Exhibit 10.2

 

Sunterra Corporation

 

2005 Incentive Plan

 

Plan Specifications for Annual Incentive Awards

 

October 1, 2005

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Section 1: Introduction.

 

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 more detailed specifications, and other terms and conditions
applicable to awards under the Plan, subject to any limitations or restrictions
set forth in the Plan. This document sets forth such specifications, terms and
conditions applicable to annual incentive awards to be granted to Senior
Executives, as well as select other employees. 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 and Terms. Unless the context requires otherwise, each
capitalized term used without being defined herein shall have the same meaning
ascribed to such term in the Plan.

 

  2.1 Accounting Terms. Except as the context otherwise requires, financial and
accounting terms shall have the meaning ascribed to such terms for purposes of
and shall be determined in accordance with generally accepted accounting
principles, as from time to time in effect, as applied and included in the
consolidated financial statements of the Company, prepared in the ordinary
course of business.

 

  2.2 Specific Terms. The following words and phrases as used herein shall have
the following meanings unless a different meaning is plainly required by the
context:

 

“Adjusted EBITDA” means EBITDA, subject to and/or after giving effect to any
adjustments applicable pursuant to Section 4.6 at the time Business Criteria and
Performance Target(s) are established.

 

“Adjusted Net Income” means Net Income, subject to and/or after giving effect to
any adjustments applicable pursuant to Section 4.6 at the time Business Criteria
and Performance Target(s) are established.

 

“Adjusted Return on Assets” shall mean Return on Assets, subject to and/or after
giving effect to any adjustments applicable pursuant to Section 4.6 at the time
Business Criteria and Performance Target(s) are established.

 

“Adjusted Return on Equity” shall mean Return on Equity, subject to and/or after
giving effect to any adjustments applicable pursuant to Section 4.6 at the time
Business Criteria and Performance Target(s) are established.

 

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“Base Salary” in respect of any Performance Period means the aggregate base
annualized salary of a participant from the Company and all affiliates of the
Company at the time the participant is selected to participate for that
Performance Period, exclusive of any commissions or other actual or imputed
income from any Company-provided benefits or perquisites, but prior to any
reductions for salary deferred pursuant to any deferred compensation plan or for
contributions to a plan qualifying under Section 401(k) of the Code or
contributions to a cafeteria plan under Section 125 of the Code.

 

“Business Criteria” means any one or any combination of the business criteria
described in Section 12 of the Plan, including, but not limited to, EBITDA,
Adjusted EBITDA, Net Income, Adjusted Net Income, Return on Equity, Adjusted
Return on Equity, Return on Assets or Adjusted Return on Assets. In the case of
any participant who is not a Senior Executive, the term “Business Criteria”
shall also include performance targets based on Company-wide, divisional or
individual performance as the Committee may determine in its discretion.

 

“EBITDA” for any Year means 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.

 

“Senior Executive” means 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.

 

“Net Income” for any Year means the consolidated net income of the Company, as
reported in the consolidated financial statements of the Company for the Year;
provided, however, that in the event of a change in accounting principles
affecting the Company or Net Income during a Performance Period, Net Income
shall be determined without regard to such change unless otherwise specified by
the Committee at the time the Business Criteria and Performance Targets for any
Awards relative to such Performance Period are established.

 

“Performance Period” means the Year (or portions thereof) with respect to which
the Performance Targets are set by the Committee.

 

“Performance Target(s)” means the specific objective goal or goals that are
timely set in writing by the Committee pursuant to Section 4.2 for each
participant for the applicable Performance Period in respect of any one or more
of the Business Criteria.

 

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“Return on Assets” means Net Income divided by the average of the total assets
of the Company at the end of the four fiscal quarters of the Year, as reported
by the Company in its consolidated financial statements; provided, however, that
in the event of a change in accounting principles affecting the Company or
Return on Assets during a Performance Period, Return on Assets shall be
determined without regard to such change unless otherwise specified by the
Committee at the time the Business Criteria and Performance Targets for any
Awards relative to such Performance Period are established.

 

“Return on Equity” means the Net Income divided by the average of the common
shareholders equity of the Company at the end of each of the four fiscal
quarters of the Year, as reported by the Company in its consolidated financial
statements; provided, however, that in the event of a change in accounting
principles affecting the Company or Return on Equity during a Performance
Period, Return on Equity shall be determined without regard to such change
unless otherwise specified by the Committee at the time the Business Criteria
and Performance Targets for any Awards relative to such Performance Period are
established.

 

“Section 162(m)” means Section 162(m) of the Code, and the regulations
promulgated thereunder, all as amended from time to time.

 

“Shares” means shares of common stock of the Company or any securities or
property, including rights, into which the same may be converted by operation of
law or otherwise.

 

“Year” means a fiscal year of the Company commencing on or after October 1, 2005
that constitutes all or part of the applicable Performance Period.

 

Section 3: Administration of the Plan.

 

  3.1 The Committee. The Committee administers the Plan and awards granted
subject to the specifications, terms and conditions set forth herein. A majority
(but not fewer than two) of the members of the Committee shall constitute a
quorum. The vote of a majority of those present at a meeting at which a quorum
is present or the unanimous written consent of the Committee shall constitute
action by the Committee.

 

  3.2 Authority to Change Terms and Conditions of Awards. Without limiting the
Committee’s authority under the Plan, but subject to any limitations of the Plan
and compliance with Section 162(m) to the extent applicable, the Committee shall
have the authority to waive restrictive conditions for an award (including any
forfeiture conditions, but not Performance Target(s)), in such circumstances as
the Committee deems appropriate. In particular, the Committee has

 

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authority to provide under the terms of an Award that payment shall be
accelerated upon the death or disability of a participant, a change in control
of the Company, or upon termination of the participant’s employment without
cause or as a constructive termination.

 

Section 4: Annual Incentive Awards.

 

  4.1 Selection of Participants. The Committee shall determine, at the time the
Business Criteria and the Performance Target(s) are set for any Performance
Period, the employees of the Company or any of its subsidiaries who will be
granted a conditional opportunity to earn an annual incentive award with respect
to such Performance Period.

 

  4.2 Awards. Unless otherwise provided by the Committee, the Committee shall
specify, as to each annual incentive award granted hereunder, the Performance
Period, the Business Criteria, the Performance Targets, the amount (expressed as
a fixed amount in dollars or other currency, or as a percentage of Base Salary)
that could be earned relative to the satisfaction of the Performance Targets,
the maximum amount, if any, of compensation that could be earned and, if
applicable, the allocable portion of the award dependent on any particular
Performance Target. The applicable Performance Target(s) shall be determined by
the Committee consistent with the terms of the Plan and may be based on
Company-wide, division or individual performance. Notwithstanding the fact that
the Performance Target(s) have been attained, the Company may pay an award of
less than the amount determined by the formula or standard established pursuant
to Section 4.2 or may pay no amount at all, unless the Committee otherwise
expressly provides by written contract or other written commitment.

 

  4.3 Limitations Applicable to Senior Executives. Annual incentive awards
hereunder to Senior Executives shall be Performance-Based Awards under the Plan.
The specific Performance Target(s) with respect to the Business Criteria must be
established for Senior Executives by the Committee in advance of the deadlines
applicable under Section 162(m) and while the performance relating to the
Performance Target(s) remains substantially uncertain within the meaning of
Section 162(m). The Performance Target(s) with respect to any Performance Period
may be established on a cumulative basis or in the alternative, and may be
established on a stand-alone basis with respect to the Company or on an a
relative basis with respect to any peer companies or index selected by the
Committee. At the time the Performance Target(s) are selected, the Committee
shall provide, in terms of an objective formula or standard for each participant
who is a Senior Executive at such time, the method of computing the specific
amount that will represent the maximum amount of Cash Award

 

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payable to such participant if the Performance Target(s) are attained, subject
to Sections 4.1, 4.3, 4.7, 6.1 and 6.8. The Performance Target(s) shall be based
on an objective formula or standard, shall comply with the requirements of
Section 162(m) applicable to performance-based compensation and shall preclude
the use of discretion to increase the amount of any Cash Award earned pursuant
to the terms of the Award. Notwithstanding the fact that the Performance
Target(s) have been attained, the Company may pay a Cash Award of less than the
amount determined by the formula or standard established pursuant to Section 4.2
or may pay no Cash Award at all, unless the Committee otherwise expressly
provides by written contract or other written commitment.

