to
the amount per month that the Executive would have received in medical benefits
allowance had he been an employee of the Company. The Executive will be
responsible for any excess COBRA costs.
7. Confidentiality and Non-Solicitation Covenants.
(a) Confidentiality. In addition to the agreements set forth in
Section 5(h)(i), the Executive hereby agrees that the Executive will not, during
the Employment Period or at any time thereafter directly or indirectly disclose
or make available to any person, firm, corporation, association or other entity
for any reason or purpose whatsoever, any Confidential Information (as defined
below). The Executive agrees that, upon termination of his employment with the
Company, all Confidential Information in his possession that is in written or
other tangible form (together with all copies or duplicates thereof, including
computer files) shall be returned to the Company and shall not be retained by
the Executive or furnished to any third party, in any form except as provided
herein; provided, however, that the Executive shall not be obligated to treat as
confidential, or return to the Company copies of any Confidential Information
that (i) was publicly known at the time of disclosure to the Executive, (ii)
becomes publicly known or available thereafter other than by any means in
violation of this Agreement or any other duty owed to the Company by any person
or entity or (iii) is lawfully disclosed to the Executive by a third party. As
used in this Agreement the term "Confidential Information" means: information
disclosed to the Executive or known by the Executive as a consequence of or
through his relationship with the Company, about the owners, customers,
employees, business methods, public relations methods, organization, procedures
or finances, including, without limitation, information of or relating to owner
or customer lists of the Company and its affiliates.
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(b) Non-Solicitation. The Executive hereby agrees that during the
Employment Period and at all times thereafter, regardless of the reason or
circumstances of termination of employment with the Company, the Executive will
not, either on his own account or jointly with or as a manager, agent, officer,
employee, consultant, partner, joint venturer, owner or shareholder or otherwise
on behalf of any other person, firm or corporation, (i) carry on or be engaged
or interested directly or indirectly in, or solicit, the manufacture or sale of
goods or provision of services to any person, firm or corporation which, at any
time during the Employment Period has been or is a customer of or in the habit
of dealing with the Company in its business, (ii) endeavor directly or
indirectly to canvas or solicit in competition with Company or to interfere with
the supply of orders for goods or services from or by any person, firm or
corporation which during the Employment Period has been or is a supplier of
goods or services to Company or (iii) directly or indirectly solicit or attempt
to solicit away from Company any of its officers or employees or offer
employment to any person (except for Dewey W. Chambers, to whom the prohibitions
set forth in this subsection (iii) do not apply) who, on or during the 6 months
immediately preceding the date of such solicitation or offer, is or was an
officer or employee of Company.
8. Covenant Not to Compete.
(a) The Executive agrees that during the Employment Period he
will devote substantially full-time to the business of the Company, will not
engage in any competitive businesses and will not serve as an officer of any
other public company, except with the prior written approval of the Board (which
the Board may grant or withhold in its sole and absolute discretion). Subject to
such full-time requirement and the restrictions set forth below in this Section
8 and Section 3(c) above, the Executive agrees that he shall not (i) invest in,
manage, consult or participate in any way in any other timeshare business (in
either an active or passive manner), (ii) participate in or advise any business
wherein timeshare is a relevant business segment or (iii) act for or on behalf
of any business that intends to enter or participate in the timeshare business,
in each case unless the independent members of the Company's Board determine
that such action is in the best interest of the Company. Notwithstanding the
foregoing, the Executive may purchase stock as a stockholder in any publicly
traded company, including any company which is involved in the timeshare
business; provided that the Executive does not own (together or separately or
through his affiliates) more than 5% of any company (other than the Company) in
the timeshare business. In addition, the Executive shall not invest (directly or
indirectly) in any timeshare property in the hospitality business (including any
condominium project) or any property where the business plan therefor includes
an intention to convert the property to timeshare, unless the independent
members of the Company's Board of Directors determine that such an investment is
in the best interest of the Company. In the event that there is no Consulting
Period due to a breach of the Agreement by the Executive, the provisions of this
Section 8(a) shall survive until the later of two years following the Date of
Termination, regardless of whether the termination is for "Good Cause" or
otherwise. In the event that there is a Consulting Period, the provisions of
this Section 8(a) shall terminate as of the Date of Termination.
