-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FiEyvW+ka1GukLTsT15o7QjBCWeauhp6v/D8s6cnkBCc+gUq9N1S+0cazbGuZ24V f9xZAH1Zm9Yt6YW1Zd6KUQ== 0000950150-99-000393.txt : 19990402 0000950150-99-000393.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950150-99-000393 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNTERRA CORP CENTRAL INDEX KEY: 0001016577 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS, ROOMING HOUSE, CAMPS & OTHER LODGING PLACES [7000] IRS NUMBER: 954582157 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13815 FILM NUMBER: 99581598 BUSINESS ADDRESS: STREET 1: 1875 SOUTH GRANT STREET STREET 2: SUITE 650 CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 6503127171 MAIL ADDRESS: STREET 1: 1875 SOUTH GRANT STREET STREET 2: SUITE 650 CITY: SAN MATEO STATE: CA ZIP: 94402 FORMER COMPANY: FORMER CONFORMED NAME: SIGNATURE RESORTS INC DATE OF NAME CHANGE: 19980722 FORMER COMPANY: FORMER CONFORMED NAME: KGK RESORTS INC DATE OF NAME CHANGE: 19960611 10-K 1 FORM 10-K FOR THE PERIOD ENDED 12/31/98 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20459 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] 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 SUNTERRA CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 95-458215-7 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1781 PARK CENTER DRIVE ORLANDO, FLORIDA 32835 "WWW.SUNTERRA.COM" REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (407) 532-1000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, par value $0.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None 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 past 90 days. YES [X] NO [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: YES [ ] NO [X]. The aggregate market value of the voting stock held by non-affiliates of the Registrant based upon the closing sales price of the Common Stock on March 18, 1999, as reported on the New York Stock Exchange, was approximately $274.2 million. At March 18, 1999 there were 35,912,596 shares of the Registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the Registrant's Definitive Proxy Statement, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the Registrant's 1998 fiscal year, are incorporated by reference in part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I Unless the context otherwise indicates, the "Company" refers to Sunterra Corporation (formerly Signature Resorts, Inc.) and includes its corporate and partnership predecessors and wholly-owned subsidiaries and affiliates including AVCOM International, Inc. ("AVCOM") and its subsidiaries, which were acquired in February 1997 (the "AVCOM Acquisition"); Plantation Resorts Group, Inc. ("PRG") and its subsidiaries, which were acquired in May 1997 (the "PRG Acquisition"); LSI Group Holdings, plc (doing business as Sunterra Europe, "LSI") and its subsidiaries, which were acquired in August 1997 (the "LSI Acquisition"); Marc Hotels & Resorts, Inc. ("Marc"), which was acquired in October 1997 (the "Marc Acquisition"); Sunterra Pacific, Inc. (formerly known as Vacation International, Ltd.) and its subsidiaries ("Sunterra Pacific"), which were acquired in November 1997 (the "Sunterra Pacific Acquisition"); Global Development Ltd. and certain of its subsidiaries (the "Global Group"), which was acquired in December 1997 (the "Global Acquisition"); MMG Holding Corporation and its subsidiaries ("MMG"), which were acquired in February 1998 (the "MMG Acquisition"), and Harich Tahoe Developments and its subsidiaries ("HTD"), which were acquired in July 1998 (the "HTD Acquisition"). ITEMS 1 AND 2 BUSINESS AND PROPERTIES THE COMPANY Sunterra Corporation is the world's largest vacation ownership company, as measured by resort locations and owner families. Currently, the Company has 89 resort locations in North America, Europe, the Caribbean and Japan. The Company's resort locations are in a variety of popular vacation destinations, including California, Hawaii, Arizona, Florida, South Carolina, Virginia, the Caribbean, Mexico, France, the United Kingdom, Spain, Japan and the Canary Islands. Through both internal development and strategic acquisitions, the Company has expanded the number of its resort locations and its owner family base from nine resort locations and approximately 25,000 owner families at the time of its August 1996 initial public offering to 87 resort locations and approximately 240,000 owner families at December 31, 1998. The Company has acquired interests in two additional resort locations in 1999. The Company's operations consist of (i) marketing and selling vacation ownership interests at its resort locations and off-site sales centers, 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 for varying lengths of stay at participating resort locations ("Vacation Points," and together with Vacation Intervals, "Vacation Interests"), (ii) acquiring, developing and operating vacation ownership resorts, (iii) providing consumer financing to individual purchasers for the purchase of Vacation Interests at its resort locations and off-site sales centers and (iv) providing resort rental, management and maintenance services for which it receives fees paid by the resorts' homeowners' associations. The Company markets Vacation Interests as Sunterra Resorts and offers points-based vacation ownership systems in North America through Club Sunterra and the Vacation Time Share Program (the "VTS Program"), in Europe through the Grand Vacation Club ("GVC") and in Japan through Sunterra Japan Vacation Club ("SJVC"). The Company also markets Vacation Intervals at four Embassy Vacation Resorts ("EVR"), which operate under an agreement with Promus Hotel Corporation ("Promus") and one Westin Vacation Club ("WVC") resort which is operated and managed by Starwood Hotels and Resorts Worldwide, Inc. ("Starwood"). The Company provides mortgage financing for approximately 65% of its Vacation Interests sales. In addition to enhancing sales revenues, financing customer receivables generates attractive profit margins and cash flows from the spread between interest rates charged by the Company on its mortgages receivable and the Company's cost of capital. This financing is typically collateralized by the underlying Vacation Interests. 