 

  4.4 Effect of Mid-Year Commencement of Service; Termination of Employment. To
the extent compatible with Sections 4.3 and 5.7, if any individual commences
employment after the adoption of the Plan and the Performance Target(s) are
established for a Performance Period, the Committee may grant an annual
incentive award that is proportionately adjusted based on the period of actual
service during the Year; the amount of any annual incentive award paid to such
person shall not exceed that proportionate amount of the applicable maximum
individual bonus. In the event of the termination of employment of a participant
prior to the payment of an annual incentive award, the participant shall not be
entitled to any payment in respect of such award, unless otherwise expressly
provided by the terms of the award or other written contract with the Company.

 

  4.5 Adjustments. To preserve the intended incentives and benefits of an award
based on selected Business Criteria and Performance Targets, the Committee shall
apply the objective formula or standard with respect to the applicable
Performance Target in a manner that shall eliminate, in whole or in part, in
such manner as is specified by the Committee, the effects of the following :
(i) the gain, loss, income or expense resulting from changes in accounting
principles that become effective during the Performance Period; (ii) the gain,
loss, income or expense reported by the Company in its public filings with
respect to the Performance Period that are extraordinary or unusual in nature or
infrequent in occurrence, excluding gains or losses on the early extinguishment
of debt, as determined in accordance with Opinion No. 30 of the Accounting
Principles Board, and (iii) the gains or losses resulting from, and the direct
expenses incurred in connection with, the disposition of a business, in whole or
in part. The Committee may, however, provide at the time the Performance Targets
are established that one or more of the foregoing adjustments will not be made
as to a specific award. In addition, the Committee may determine at the time the
Performance Targets are established that other adjustments shall apply to the
objective formula or standard with respect to the

 

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applicable Performance Target to take into account, in whole or in part, in any
manner specified by the Committee, any one or more of the following with respect
to the Performance Period: (a) gain or loss from all or certain claims and/or
litigation and all or certain insurance recoveries relating to claims or
litigation, (b) the impact of impairment of tangible or intangible assets,
(c) the impact of restructuring activities, including but not limited to
reductions in force, that are reported in the Company’s public filings covering
the Performance Period and (d) the impact of investments or acquisitions made
during the year or, to the extent provided by the Committee, any prior year.
Each of the adjustments described in this Section 4.6 may relate to the Company
as a whole or any part of the Company’s business or operations, as determined by
the Committee at the time the Performance Targets are established. The
adjustments are to be determined in accordance with generally accepted
accounting principles and standards, unless another objective method of
measurement is designated by the Committee. In addition to the foregoing, the
Committee shall adjust any Business Criteria, Performance Targets or other
features of an Award that relate to or are wholly or partially based on the
number of, or the value of, any Shares, to reflect a change in the Company’s
capitalization, such as a stock split or dividend, or a corporate transaction,
such as a merger, consolidation, separation (including a spin-off or other
distribution of stock or property), or a reorganization of the Company.

 

  4.6 Committee Discretion to Determine Cash Awards. The Committee has the sole
discretion to determine the standard or formula pursuant to which each
participant’s award shall be calculated (in accordance with Section 4), whether
all or any portion of the amount so calculated will be paid, and the specific
amount (if any) to be paid to each participant, subject in all cases to the
terms, conditions and limits of the Plan and of any other written commitment
authorized by the Committee. To this same extent, the Committee may at any time
establish (and, once established, rescind, waive or amend) additional conditions
and terms of payment of Cash Awards (including but not limited to the
achievement of other financial, strategic or individual goals, which may be
objective or subjective) as it may deem desirable in carrying out the purposes
of the Plan and may take into account such other factors as it deems appropriate
in administering any aspect of the Plan. The Committee may not grant an award
under the Plan if the applicable Performance Target(s) have not been satisfied.

 

  4.7 Committee Certification. No Senior Executive shall receive any payment
under the Plan unless the Committee has certified, by resolution or other
appropriate action in writing, that the amount thereof has been accurately
determined in accordance with the terms, conditions and limits of the Plan and
that the Performance Target(s) and any other material terms previously
established by the Committee or set forth in the Plan were in fact satisfied.

 

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  4.8 Time of Payment; Deferred Amounts. Any awards granted by the Committee
under the Plan shall be paid as soon as practicable following the Committee’s
determinations under this Section 4 and the certification of the Committee’s
findings under Section 4.7. Any such payment shall be in cash or cash equivalent
or in such other form of equal value on such payment date (including Shares or
share equivalents as contemplated by Section 4.9) as the Committee may approve
or require, subject to applicable withholding requirements and, if applicable,
Section 4.9. Notwithstanding the foregoing, the Committee, in its sole
discretion (but subject to compliance with Section 162(m) to the extent
applicable and to any prior written commitments and to any conditions consistent
with Sections 3.4, 4.9 and 5.7 that it deems appropriate), defer the payout or
vesting of any Cash Award and/or provide to participants the opportunity to
elect to defer the payment of any Cash Award under a nonqualified deferred
compensation plan and as contemplated by Section 4.9. In the case of any
deferred payment of a Cash Award after the attainment of the applicable
Performance Target(s), any amount in excess of the amount otherwise payable
shall be based on either Moody’s Average Corporate Bond Yield (or such other
rate of interest that is deemed to constitute a “reasonable rate of interest”
for purposes of Section 162(m)) over the deferral period or the return over the
deferral period of one or more predetermined actual investments (including
Shares) such that the amount payable at the later date will be based upon actual
returns, including any decrease or increase in the value of the investment(s),
unless the alternative deferred payment is otherwise exempt from the limitations
under Section 162(m).

 

  4.9 Share Payouts of Cash Award. Any Shares payable under an award shall be
pursuant to a combined Award under the Plan. The number of Shares or stock units
(or similar deferred award representing a right to receive Shares) awarded in
lieu of all or any portion of an Award shall be equal to the largest whole
number of Shares which have an aggregate fair market value (as defined in the
Plan) no greater than the amount of cash otherwise payable as of the date the
cash payment of the award would have been made. Any such Shares, stock units (or
similar rights) shall thereafter be subject to adjustments for changes in
corporate capitalization as provided in the Stock Plan. Dividend equivalent
rights thereafter earned may be accrued and payable in additional stock units,
cash or Shares or any combination thereof, in the Committee’s discretion.

 

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Section 5: General Provisions.

 

  5.1 No Right to Awards or Continued Employment. Neither the establishment of
the Plan nor the provision for or payment of any amounts hereunder nor any
action of the Company (including, for purposes of this Section 5.1, any
predecessor or subsidiary), the Board of Directors of the Company or the
Committee in respect of the Plan shall be held or construed to confer upon any
person any legal right to receive, or any interest in, an Award or any other
benefit under the Plan, or any legal right to be continued in the employ of the
Company. The Company expressly reserves any and all rights to discharge an
Executive in its sole discretion, without liability of any person, entity or
governing body under the Plan or otherwise. Nothing in this Section 5.1,
however, is intended to adversely affect any express independent right of any
person under a separate employment agreement. Notwithstanding any other
provision hereof and notwithstanding the fact that the Performance Target(s)
have been attained and/or the individual maximum amounts hereunder have been
calculated, the Company shall have no obligation to pay any award hereunder nor
to pay the maximum amount so calculated or any prorated amount based on service
during the period, unless the Committee otherwise expressly provides by written
contract or other written commitment.

 

  5.2 Discretion of Company, Board of Directors and Committee. Any decision made
or action taken by the Company or by the Board of Directors of the Company or by
the Committee arising out of or in connection with the creation, amendment,
construction, administration, interpretation and effect of the Plan shall be
within the absolute discretion of such entity and shall be conclusive and
binding upon all persons. No member of the Committee shall have any liability
for actions taken or omitted under the Plan by the member or any other person.

 

  5.3 Non-Exclusivity. 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.

 

  5.4 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.

 

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Section 6: 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. 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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