(b) The Executive agrees that during any Consulting Period he
will not (i) manage, consult, invest in or participate in any way in any other
public timeshare or vacation
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ownership business (in either an active or passive manner), (ii) participate in,
advise or invest in any public company wherein timeshare or vacation ownership
is a relevant business segment, (iii) act for or on behalf of or invest in any
business that intends to enter or participate in the timeshare business as a
public company, provided that the Executive may purchase stock as a stockholder
in any publicly traded company, including any company which is involved in the
timeshare business so long as the Executive does not own (together or separately
or through his affiliates) more than 5% of any company (other than the Company)
in the timeshare business. The provisions of this Section 8(b) shall survive
until the expiration of any Consulting Period, regardless of whether the
Executive's termination is for "Good Cause" or otherwise.
9. Injunctive Relief and Enforcement. In the event of breach by the
Executive of the terms of Sections 5(h)(i), 7 or 8, and only following mediation
or attempted mediation as set forth in Section 16 below (unless the Company is
suffering irreparable injury, in which case Section 16 will not prevent the
Company from seeking injunctive relief against the Executive in any court or
forum), the Company shall be entitled to institute legal proceedings to enforce
the specific performance of this Agreement by the Executive and to enjoin the
Executive from any further violation of Sections 5(h)(i), 7 or 8 and to exercise
such remedies cumulatively or in conjunction with all other rights and remedies
provided by law and not otherwise limited by this Agreement. The Executive
acknowledges, however, that the remedies at law for any breach by him of the
provisions of Sections 5(h)(i), 7 or 8 may be inadequate. In addition, in the
event the agreements set forth in Sections 5(h)(i), 7 or 8 shall be determined
by any court of competent jurisdiction to be unenforceable by reason of
extending for too great a period of time or over too great a geographical area
or by reason of being too extensive in any other respect, each such agreement
shall be interpreted to extend over the maximum period of time for which it may
be enforceable and to the maximum extent in all other respects as to which it
may be enforceable, and enforced as so interpreted, all as determined by such
court in such action.
10. Notice. For the purposes of this Agreement, notices, demands and
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered when
transmitted by telecopy with receipt confirmed, or one day after delivery to an
overnight air courier guaranteeing next day delivery, addressed as follows:
If to the Executive: Michael A. Depatie
245 Lindenbrook Road
Woodside, California 94062
If to the Company: Signature Resorts, Inc.
5933 W. Century Boulevard, Suite 210
Los Angeles, California 90045
Attention: Steven C. Kenninger
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With a copy to: Signature Resorts, Inc.
1875 South Grant Street, Suite 650
San Mateo, California 94402
Attention: Andrew D. Hutton
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
11. Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force and
effect; provided, however, that if any one or more of the terms contained in
Sections 5(h), 7 or 8 hereto shall for any reason be held to be excessively
broad with regard to time, duration, geographic scope or activity, that term
shall not be deleted but shall be reformed and constructed in a manner to enable
it to be enforced to the extent compatible with applicable law.
12. Assignment. This Agreement may not be assigned by the Executive,
but may be assigned by the Company to any successor to its business and will
inure to the benefit and be binding upon any such successor.
13. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
14. Headings. The headings contained herein are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.
15. Choice of Law. This Agreement shall be construed, interpreted and
the rights of the parties determined in accordance with the laws of the State of
Maryland (without reference to the choice of law provisions of Maryland), except
with respect to matters of law concerning the internal corporate affairs of any
corporate entity which is a party to or the subject of this Agreement, and as to
those matters the law of the jurisdiction under which the respective entity
derives its powers shall govern.
16. Mediation. Subject to any irreparable injury being suffered by the
Company giving rise to the right of the Company to seek injunctive relief
against the Executive pursuant to Section 9 hereof, in the event that there
shall be a dispute among the parties arising out of or relating to this
Agreement, or the breach thereof, the parties agree that such dispute shall be
resolved by final and binding mediation in Los Angeles, California, before a
mediator and on terms and conditions mutually acceptable to the parties;
provided, however, that if the parties cannot agree on the terms and conditions
of such mediation, such terms and conditions shall be established by the
mediator. Any award issued as a result of such mediation shall be final and
binding between the parties thereto, and shall be enforceable by any court
having jurisdiction over the party against whom enforcement is sought. The fees
and expenses relating to such mediation (with the exception of the Executive's
attorneys' fees, if any) or any action to enforce a mediation award shall be
paid by the Company.
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17. LIMITATION ON LIABILITIES. IF EITHER THE EXECUTIVE OR THE COMPANY
IS AWARDED ANY DAMAGES AS COMPENSATION FOR ANY BREACH OR ACTION RELATED TO THIS
AGREEMENT, A BREACH OF ANY COVENANT CONTAINED IN THIS AGREEMENT (WHETHER EXPRESS
OR IMPLIED BY EITHER LAW OR FACT), OR ANY OTHER CAUSE OF ACTION BASED IN WHOLE
OR IN PART ON ANY BREACH OF ANY PROVISION OF THIS AGREEMENT, SUCH DAMAGES SHALL
BE LIMITED TO CONTRACTUAL DAMAGES AND SHALL EXCLUDE (I) PUNITIVE DAMAGES, AND
(II) CONSEQUENTIAL AND/OR INCIDENTAL DAMAGES (E.G., LOST PROFITS AND OTHER
INDIRECT OR SPECULATIVE DAMAGES). THE MAXIMUM AMOUNT OF DAMAGES THAT THE
EXECUTIVE MAY RECOVER FOR ANY REASON SHALL BE THE AMOUNT EQUAL TO ALL AMOUNTS
OWED (BUT NOT YET PAID) TO THE EXECUTIVE PURSUANT TO THIS AGREEMENT THROUGH ITS
NATURAL TERM OR THROUGH ANY SEVERANCE PERIOD, PLUS INTEREST ON ANY DELAYED
PAYMENT AT THE MAXIMUM RATE PER ANNUM ALLOWABLE BY APPLICABLE LAW FROM AND AFTER
THE DATE(S) THAT SUCH PAYMENTS WERE DUE.
18. WAIVER OF JURY TRIAL. TO THE EXTENT APPLICABLE, EACH OF THE
PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS
AGREEMENT.
19. Entire Agreement. This Agreement contains the entire agreement and
understanding between the Company and the Executive with respect to the
employment of the Executive by the Company as contemplated hereby, and no
representations, promises, agreements or understandings, written or oral, not
herein contained shall be of any force or effect. This Agreement shall not be
changed unless in writing and signed by both the Executive and the Board of
Directors of the Company.
20. The Executive's Acknowledgment. The Executive acknowledges (a)
that he has had the opportunity to consult with independent counsel of his own
choice concerning this Agreement, and (b) that he has read and understands the
Agreement, is fully aware of its legal effect, and has entered into it freely
based on his own judgment.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
this 27th day of July 1998.
SUNTERRA CORPORATION
By /s/ STEVEN C. KENNINGER
------------------------------------
Name: Steven C. Kenninger
Title: President
EXECUTIVE
/s/ MICHAEL A. DEPATIE
------------------------------------
Michael A. Depatie
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EXHIBIT 10.5
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (the "Agreement"), dated as of
__________________, is made by and between Sunterra Corporation (formerly known
as Signature Resorts, Inc.), a Maryland corporation, hereinafter referred to as
"Company," and ________________, an [employee and consultant] of the Company,
hereinafter referred to as "Optionee":
WHEREAS, the Company wishes to afford the Optionee the
opportunity to purchase shares of its $.01 par value Common Stock; and
WHEREAS, the Company wishes to carry out the Plan (the terms of
which are hereby incorporated by reference and made a part of this Agreement);
and
WHEREAS, the Committee, appointed to administer the Plan, has
determined that it would be to the advantage and best interest of the Company
and its shareholders to grant the Option provided for herein to the Optionee as
an inducement to enter into or remain in the service of the Company or its
Subsidiaries and as an incentive for increased efforts during such service, and
has advised the Company thereof and instructed the undersigned officers to issue
said Option;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Agreement, they
shall have the meaning specified below unless the context clearly indicates to
the contrary. The masculine pronoun shall include the feminine and neuter, and
the singular the plural, where the context so indicates.
Section 1.1 - Board
"Board" shall mean the Board of Directors of the Company.
Section 1.2 - Code
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Section 1.3 - Committee
"Committee" shall mean the Compensation Committee of the Board,
or a subcommittee of the Board, appointed as provided in Section 9.1 of the
Plan.
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Section 1.4 - Common Stock
"Common Stock" shall mean the common stock of the Company, par
value $.01 per share, and any equity security of the Company issued or
authorized to be issued in the future, but excluding any warrants, options or
other rights to purchase Common Stock. Debt securities of the Company
convertible into Common Stock shall be deemed equity securities of the Company.
Section 1.5 - Company
"Company" shall mean Sunterra Corporation, a Maryland
corporation.
Section 1.6 - Director
"Director" shall mean a member of the Board.
Section 1.7 - Employee
"Employee" shall mean any officer or other employee (as defined
in accordance with Section 3401(c) of the Code) of the Company, or of any
corporation which is a Subsidiary.
Section 1.8 - Exchange Act
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
Section 1.9 - Fair Market Value
"Fair Market Value" of a share of Common Stock as of a given date
shall be (i) the mean between the highest and lowest selling price of a share of
Common Stock on the principal exchange on which shares of Common Stock are then
trading, if any, on such date, or if shares were not traded on such date, then
on the closest preceding date on which a trade occurred, or (ii) if Common Stock
is not traded on an exchange, the mean between the closing representative bid
and asked prices for the Common Stock on such date as reported by NASDAQ or, if
NASDAQ is not then in existence, by its successor quotation system; or (iii) if
Common Stock is not publicly traded, the Fair Market Value of a share of Common
Stock as established by the Committee acting in good faith.
Section 1.10 - Option
"Option" shall mean a non-qualified stock option granted under
this Agreement and Article III of the Plan.
Section 1.11 - Optionee
"Optionee" shall mean an Employee or consultant granted an Option
under this Agreement and the Plan.
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Section 1.12 - Plan
"Plan" shall mean The 1996 Equity Participation Plan of Sunterra
Corporation, formerly known as Signature Resorts, Inc., as amended.
Section 1.13 - Rule 16b-3
"Rule 16b-3" shall mean that certain Rule 16b-3 under the
Exchange Act, as such Rule may be amended from time to time.
Section 1.14 - Secretary
"Secretary" shall mean the Secretary of the Company.
Section 1.15 - Securities Act
"Securities Act" shall mean the Securities Act of 1933, as
amended.
Section 1.16 - Subsidiary
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
Section 1.17 - Termination of Consultancy
"Termination of Consultancy" shall mean the time when the
engagement of Optionee as a Consultant to the Company or a Subsidiary is
terminated for any reason, with or without cause, including without limitation,
resignation, discharge, death or retirement; but excluding terminations where
there is a simultaneous commencement of employment with the Company or any
Subsidiary. The Committee, in its absolute discretion, shall determine the
effect of all matters and questions relating to Termination of Consultancy,
including, but not by way of limitation, the question of whether a Termination
of Consultancy resulted from a discharge for good cause, and all questions of
whether particular leaves of absence constitute Terminations of Employment.
Notwithstanding any other provision of this Plan, the Company or any Subsidiary
has an absolute and unrestricted right to terminate a consultant's service at
any time for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.
Section 1.18 - Termination of Employment
"Termination of Employment" shall mean the time when the
employee-employer relationship between the Optionee and the Company or any
Subsidiary is terminated for any reason, including, but not by way of
limitation, a termination by resignation, discharge, death, disability or
retirement; but excluding (i) terminations where there is a simultaneous
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reemployment, continuing employment of an Optionee by the Company or any
Subsidiary, (ii) at the discretion of the Committee, terminations which result
in a temporary severance of the employee-employer relationship, and (iii) at the
discretion of the Committee, terminations which are followed by the simultaneous
establishment of a consulting relationship by the Company or a Subsidiary with
the former employee. The Committee, in its absolute discretion, shall determine
the effect of all matters and questions relating to Termination of Employment,
including, but not by way of limitation, the question of whether a Termination
of Employment resulted from a discharge for good cause, and all questions of
whether particular leaves of absence constitute Terminations of Employment.
Notwithstanding any other provision of this Plan, the Company or any Subsidiary
has an absolute and unrestricted right to terminate an Employee's employment at
any time for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.
ARTICLE II
GRANT OF OPTION
Section 2.1 - Grant of Option
In consideration of the Optionee's agreement to remain in the
employ of (or consult for) the Company or its Subsidiaries for a period of at
least ___ years after the commencement of Executive's employment with the
Company and for other good and valuable consideration, on the date hereof the
Company irrevocably grants to the Optionee the option to purchase any part or
all of an aggregate of ___________________________________________ shares of its
$.01 par value Common Stock upon the terms and conditions set forth in this
Agreement.
Section 2.2 - Purchase Price
The per share purchase price of the shares of stock covered by
the Option shall be $_____, which is the per share Fair Market Value of such
shares as of the date hereof.
Section 2.3 - Consideration to Company
In consideration of the granting of this Option by the Company,
the Optionee agrees to render faithful and efficient services to the Company or
a Subsidiary, with such duties and responsibilities as the Company shall from
time to time prescribe, for a period of at least _______ years after the
commencement of Executive's employment with the Company. Nothing in the Plan or
this Agreement shall confer upon any Optionee any right to continue in the
employ of, or as a consultant for, the Company or any Subsidiary, or as a
director of the Company, or shall interfere with or restrict in any way the
rights of the Company and any Subsidiary, which are hereby expressly reserved,
to discharge the Optionee at any time for any reason whatsoever, with or without
good cause[, subject to the terms of the Executive's Employment Agreement with
the Company.]
Section 2.4 - Adjustments in Option
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<PAGE> 5
(a) In the event that the outstanding shares of the stock subject
to the Option are changed into or exchanged for a different number or kind of
shares of the Company or other securities of the Company, or of another
corporation, by reason of reorganization, merger, consolidation,
recapitalization, reclassification, stock split up, stock dividend or
combination of shares, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares as to which the Option, or portions
thereof then unexercised, shall be exercisable, to the end that after such event
the Optionee's proportionate interest shall be maintained as before the
occurrence of such event. Such adjustment in the Option may include any
necessary corresponding adjustment in the Option price per share, but shall be
made without change in the total price applicable to the unexercised portion of
the Option (except for any change in the aggregate price resulting from
rounding-off of share quantities or prices). Any such adjustment made by the
Committee shall be final and binding upon the Optionee, the Company and all
other interested persons.
(b) Notwithstanding the foregoing, in the event of such a
reorganization, merger, consolidation, recapitalization, reclassification, stock
split up, stock dividend or combination, or other adjustment or event which
results in shares of Common Stock being exchanged for or converted into cash,
securities or other property, the Company will have the right to terminate the
Plan as of the date of the exchange or conversion, in which case all options,
rights and other awards under this Plan shall become the right to receive such
cash, securities or other property, net of any applicable exercise price.
(c) In the event of a "spin-off" or other substantial
distribution of assets of the Company which has a material diminutive effect
upon the Fair Market Value of the Company's Common Stock, the Board may in its
discretion make an appropriate and equitable adjustment to the Option to reflect
such diminution.
ARTICLE III
PERIOD OF EXERCISABILITY
Section 3.1 - Commencement of Exercisability
(a) Subject to Section 5.7, the Option shall become exercisable
in __________ cumulative installments as follows:
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<PAGE> 6
(b) No portion of the Option which is unexercisable at
Termination of Employment or Termination of Consultancy, as applicable, shall
thereafter become exercisable.
Section 3.2 - Duration of Exercisability
The installments provided for in Section 3.1 are cumulative. Each
such installment which becomes exercisable pursuant to Section 3.1 shall remain
exercisable until it becomes unexercisable under Section 3.3.
Section 3.3 - Expiration of Option
The Option may not be exercised to any extent by anyone after the
first to occur of the following events:
(a) The expiration of ten (10) years from the date the Option was
granted; or
(b) The time of the Optionee's Termination of Employment or
Termination of Consultancy unless such Termination of Employment or Termination
of Consultancy, as applicable, results from his death, his retirement, his
disability or his being discharged not for "Cause" (as defined in Section 5(c)
of the Employment Agreement dated the date hereof between Optionee and the
Company); or
(c) The expiration of three (3) months from the date of the
Optionee's Termination of Employment or Termination of Consultancy by reason of
his retirement or his being discharged not for "Cause," unless the Optionee dies
within said three-month period; or
(d) The expiration of one (1) year from the date of the
Optionee's Termination of Employment or Termination of Consultancy by reason of
his disability; or
(e) The expiration of one (1) year from the date of the
Optionee's death; or
(f) The effective date of either the merger or consolidation of
the Company with or into another corporation, the exchange of all or
substantially all of the assets of the Company for the securities of another
corporation, the acquisition by another corporation or
6
<PAGE> 7
person of all or substantially all of the Company's assets or eighty percent
(80%) or more of the Company's then outstanding voting stock, or the liquidation
or dissolution of the Company. At least ten (10) days prior to the effective
date of such merger, consolidation, exchange, acquisition, liquidation or
dissolution, the Committee shall give the Optionee notice of such event if the
Option has then neither been fully exercised nor become unexercisable under this
Section 3.3.
ARTICLE IV
EXERCISE OF OPTION
Section 4.1 - Person Eligible to Exercise
During the lifetime of the Optionee, only he may exercise the
Option or any portion thereof. After the death of the Optionee, any exercisable
portion of the Option may, prior to the time when the Option becomes
unexercisable under Section 3.3, be exercised by his personal representative or
by any person empowered to do so under the Optionee's will or under the then
applicable laws of descent and distribution.
Section 4.2 - Partial Exercise
Any exercisable portion of the Option or the entire Option, if
then wholly exercisable, may be exercised in whole or in part at any time prior
to the time when the Option or portion thereof becomes unexercisable under
Section 3.3; provided, however, that each partial exercise shall be for not less
than one thousand (1,000) shares and shall be for whole shares only.
Section 4.3 - Manner of Exercise
The Option, or any exercisable portion thereof, may be exercised
solely by delivery to the Secretary or his office of all of the following prior
to the time when the Option or such portion becomes unexercisable under Section
3.3:
(a) Notice in writing signed by the Optionee or the other person
then entitled to exercise the Option or portion, stating that the Option or
portion is thereby exercised, such notice complying with all applicable rules
established by the Committee or the Board; and
(b) (i) Full payment (in cash) for the shares with respect to
which such Option or portion is exercised;
(ii) With the consent of the Committee, payment delayed
for up to thirty (30) days from the date the Option, or portion thereof,
is exercised; or
(iii) With the consent of the Committee, (A) shares of the
Company's Common Stock owned by the Optionee duly endorsed for transfer
to the Company or (B) subject to the timing requirements of Section 4.4,
shares of the Company's Common Stock issuable to the Optionee upon
exercise of the Option, with a Fair Market Value on
7
<PAGE> 8
the date of Option exercise equal to the aggregate purchase price of the
shares with respect to which such Option or portion is exercised; or
(iv) With the consent of the Committee, property of any
kind which constitutes good and valuable consideration; or
(v) With the consent of the Committee, a full recourse
promissory note bearing interest (at no less than such rate as shall
then preclude the imputation of interest under the Code or successor
provision) and payable upon such terms as may be prescribed by the
Committee or the Board. The Committee may also prescribe the form of
such note and the security to be given for such note. The Option may not
be exercised, however, by delivery of a promissory note or by a loan
from the Company when or where such loan or other extension of credit is
prohibited by law; or
(vi) With the consent of the Committee, any combination of
the consideration provided in the foregoing subparagraphs (iii), (iv)
and (v); and
(c) A bona fide written representation and agreement, in a form
satisfactory to the Committee or the Board, signed by the Optionee or other
person then entitled to exercise such Option or portion, stating that the shares
of stock are being acquired for his own account, for investment and without any
present intention of distributing or reselling said shares or any of them except
as may be permitted under the Securities Act and then applicable rules and
regulations thereunder, and that the Optionee or other person then entitled to
exercise such Option or portion will indemnify the Company against and hold it
free and harmless from any loss, damage, expense or liability resulting to the
Company if any sale or distribution of the shares by such person is contrary to
the representation and agreement referred to above. The Committee may, in its
absolute discretion, take whatever additional actions it deems appropriate to
insure the observance and performance of such representation and agreement and
to effect compliance with the Securities Act and any other federal or state
securities laws or regulations. Without limiting the generality of the
foregoing, the Committee may require an opinion of counsel acceptable to it to
the effect that any subsequent transfer of shares acquired on an Option exercise
does not violate the Securities Act, and may issue stop-transfer orders covering
such shares. Share certificates evidencing stock issued on exercise of this
Option shall bear an appropriate legend referring to the provisions of this
subsection (c) and the agreements herein. The written representation and
agreement referred to in the first sentence of this subsection (c) shall,
however, not be required if the shares to be issued pursuant to such exercise
have been registered under the Securities Act, and such registration is then
effective in respect of such shares; and
(d) Full payment to the Company (or other employer corporation)
of all amounts which, under federal, state or local tax law, it is required to
withhold upon exercise of the Option; with the consent of the Committee, (i)
shares of the Company's Common Stock owned by the Optionee duly endorsed for
transfer, or (ii) subject to the timing requirements of Section 4.4, shares of
the Company's Common Stock issuable to the Optionee upon exercise of the Option,
having a Fair Market Value at the date of Option exercise equal to the sums
required to be withheld, may be used to make all or part of such payment; and
8
<PAGE> 9
(e) In the event the Option or portion shall be exercised
pursuant to Section 4.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the Option.
Section 4.4 - Certain Timing Requirements
Shares of the Company's Common Stock issuable to the Optionee
upon exercise of the Option may be used to satisfy the Option price or the tax
withholding consequences of such exercise only (i) during the period beginning
on the third (3rd) business day following the date of release of the quarterly
or annual summary statement of sales and earnings of the Company and ending on
the twelfth (12th) business day following such date or (ii) pursuant to an
irrevocable written election by the Optionee to use shares of the Company's
Common Stock issuable to the Optionee upon exercise of the Option to pay all or
part of the Option price or the withholding taxes (subject to the approval of
the Committee) made at least six (6) months prior to the payment of such Option
price or withholding taxes.
Section 4.5 - Conditions to Issuance of Stock Certificates
The shares of stock deliverable upon the exercise of the Option,
or any portion thereof, may be either previously authorized but unissued shares
or issued shares which have then been reacquired by the Company. Such shares
shall be fully paid and nonassessable. The Company shall not be required to
issue or deliver any certificate or certificates for shares of stock purchased
upon the exercise of the Option or portion thereof prior to fulfillment of all
of the following conditions:
(a) The admission of such shares to listing on all stock
exchanges on which such class of stock is then listed; and
(b) The completion of any registration or other qualification of
such shares under any state or federal law or under rulings or regulations of
the Securities and Exchange Commission or of any other governmental regulatory
body, which the Committee or Board shall, in its absolute discretion, deem
necessary or advisable; and
(c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee or Board shall, in its
absolute discretion, determine to be necessary or advisable; and
(d) The receipt by the Company of full payment for such shares,
including payment of all amounts which, under federal, state or local tax law,
it is required to withhold upon exercise of the Option; and
(e) The lapse of such reasonable period of time following the
exercise of the Option as the Committee or Board may from time to time establish
for reasons of administrative convenience.
Section 4.6 - Rights as Shareholder
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<PAGE> 10
The holder of the Option shall not be, nor have any of the rights
or privileges of, a shareholder of the Company in respect of any shares
purchasable upon the exercise of any part of the Option unless and until
certificates representing such shares shall have been issued by the Company to
such holder.
ARTICLE V
OTHER PROVISIONS
Section 5.1 - Administration
The Committee shall have the power to interpret the Plan and this
Agreement and to adopt such rules for the administration, interpretation and
application of the Plan as are consistent therewith and to interpret or revoke
any such rules. All actions taken and all interpretations and determinations
made by the Committee in good faith shall be final and binding upon the
Optionee, the Company and all other interested persons. No member of the
Committee shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or the Option. In its
absolute discretion, the Board may at any time and from time to time exercise
any and all rights and duties of the Committee under this Plan except with
respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or any
regulations or rules issued thereunder, are required to be determined in the
sole discretion of the Committee.
Section 5.2 - Option Not Transferable
Neither the Option nor any interest or right therein or part
thereof shall be liable for the debts, contracts or engagements of the Optionee
or his successors in interest or shall be subject to disposition by transfer,
alienation, anticipation, pledge, encumbrance, assignment or any other means
whether such disposition be voluntary or involuntary or by operation of law by
judgment, levy, attachment, garnishment or any other legal or equitable
proceedings (including bankruptcy), and any attempted disposition thereof shall
be null and void and of no effect; provided, however, that this Section 5.2
shall not prevent transfers by will or by the applicable laws of descent and
distribution.
Section 5.3 - Shares to Be Reserved
The Company shall at all times during the term of the Option
reserve and keep available such number of shares of stock as will be sufficient
to satisfy the requirements of this Agreement.
Section 5.4 - Notices
Any notice to be given under the terms of this Agreement to the
Company shall be addressed to the Company in care of its Secretary, and any
notice to be given to the Optionee shall be addressed to him at the address
given beneath his signature hereto. By a notice given pursuant to this Section
5.4, either party may hereafter designate a different address for notices to
10
<PAGE> 11
be given to him. Any notice which is required to be given to the Optionee shall,
if the Optionee is then deceased, be given to the Optionee's personal
representative if such representative has previously informed the Company of his
status and address by written notice under this Section 5.4. Any notice shall be
deemed duly given when enclosed in a properly sealed envelope or wrapper
addressed as aforesaid, deposited (with postage prepaid) in a post office or
branch post office regularly maintained by the United States Postal Service.
Section 5.5 - Titles
Titles are provided herein for convenience only and are not to
serve as a basis for interpretation or construction of this Agreement.
Section 5.6 - Construction
This Agreement shall be administered, interpreted and enforced
under the laws of the State of Maryland.
Section 5.7 - Conformity to Securities Laws
The Optionee acknowledges that the Plan is intended to conform to
the extent necessary with all provisions of the Securities Act and the Exchange
Act and any and all regulations and rules promulgated by the Securities and
Exchange Commission thereunder, including without limitation Rule 16b-3.
Notwithstanding anything herein to the contrary, the Plan shall be administered,
and the Option is granted and may be exercised, only in such a manner as to
conform to such laws, rules and regulations. To the extent permitted by
applicable law, the Plan and this Agreement shall be deemed amended to the
extent necessary to conform to such laws, rules and regulations.
[Signature Page to Follow]
11
<PAGE> 12
IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto.
Sunterra Corporation
--------------------------------------------
By:
Its:
--------------------------------------------
By:
Its:
- ----------------------------
Optionee
- ----------------------------
- ----------------------------
Address
Optionee's Taxpayer
Identification Number:
- ----------------------------
12
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