1 3 RECENT DEVELOPMENTS Acquisition of Interests in New Resorts. In January 1999, the Company acquired one resort in Soriano nel Cirino, Italy (approximately 20 minutes outside of Rome) and entered into a leasing agreement with respect to eight units located at one resort in Izu, Japan. These resorts will be included in the GVC and SJVC points-based vacation ownership systems, respectively. New Management Changes and Organizational Alignment. In January 1999, the Company announced a realignment of its business units and the consolidation of management to its Orlando, Florida headquarters. The Company is now organized under the following six integrated business units, with the heads of each business unit reporting directly to L. Steven Miller, Chief Executive Officer and President: Sales; Owner Services; Finance and Administration; Legal; Sunterra Europe; and Marketing. The Sales business unit operates under the direction of James E. Noyes, Executive Vice President -- Sales. Mr. Noyes manages the development and operation of a fully integrated global sales system designed to maximize the demand for the Company's resorts. The Owner Services business unit operates under the direction of Charles C. Frey, Senior Vice President -- Owner Services. Mr. Frey manages all service functions related to owners, guests and visitors, including hospitality management and call center operations (reservation, travel and membership services), as well as construction for both newly acquired and existing resorts. The Finance and Administration business unit operates under the direction of Richard Goodman, Executive Vice President and Chief Financial Officer. Mr. Goodman manages all finance, treasury, accounting and investor relations functions, as well as human resources, information technology, risk management and acquisition and development. The Legal business unit operates under the direction of Thomas A. Bell, Senior Vice President and General Counsel. Mr. Bell manages all legal matters, including shareholder matters, federal filings, legislative developments and governmental agency relations. The Sunterra Europe business unit operates under the direction of Richard Harrington, Managing Director-Sunterra Europe. Mr. Harrington manages all European operations. The Marketing business unit is responsible for the development and commercialization of the Company's brand, products and markets. The Company is currently evaluating candidates to head the Marketing business unit. BUSINESS STRATEGY The Company's business strategy is designed to (i) implement Club Sunterra and grow its vacation club membership base, (ii) expand its resort network through development and acquisition, (iii) increase sales through existing and future resort locations and off-site sales centers, (iv) improve operating efficiencies and profitability, and (v) expand rental services and property management businesses. Club Sunterra. The Company is currently introducing Club Sunterra to its sales centers on a resort-by-resort basis, which is anticipated to be fully implemented at all wholly-owned Sunterra resorts by the end of 1999. Club Sunterra is a new points-based vacation ownership system, enabling members to vacation at any resort in the Club Sunterra network by utilizing their annual allotment of points ("SunOptions") as a vacation currency. The Company believes the flexibility of its Club Sunterra product will expand the market for vacation ownership, as it is designed to evolve with an owner's life style changes, and enable the Company to target a wider base of new potential customers. Through Club Sunterra, the Company believes that it has created a superior product which provides customers with the variety and flexibility they desire in their vacation experiences. The Company believes Club Sunterra increases the value of vacation ownership by offering customers a superior product and myriad of options for vacation planning. Club Sunterra creates an affinity relationship with the owner base and provides the platform for cross marketing opportunities for leisure time products and services. 2 4 In addition, the Club Sunterra membership business generates annual recurring revenues to the Company, which currently are $139 per member per year. This fee entitles such member to participate in the Club Sunterra vacation ownership system, including fee-less exchanges within the Club Sunterra resort network and an annual membership to a third party exchange company for exchanges outside of the Club Sunterra resort network. Expand Resort Network. A larger network of resorts provides the Company's owners, guests and potential customers more vacation choices. With the implementation of Club Sunterra, a continually expanding network of resorts provides the Company's current and future owners more options to customize their vacations. In addition, the expanded network of resorts will provide a greater base of resorts to distribute and sell Vacation Interests, leverage the development of more sophisticated delivery and support systems, and create a consumer brand. The Company has achieved its leading position in the industry by developing and acquiring desirable resorts at attractive prices which the Company believes will allow it to achieve above average returns. Management believes that its proven acquisition and development record and public company status give the Company a competitive advantage in acquiring assets, businesses and operations in the fragmented vacation ownership industry. The Company's continued development of its infrastructure, building of its management team, and implementation of Club Sunterra further enable the Company to successfully integrate future acquisitions into its operations. Increase Sales. The Company intends to increase sales of Vacation Interests through the implementation of its more flexible vacation ownership product, Club Sunterra. Through Club Sunterra, customers have access to the Company's network of resorts and the flexibility to choose the season, location, duration and unit size, based on their annual allotment of SunOptions. Club Sunterra is designed to profile the entire resort network, enabling purchasers to have a home resort advantage, yet also the ability to use their SunOptions to experience a vacation or multiple vacations at any of the resorts in the network. The Company believes sales opportunities will significantly increase at all resort locations as well as at off-site centers because the sales and marketing processes are no longer associated with just one resort. This selling process increases customer contact which, over time, will increase each customer's affinity with Club Sunterra and the Sunterra Resorts brand. The Company also expects to enhance sales through its network of off-site sales centers and larger distribution channels. There are currently seven and seventeen off-site sales centers operating in the United States and Europe, respectively. In addition, the Company's expansion of its resort network will provide additional distribution outlets for the sale of Vacation Interests. Improve Operating Efficiencies and Profitability. The Company intends to improve operating efficiencies and profitability by implementing the Club Sunterra points-based vacation ownership system and consolidating and centralizing several key operating functions including mortgages receivable processing, call center and reservations services, all of which were typically performed at each resort location. Additionally, by leveraging against a larger customer base, the Company anticipates that it will be able to lower its cost associated with delivering services. Expand Rental Services and Property Management Businesses. The Company intends to expand its rental services operations and property management business. To date, the Company believes an efficient rental market does not currently exist with respect to vacation ownership resorts, other resorts and condominium accommodations. The Company intends to develop services which are designed to increase efficiency of a rental market and capitalize on the growing need of owners to provide the flexibility associated with rental of their accommodations. The Company intends to pursue these opportunities by utilizing its traditional sales channels and through its Club Sunterra reservations systems. Additionally, the Company believes substantial opportunities exist to increase its property management business, both for owned vacation ownership resorts and for other vacation ownership resorts as well as hotels, condominiums and other resorts. 3 5 THE VACATION OWNERSHIP INDUSTRY The Market. The resort component of the leisure industry primarily is serviced by two separate alternatives for overnight accommodations: commercial lodging establishments and vacation ownership resorts. Commercial lodging consists of hotels and motels in which a room is rented on a nightly, weekly or monthly basis for the duration of the visit and is supplemented by rentals of privately-owned condominium units or homes. For many vacationers, particularly those with families, the space provided to the guest relative to the cost (without renting multiple rooms) is not economical. Also, room rates and availability at such establishments are subject to change periodically. In addition to providing improved lifestyle benefits to owners, vacation ownership presents an economical alternative to commercial lodging for vacationers. The vacation ownership industry represents one of the fastest growing segments of the lodging industry. According to the American Resort Development Association ("ARDA") and other industry sources, during the 17 year period ending in 1997, worldwide Vacation Interest sales volume increased from $490 million in 1980 to an estimated $6.0 billion in 1997, a compounded annual growth rate of 15.9%. Vacation ownership has size and reach, with more than 5,000 vacation ownership resorts in over 80 countries and 4.5 million vacation ownership families in 174 countries worldwide. The January 1999 issue of "Vacation Ownership World" indicated that the top 38 companies in the vacation ownership industry (representing approximately 66% of the market) generated 24% growth in year-over-year Vacation Interest sales in 1998. As shown in the following charts, according to ARDA, the worldwide vacation ownership industry has expanded significantly since 1980 both in Vacation Interest sales volume and number of Vacation Interest owners. [Chart [Chart indicating Interest Sales Volume] indicating Vacation Interest Owners] Source: ARDA (includes, with respect to 1995, 1996 and 1997 unpublished estimates provided by ARDA) The Company believes that overall, the vacation ownership industry offers many vacationers a superior economic value and a more flexible alternative to traditional commercial lodging accommodations, and as a result, has historically achieved high levels of customer satisfaction. A survey of vacation owners conducted by ARDA in 1997 found that approximately 85% were either satisfied or very satisfied with their vacation ownership purchase. ARDA also found that about 76% of purchasers consider their time-of-purchase expectations to have been matched or exceeded and that approximately 72% of owners eventually purchase additional vacation ownership time. The average vacation ownership customer owns 1.7 vacation ownership weeks. Industry research also suggests that customer satisfaction increases with length of ownership, age, income, multiple location ownership and accessibility to Vacation Interest exchange networks. Increased government regulation, higher standards of quality and service, increased flexibility and the rapid entry of a number of well-organized lodging and entertainment companies, including Marriott Ownership Resorts ("Marriott"), The Walt Disney Company ("Disney"), Four Seasons Hotel & Resorts ("Four Seasons"), Hilton Hotels Corporation ("Hilton"), Hyatt Corporation ("Hyatt"), Promus Hotel Corporation ("Promus") and Starwood Hotels and Resorts Worldwide, Inc. ("Starwood"), have enhanced the industry's image and increased consumer satisfaction. 4 6 Sunterra believes it has significant opportunities to capitalize on positive industry dynamics including continued worldwide industry growth and favorable trends in consumer demographics. The large Baby Boomer market segment is projected to reach its greatest ever concentration in the next ten years, with an estimated 40 million people turning 50 years old over that period. Additionally, the Generation X market segment has the highest awareness of and receptivity to vacation ownership products that has ever been experienced in the 21 to 35 year old category. Demographic trends favor continuing growth in overall demand for vacation ownership products, as the population of individuals aged 45 to 60 is expected to increase by more than 50% in the United States within the next decade. Historically, individuals age 45 to 60 represent a market with significant discretionary income and have been the vacation ownership industry's primary target market. In addition, the Company will seek to capture an increasing share of the overall worldwide leisure travel and hotel stay markets, providing substantial opportunities to increase market share from contiguous, yet non-traditional marketing channels. DESCRIPTION OF THE COMPANY'S RESORT LOCATIONS Currently, the Company has 89 resort locations, which include 33 resort locations sold as Vacation Intervals and 56 resort locations sold in points-based vacation ownership systems. With respect to the Company's resorts, all of the units are fully-furnished, and include telephones, televisions, VCRs and stereos, and all but the studio units feature full kitchens. Most of the units contain a washer and dryer, microwave and outdoor barbecue grill. Many units also include a private deck. The Company offers Vacation Interests through the following six principal products: Sunterra Resorts -- Club Sunterra. The Company is in the process of introducing Club Sunterra to each resort location and off-site sales center and plans to complete the roll-out by the end of 1999. Until Club Sunterra is introduced to individual resorts, the resorts will continue to sell Vacation Intervals. Vacation Intervals at the Company's Sunterra Resorts generally sell for $5,000 to $11,000 for a studio unit, $7,000 to $13,000 for a one-bedroom unit, $8,000 to $20,000 for a two-bedroom unit, $10,000 to $21,000 for a three- bedroom unit and $12,000 to $22,000 for a four-bedroom unit. Sunterra Europe -- Grand Vacation Club. GVC allows members to purchase an annual allotment of points that can be redeemed for occupancy rights at GVC's European resorts and at other participating resorts. The Company markets GVC in the United Kingdom, Spain, Portugal, Italy, France and Austria. Each GVC member receives a new allotment of points each year throughout the term of its membership in the club. Sunterra Pacific -- Vacation Time Share Program. The VTS Program is marketed to potential buyers in the United States, Canada and Mexico. The VTS Program is a points-based vacation ownership system much like GVC in that it allows members to purchase Vacation Points that are redeemed for occupancy rights at participating VTS Program resorts. Each VTS Program member receives a new allotment of points each year throughout the term of its membership in the program. Sunterra Japan -- SJVC. The Company markets SJVC to potential buyers in Japan. SJVC is much like GVC in that it allows members to purchase Vacation Points that are redeemed for occupancy rights at participating Sunterra Japan resorts. Embassy Vacation Resorts. Vacation Intervals at the Company's four EVR resorts generally sell for $13,000 to $26,000. EVR resorts are designed to provide vacation ownership accommodations that offer the same high quality and value that is represented by the more than 140 Embassy Suites hotels throughout North America. The Company is one of two licensees and operators of EVR resorts. Westin Vacation Club Resort. Vacation Intervals at the Company's one WVC resort sell for $18,000 to $20,000. The Company also has six other resort locations, which are not affiliated with the above-mentioned products. 5 7 As of December 31, 1998, the Company had the following number of resorts, completed units, potential unit expansion, total potential units and current inventory of Vacation Intervals or Vacation Points by product offering:
CURRENT INVENTORY(C) NUMBER POTENTIAL TOTAL ----------------------- OF COMPLETED UNIT POTENTIAL VACATION VACATION RESORTS UNITS(A) EXPANSION(B) UNITS INTERVALS POINTS ------- --------- ------------ --------- --------- -------- Sunterra Resorts.................................. 27 2,300 2,302 4,602 16,091 -- Sunterra Europe -- GVC............................ 24 1,835 231 2,066 -- 470,302 Sunterra Pacific -- VTS Program................... 22 776 -- 776 -- 169,674 Sunterra Japan -- SJVC............................ 3 48 -- 48 -- 180,708 Embassy Vacation Resorts.......................... 4 504 456 960 12,605 -- Westin Vacation Club Resorts...................... 1 48 48 96 1,557 -- Other............................................. 6 66 -- 66 1,310 -- -- ----- ----- ----- ------- ------- Total..................................... 87 5,577 3,037 8,614 31,563 820,684
(a) Completed units represent only those units that have received their certificate of occupancy as of December 31, 1998. The Company generally is able to sell 51 Vacation Intervals with respect to each unit at its resorts. (b) Potential unit expansion includes, as of December 31, 1998, (i) units then under construction and (ii) units planned to be developed on land then owned by the Company or under option to be acquired and which were not then under construction. The Company estimates that it would incur approximately $400 million to develop all of the potential unit expansion. However, except for the projects currently under construction (the costs of which completing are expected to be approximately $14.3 million in 1999), the Company has not committed to develop any other of the potential unit expansion. (c) Current inventory of Vacation Intervals or Vacation Points represents only those unsold Vacation Intervals or Vacation Points that have received their certificate of occupancy as of December 31, 1998. The following tables set forth the name and location, as of December 31, 1998, of each of the Company's 87 resort locations. Of the resort locations set forth below, the EVR Poipu Point and Kaanapali Beach, the NorthBay at Lake Arrowhead, Ridge Point Tahoe and the WVC St. John are held in partnership with third parties.
RESORT LOCATION ------ -------- SUNTERRA RESORTS Avalon Deerfield Beach, Florida Bent Creek Golf Village Gatlinburg, Tennessee Carambola Beach St. Croix, USVI Coral Sands Miami Beach, Florida Cypress Pointe Lake Buena Vista, Florida Flamingo Beach St. Maarten, Netherlands Antilles Ft. Lauderdale Beach Ft. Lauderdale, Florida Greensprings Plantation Williamsburg, Virginia The Highlands at Sugar Banner Elk, North Carolina Mountain Meadows Pigeon Forge, Tennessee The Plantation at Fall Creek Branson, Missouri Polynesian Isles Orlando, Florida Powhatan Plantation Williamsburg, Virginia The Ridge on Sedona Golf Sedona, Arizona Royal Dunes Hilton Head, South Carolina Royal Palm Beach St. Maarten, Netherlands Antilles San Luis Bay Avila Beach, California The Savoy on South Beach Miami Beach, Florida Scottsdale Villa Mirage Scottsdale, Arizona Sedona Springs Sedona, Arizona Sedona Summit Sedona, Arizona
6 8
RESORT LOCATION ------ -------- Town Square Gatlinburg, Tennessee Town Village Gatlinburg, Tennessee Villas at Poco Diablo Sedona, Arizona Villas de Santa Fe Santa Fe, New Mexico Villas of Sedona Sedona, Arizona Villas on the Lake Montgomery, Texas SUNTERRA EUROPE -- GRAND VACATION CLUB The Alpine Club Schladming, Austria Carlton Court London, England Club del Carmen Lanzarote, Canary Islands Club Mougins Cannes, France Flanesford Priory Country Estate Herefordshire, England Kenmore Club Perthshire, Scotland Le Moulin de Connelles Normandy, France Los Amigos Beach Club Costa del Sol, Spain Marina Baie des Anges Nice, France Pine Lake Resort Lancashire, England Royal Oasis Club at Benal Beach Costa del Sol, Spain Royal Oasis Club at La Quinta Costa del Sol, Spain Royal Sunset Beach Club Tenerife, Canary Islands Royal Tenerife Country Club Tenerife, Canary Islands Sahara Sunset Club Costa del Sol, Spain Santa Barbara Golf & Ocean Club Tenerife, Canary Islands Sunset Bay Club Tenerife, Canary Islands Sunset Harbour Club Tenerife, Canary Islands Sunset View Club Tenerife, Canary Islands Vilar do Golf Algarve, Portugal White Sands Beach Club Menorca, Balearic Islands White Sands Country Club Menorca, Balearic Islands Woodford Bridge Country Club North Devon, England Wychnor Park Country Club Straffordshire, England SUNTERRA PACIFIC -- VTS PROGRAM Clock Tower Whistler, British Columbia Elkhorn Village(1) Sun Valley, Idaho Embarcadero(1) Newport, Oregon Fairway Villa Oahu, Hawaii Hololani Maui, Hawaii Kapaa Shore Kauai, Hawaii Kihei Kai Nani Maui, Hawaii Kingsbury Stateline, Nevada Marina Inn(1) Oceanside, California Oasis Palm Springs, California Papakea Maui, Hawaii The Pines at Sunriver Sunriver, Oregon Point Brown Resort Ocean Shores, Washington Pono Kai Kauai, Hawaii Royal Kuhio Oahu, Hawaii Sea Mountain Big Island, Hawaii
7 9
RESORT LOCATION ------ -------- Sea Village Big Island, Hawaii Tahoe Beach & Ski S. Lake Tahoe, California Torres Mazatlan Mazatlan, Mexico Vallarta Torre Puerto Vallarta, Mexico Valley Isle Maui, Hawaii The Village at Steamboat Steamboat Springs, Colorado SUNTERRA JAPAN--SJVC Kawaguchiko Yamanashi, Japan Minamibousoh(1)(2) Chiba, Japan Naeba Niigat, Japan EMBASSY VACATION RESORTS Grand Beach(1) Orlando, Florida Kaanapali Beach Maui, Hawaii Lake Tahoe(1) S. Lake Tahoe, California Poipu Point Kauai, Hawaii WESTIN VACATION CLUB St. John(1) St. John, USVI OTHER Los Clavales(1) Tenerife, Canary Island Malibu Village(1) Roussilon, France Northbay at Lake Arrowhead Lake Arrowhead, California Playa Paraiso Majorca, Spain Ridge Pointe Tahoe(1) S. Lake Tahoe, California Tahoe Seasons(1) S. Lake Tahoe, California
- --------------- (1) Units owned by the Company at the resort are managed by a third party management company. (2) The Company is currently leasing units at this resort. CUSTOMER FINANCING The Company offers consumer financing to the purchasers of Vacation Interests at the Company's resort locations and off-site sales centers who make a down payment generally equal to at least 10% of the purchase price. This financing generally bears interest at fixed rates and is collateralized by the underlying Vacation Interest. At December 31, 1998, the Company's mortgages receivable portfolio included approximately 52,000 promissory notes totaling approximately $358.9 million, with a stated maturity of typically seven to ten years and a weighted average interest rate of 14.5% per annum. Consumer loans in excess of 60 days past due, including defaulted loans and loans in the deed-in-lieu process, at December 31, 1998, were 7.4% as a percentage of gross mortgages receivable. As of December 31, 1998, the Company's allowance for doubtful accounts, which is net of recoveries, was 6.4% as a percentage of gross mortgages receivable. Management believes that this percentage is an adequate reserve for expected loan losses because the past due loan amounts do not include amounts recovered from the underlying Vacation Interests nor do all past due loans become defaulted loans. The Company has entered into agreements with lenders for the Company's financing or sale of customer receivables. At December 31, 1998, the Company had approximately $123.1 million of additional borrowing capacity available, which could be used for financing mortgages receivables and other general corporate purposes. Sunterra Europe currently contracts with a third-party bank to provide financing to purchasers of Vacation Points in its GVC and is paid an upfront commission of approximately 14% (which includes a 8 10 1% commission contingent on the Company meeting certain volume thresholds) of the principal amount of eligible consumer loans on a non-recourse basis. SALES AND MARKETING The Company's primary means of selling Vacation Interests is through both on-site and off-site sales teams. A variety of marketing programs are employed to generate prospects for these sales efforts, which include targeted mailings, overnight mini-vacation packages, gift certificates, seminars and various destination-specific local marketing efforts. Additionally, incentive premiums are offered to guests and other potential customers to encourage resort tours, in the form of entertainment tickets, hotel stays, gift certificates or free meals. The Company's sales process is tailored to each prospective buyer based upon the marketing program that brought the prospective buyer to the resort for a sales presentation. Prospective target customers are identified through various means of profiling, and are intended to include current owners of Vacation Interests. ACQUISITION PROCESS The Company obtains information with respect to resort acquisition opportunities through interaction by the Company's management team with resort operators, real estate brokers, lodging companies or financial institutions with which the Company has established business relationships. From time to time, the Company is also contacted by lenders and property owners who are aware of the Company's development, management, operations and sales expertise with respect to vacation resort properties. During 1998, the Company acquired in separate transactions MMG, HTD, and an additional ten resorts located in the United States, Europe, and Japan. The Company has expertise in all areas of resort development including, but not limited to, architecture, construction, finance, management, operations and sales. Management believes that its proven acquisition and development record and public company status give the Company a competitive advantage in acquiring assets, businesses and operations in the fragmented vacation ownership industry that will prove to increase operating profits and enable Club Sunterra to expand. RENTAL OPERATIONS The Company generates additional revenue by renting the unsold or unused Vacation Interests at certain of its resorts. The Company rents unoccupied units both through direct consumer sales, travel agents and/or vacation package wholesalers. In addition to providing the Company with supplemental revenue, the Company believes its room-rental operations provide it with a good source of potential customers for the purchase of Vacation Interests. As part of the management services provided by the Company to Vacation Interests owners, the Company receives a fee for services provided to rent an owner's Vacation Interests in the event the owner is unable to use or exchange the Vacation Interests. In addition, the Company has purchased traditional resort condominiums and resort hotels with the intention of converting each such resort location to a vacation ownership property. Until such time as a unit at each resort is sold as Vacation Interests, the Company continues (and will continue) to rent the underlying unit on a nightly basis. Resorts acquired in the future may be operated in this fashion during the start-up of Vacation Interests sales. RESORT MANAGEMENT The Company's resort locations are (i) generally managed by the Company pursuant to management agreements with homeowner associations with respect to each of the Company's Sunterra Resorts, (ii) managed by Promus pursuant to management agreements with the Company with respect to EVR Grand Beach and EVR Lake Tahoe and (iii) managed by Westin with respect to the WVC resort. At December 31, 1998, the Company managed 27 Sunterra Resorts, two EVR resorts, 19 Sunterra Pacific resorts and 24 Sunterra Europe resorts. The Company manages third party units at an additional 18 resorts in Hawaii. The remaining resort locations are managed by third party management companies. See "-- Description of the Company's Resort Locations." 9 11 At each of the Company's managed resort locations, the Company enters into a management agreement to provide for management and maintenance of the resort. Pursuant to each such management agreement the Company is typically paid a monthly management fee equal to 10% to 15% of monthly maintenance fees. The management agreements are typically for a three-year period, automatically renewable annually unless notice of non-renewal is given by either party. Pursuant to each management agreement, the Company has primary responsibility and authority for all activities necessary for the day-to-day operation of the managed resort locations, including administrative services, procurement of inventories and supplies and promotion and publicity. With respect to each managed resort location, the Company generally also obtains comprehensive and general public liability insurance, all-risk property insurance, business interruption insurance and such other insurance as is customarily obtained for similar properties. The Company also provides all managerial and other employees necessary for the managed resort locations, including those necessary for review of the operation and maintenance of the resorts, preparation of reports, budgets and projections, employee training, and the provision of certain in-house legal services. At EVR Grand Beach and EVR Lake Tahoe, Promus provides these services, and the Company shares in the profitability of these agreements. Sunterra Europe manages each resort in GVC pursuant to contracts that typically provide for a management fee of 15% of monthly maintenance fees to be paid to Sunterra Europe. VACATION INTERVAL OWNERSHIP The purchase of a Vacation Interval typically entitles the buyer to use a fully furnished vacation residence, generally for a one-week period each year, in perpetuity. Typically, the buyer acquires an ownership interest in the vacation residence, which is often held as tenant in common or similar legal arrangement with other buyers of Vacation Interests in the property. The owners of Vacation Intervals manage the property through a non-profit homeowners' association, which is governed by a board consisting of representatives of the developer and owners of Vacation Intervals at the resort. The board hires a management company, delegating many of the rights and responsibilities of the homeowners' association, as described above, including grounds landscaping, security, housekeeping and operating supplies, garbage collection, utilities, insurance, laundry and repair and maintenance. Each Vacation Interval owner is required to pay the homeowners' association a share of all costs of maintaining the property. These charges (generally $300 to $700 per Vacation Interval) can consist of an annual maintenance fee plus applicable real estate taxes and, where needed, special assessments, assessed on an as-needed basis. If the owner does not pay such charges, the owner's use rights may be suspended and the homeowners' association may foreclose on the owner's Vacation Interval. POINTS-BASED VACATION OWNERSHIP In general, under a points-based vacation ownership system, owners (usually referred to as members) purchase points which act as an annual currency entitlement for occupancy rights at any of the club's participating resorts. The Company's Club Sunterra points-based vacation ownership system operates on a basis very similar to the standard Vacation Interval ownership structure in that members have a home resort, and have a deeded, fee-simple interest in a particular unit at that home resort. The advantages of a points-based vacation ownership system relate to the flexibility given to members with respect to the usage of their Vacation Points versus the usage of a traditional Vacation Interval. In traditional Vacation Interval ownership, owners can either use their Vacation Interval for a one-week stay in a specific unit size in a specific resort or exchange through an external exchange organization (i.e., Resort Condominiums International, LLC ("RCI") or Interval International, Inc. ("II")). Because Vacation Points function as currency under a points-based vacation ownership system, owners can, subject to availability, choose the location, season, duration and unit size of their vacation, based on their annual Vacation Points allocations. Additionally, in a points-based vacation ownership system, owners can redeem their points for a stay in any one of the resorts included in the club without having to exchange through an external exchange company such as RCI or II. Members of Club Sunterra are, however, able to exchange through RCI for vacation stays at resorts outside of the Club Sunterra resort network if they desire, as the $139 annual Club Sunterra membership fee includes annual membership in RCI. 10 12 Each Vacation Points owner is required to pay the homeowners' association a share of all costs of maintaining the properties in the resort network (depending on the number of SunOptions owned). These charges consist of an annual maintenance fee plus applicable real estate taxes and special assessments, assessed on an as-needed basis. If the owner does not pay such charges, the owner's use rights may be suspended and the homeowners' association may foreclose on the owner's Vacation Points. The Company currently operates four points-based vacation ownership systems: Club Sunterra (currently six resort locations in the United States), Sunterra Europe -- GVC (currently 25 resort locations in Europe), Sunterra Pacific -- VTS Program (currently 22 resort locations in North America) and Sunterra Japan -- SJVC (currently four resort locations in Japan). Club Sunterra operates as an umbrella points-based vacation ownership system for its European and North American operations. In addition to attracting new owners, the Company will market Club Sunterra to its existing base of owner families. PARTICIPATION IN VACATION INTEREST EXCHANGE NETWORKS The Company believes that its Vacation Interests are made more attractive by the Company's participation in Vacation Interest exchange networks operated by RCI and II. In a 1998 study sponsored by ARDA, the exchange opportunity was cited by purchasers of Vacation Interests as one of the most significant factors in determining whether to purchase a Vacation Interests. Participation in RCI and II allows the Company's customers to exchange their occupancy right in a particular year in the unit in which they own a Vacation Interest for an occupancy right at the same time or a different time in another participating resort, based upon availability and the payment of a variable exchange fee. Members may exchange their Vacation Interests for occupancy rights in another participating resort by listing their Vacation Interests as available with the exchange organization and by requesting occupancy at another participating resort, indicating the particular resort or geographic area to which the member desires to travel, the size of the unit desired and the period during which occupancy is desired. Both RCI and II assign ratings to each listed Vacation Interest. These ratings are based upon a number of factors, including the location and size of the unit, the quality of the resort and the period during which the Vacation Interest is available, and attempts to satisfy the exchange request by providing an occupancy right in another vacation interest with a similar rating. If RCI or II is unable to meet the member's initial request, it suggests alternative resorts based on availability. COMPETITION The Company competes with both branded and non-branded hospitality and lodging companies, as well as other established vacation ownership companies. Although major lodging and hospitality companies such as Marriott, Disney, Hilton, Hyatt, Four Seasons, Inter-Continental Hotels and Resorts ("Inter-Continental"), Carlson Companies, Promus and Starwood have established or declared an intention to establish vacation ownership operations in the past decade, the industry remains largely unbranded and highly fragmented. However, the majority of the approximately 5,000 worldwide vacation ownership resorts are owned and operated by smaller, regional companies. In addition, the Company also competes with the buyers of its Vacation Intervals who subsequently decide to resell those Vacation Intervals. While the Company believes, based on experience at its resorts, that the market for resale of Vacation Intervals by buyers is presently limited, such resales are typically at prices substantially less than the original purchase price. The market price of Vacation Intervals sold by the Company at a given resort or by its competitors in the market in which each resort is located could be depressed by a substantial number of Vacation Intervals offered for resale. GOVERNMENTAL REGULATION General. The Company's marketing and sales of vacation interests are subject to extensive regulations by the federal government and the states and foreign jurisdictions in which its resort properties are located and in which vacation interests are marketed and sold. On a federal level, the Federal Trade Commission has taken the most active regulatory role through the Federal Trade Commission Act, which prohibits unfair or deceptive acts or competition in interstate commerce. Other federal legislation to which the Company is or 11 13 may be subject includes the Truth-In-Lending Act and Regulation Z, the Equal Credit Opportunity Act and Regulation B, the Interstate Land Sales Full Disclosure Act, Telephone Consumer Protection Act, Telemarketing and Consumer Fraud and Abuse Prevention Act, Fair Housing Act and the Civil Rights Act of 1964 and 1968. In addition, many states have adopted specific laws and regulations regarding the sale of vacation interest ownership programs. The laws of most states, including Florida, South Carolina and Hawaii require the Company to file with a designated state authority for its approval a detailed offering statement describing the Company and all material aspects of the project and sale of vacation interests. The laws of California require the Company to file numerous documents and supporting information with the California Department of Real Estate, the agency responsible for the regulation of vacation interests. When the California Department of Real Estate determines that a project has complied with California law, it will issue a public report for the project. In most states, the Company is required to deliver an offering statement or public report to all prospective purchasers of vacation interests, together with certain additional information concerning the terms of the purchase. Laws in most states where the Company sells vacation interests generally grant the purchaser of a vacation interest the right to cancel a contract of purchase at any time within a period ranging from 3 to 15 calendar days following the earlier of the date the contract was signed or the date the purchaser received the last of the documents required to be provided by the Company. Most states have other laws that regulate the Company's activities such as real estate licensure; exchange program registration; sellers of travel licensure; anti-fraud laws; telemarketing laws; price gift and sweepstakes laws; and labor laws. The Company believes that it is in material compliance with all federal, state, local and foreign laws and regulations to which it is currently or may be subject. However, no assurance can be given that the Company will not incur significant costs in qualifying under vacation interest ownership regulations in all jurisdictions in which the Company desires to conduct sales. Any failure to comply with applicable laws or regulations could have material adverse effect on the Company. Certain state and local laws may also impose liability on property developers with respect to construction defects discovered or repairs made by future owners of such property. Pursuant to such laws, future owners may recover from the Company amounts in connection with the repairs made to the developed property. In addition, from time to time, potential buyers of Vacation Interests assert claims with applicable regulatory agencies against Vacation Interest salespersons for unlawful sales practices. Such claims could have adverse implications for the Company in negative public relations and potential litigation and regulatory sanctions. However, the Company does not believe that such claims will have a material adverse effect on the Company or its business. A number of state and federal laws, including the Fair Housing Act and the Americans with Disabilities Act (the "ADA"), impose requirements related to access and use by disabled persons on a variety of public accommodations and facilities. These requirements did not become effective until after January 1, 1991. Although the Company believes that its resorts are substantially in compliance with laws governing the accessibility of its facilities to disabled persons, a determination that the Company is not in compliance with the ADA could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants. The Company is likely to incur additional costs of complying with the ADA; however, such costs are not expected to have a material adverse effect on the Company's results of operations or financial condition. Additional legislation may impose further burdens or restrictions on property owners with respect to access by disabled persons. If a homeowners' association at a resort was required to make significant improvements as a result of non-compliance with the ADA, Vacation Interests owners may default on their mortgages and/or cease making required homeowners' association assessment payments. The Company is not aware of any non-compliance with the ADA, the Fair Housing Act or similar laws that management believes would have a material adverse effect on the Company's business, assets or results of operations. The Company sells Vacation Interests at its resort locations through independent sales agents. Such independent sales agents provide services to the Company under contract and, the Company believes, are not employees of the Company. Accordingly, the Company does not withhold payroll taxes from the amounts paid to such independent contractors. In the event the Internal Revenue Service or any state or local taxing authority were to successfully classify such independent sales agents as employees of the Company, rather 12 14 than as independent contractors, and hold the Company liable for back payroll taxes, such reclassification may have a material adverse effect on the Company. The marketing and sales of the GVC points-based vacation ownership system and its other operations are subject to national and European regulation and legislation. