Exhibit 10.3

 

Sunterra Corporation

 

2005 Incentive Plan

 

Plan Specifications For Performance Share Awards

 

October 1, 2005

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Section 1: The Plan.

 

The Sunterra Corporation 2005 Incentive Plan (“Plan”) was approved by the
shareholders of Sunterra Corporation (“Sunterra” or “Company”) at the annual
shareholders meeting in February 2005, and the Compensation Committee of the
Board of Directors administers the Plan (“Committee”). A variety of awards may
be granted under the Plan, including stock awards, cash awards and
performance-based awards within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended (“Code”). The Plan authorizes the Committee to
establish terms and conditions of awards under the Plan, subject to any
limitations or restrictions applicable to any particular award under the Plan.
Pursuant to the terms of the Plan, the Committee desires to establish terms and
conditions for Stock Awards intended to qualify as Performance Awards or
Performance-Based Awards under the Plan. All awards described herein are granted
under the Plan and shall be subject to all requirements and limitations set
forth in the Plan.

 

Section 2: Definitions. Terms not otherwise defined herein shall have the
meaning ascribed to such term in the Plan. The following terms used herein have
the meaning ascribed to them below unless the context indicates otherwise:

 

  2.1 Beneficiary. A person designated by a participant, in a manner approved by
the Committee, who is entitled to vested Shares following the death of that
participant. If a participant does not designate a Beneficiary, the Beneficiary
shall be the appropriate representative of the participant’s estate.

 

  2.2 EBITDA. Earnings before interest, taxes, depreciation, and amortization,
including amortization of fresh start premiums, amortization of capitalized loan
origination costs, adjustment for foreign exchange, elimination of gains and
losses from asset dispositions outside the ordinary course of business, and
elimination of goodwill impairments.

 

  2.3 Participation Agreement. Agreement by which identified participants may
elect to participate in the Plan.

 

  2.4 Performance Period. An annual fiscal year of the Company.

 

  2.5 Performance Share. A share of common stock in the Company granted to a
participant as a Performance Award and subject to vesting based on future
services, and such shares granted to Senior Executives shall also qualify as
Performance-Based Awards.

 

  2.6 Plan Award. The number of Performance Shares provided under an Award
herein to an individual participant.

 

  2.7 Senior Executive. An executive officer of the Company or other key
employee of the Company or any of its majority-owned subsidiaries who is a
“covered employee” within the meaning of Section 162(m)(3) of the Code at the
time of an Award, and such other officers or employees as designated by the
Committee as to any Award.

 

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  2.8 Share Ownership Targets. Value of Company shares owned expressed as a
percentage of annual base salary.

 

  2.9 Share Retention Guidelines. Guideline percentage of vested Performance
Shares, after withholding for taxes, in which selected participants should
retain ownership. Guidelines relate to Performance Shares until the participant
owns sufficient shares to satisfy overall Share Ownership Targets.

 

  2.10 Termination. A cessation of a participant’s employment with the Company.
A change in a participant’s responsibilities or job title shall not be treated
as a Termination.

 

  2.11 Total Business Return. Change in operating profit (net of expenses) after
taxes, divided by the Company’s weighted average cost of capital, plus free cash
flow.

 

  2.12 Total Shares. The total outstanding shares of Common Stock.

 

  2.13 Vesting. Right of ownership to Performance Shares that have been granted
to a participant and that accrues to the participant based on a defined period
of future Company service. The Committee maintains the right in its discretion
to determine vesting for all grants under the plan.

 

Section 3: General Description of Performance Awards.

 

  3.1 Awards made under these specifications are structured to provide
participants an equity incentive opportunity relative to the value created for
shareholders. Participants will be assigned a targeted Performance Share grant
value at the beginning of the fiscal year. Following the close of the fiscal
year, actual grant values will be determined based on Company annual operating
performance relative to goals that have been established by the Committee for
shareholder value creation. Grant values will be converted into a number of
Performance Shares using the Company’s closing share price on the date of grant.
Some of the Performance Shares granted will be subject to vesting for future
service. The vesting period is intended to align the interests of participants
with shareholders through stock ownership and to enhance retention of key
employees. In addition, selected executives of the Company will be required to
retain ownership of a portion of the shares of Common Stock that vest to them.
Without limiting the foregoing, it is noted that the amount of Performance
Shares actually awarded is based on the satisfaction of performance goals and
thereafter such Performance Shares generally are subject to Vesting and not
additional performance goals.

 

  3.2 The Plan will be effective as of October 1, 2005. From time to time,
awards will be made to participants designated by the Committee as being
eligible to participate hereunder. Additional awards may be made at the
Committee’s discretion.

 

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  3.3 Unless otherwise provided by the Committee, Performance Shares will vest
25% immediately upon grant, 25% one year after grant, 25% two years after grant,
and 25% three years after grant. The Committee reserves the right to change the
vesting schedule for future grants at its discretion.

 

  3.4 The target grant value for Plan participants will be established at the
discretion of the Committee.

 

  3.5 The value of Performance Shares at date of vesting will be taxable to
participants as ordinary income and tax deductible to the Company as
compensation expense. The Company will withhold Shares to satisfy the tax
withholding requirement at the time of vesting.

 

Section 4: Determination of Restricted Share Grants.

 

  4.1 Plan participation and target grant values will be established at the
discretion of the Committee. The Committee will establish target grant values
for selected key participants and the total target grant value for all Plan
participants.

 

  4.2 The Committee will establish annual goals for shareholder value creation
using a valuation methodology such as a multiple of annual EBITDA or Total
Business Return (TBR). The performance measures used will be selected by the
Committee and may change over time, but in the case of Senior Executives shall
utilize one or more business criteria set forth in the Plan for
Performance-Based Awards. In that regard, Total Business Return is based on the
business criteria of economic value added and is derived, in part, as a function
of the business criteria of operating profit. The total value of Performance
Shares to be granted will be based on a relationship between shares granted (as
a percentage of target shares) and shareholder value creation to be established
by the Committee.

 

  4.3 For purposes of determining annual grant values, Company EBITDA or Total
Business Return will be measured at the close of the fiscal year, when all
audited financial results become available. With respect to Performance-Based
Awards, the Committee shall certify the satisfaction of the applicable
performance goals and other material terms of such awards.

 

  4.4 The number of Performance Shares granted will be determined by dividing
the Fair Market Value (as defined in the Plan) of the Common Stock at the close
of the fiscal year for which the performance goals are being measured by the
annual grant value determined by the Committee as having been earned by the
level of performance achieved.

 

Section 5: Termination Provisions.

 

  5.1 Participants must be employed by the Company on the date of grant to be
eligible for a grant of Performance Shares.

 

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In the event of termination of a participant for any reason, the participant or
the participant’s Beneficiary will forfeit all unvested Performance Shares,
unless otherwise determined by the Committee in its sole discretion.

 

  5.2 Subject to its discretion, the Committee retains the right to change the
vesting of Performance Shares upon termination of any participant.

 

Section 6: Administration.

 

  6.1 The Committee has the sole responsibility for interpreting, administering,
and modifying these specifications, terms and conditions, consistent with the
Plan, as necessary. The Committee’s recommendations regarding the construction,
interpretation, and administration of the Plan will be final and binding on all
parties.

 

  6.2 Maintenance of financial information relevant to the awards granted
hereunder will be the responsibility of an administrative committee or
identified senior executives of the Company. The financial information
considered as part of the Plan must be audited annually by the Company’s
independent auditors prior to submission to the Committee.

 

Section 7: Designation of Beneficiaries.

 

  7.1 Each participant shall have the right at any time to designate any person
or persons as Beneficiaries to whom ownership of any vested Performance Shares
shall be transferred in the event of the participant’s death. Each Beneficiary
designation shall be effective only when filed in writing with the Company
during the participant’s lifetime on a form approved by the Committee.

 

  7.2 The filing of a new Beneficiary designation will cancel all previously
filed designations. Any finalized divorce or marriage (other than a common-law
marriage) of a participant subsequent to the date of designating a Beneficiary
shall revoke such designation unless (i) in the case of divorce, the previous
spouse was not designated as a Beneficiary, and (ii) in the case of marriage,
the participant’s new spouse had previously been designated as a Beneficiary.
The spouse of a married participant shall join in the designation of any
Beneficiary other than the spouse.

 

  7.3 If a participant fails to designate a Beneficiary as provided for above,
or if the Beneficiary designation is revoked by marriage, divorce, or otherwise,
or the Beneficiary predeceases the participant without execution of a new
designation, ownership of Performance Shares under the Plan shall be transferred
to the participant’s estate.

 

Section 8: Share Ownership Targets.

 

  8.1 Selected executives are expected to achieve the following share ownership
levels:

 

Chief Executive Officer – 5 times base salary

 

Tier 2 Executives – 3 times base salary

 

Tier 3 Executives – 2 times base salary

 

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  8.2 Until an executive achieves the share ownership target, the executive is
expected to retain 50% of the Performance Shares that vest, net of any shares
that are withheld by the Company to satisfy tax withholding requirements.

 

Section 9: Miscellaneous.

 

  9.1 No right to an award exists, and no right or interest in the Plan or to an
award is assignable or transferable, or subject to any lien or encumbrance,
either directly or indirectly, by operation of law or otherwise, including levy,
garnishment, attachment, pledge, or bankruptcy.

 

  9.2 All awards to be paid under the Plan shall be subject to all applicable
withholding taxes, including federal and state income taxes and employment
taxes. The Company will withhold such taxes in accordance with applicable tax
regulations.

 

  9.3 The specifications, terms and conditions set forth herein do not limit the
authority of the Board or the Committee to grant awards to the full extent
permitted under the Plan, regardless of whether such awards comply with such
specifications, terms and conditions.

 

  9.4 Section 162(m) Conditions. Awards made hereunder to Senior Executives are
intended to satisfy and shall be interpreted in a manner that satisfies any
applicable requirements as performance-based compensation. Any provision,
application or interpretation of the Plan inconsistent with such intent shall be
disregarded.

 

  9.5 Amendments, Suspension or Termination of Plan. The Board of Directors or
the Committee may from time to time amend, suspend or terminate in whole or in
part, and if suspended or terminated, may reinstate, any or all of the
provisions of the Plan, including these specifications, terms and conditions.
Notwithstanding the foregoing, no amendment shall be effective without Board of
Directors and/or shareholder approval if such approval is necessary to comply
with the applicable provisions of Section 162(m).

 

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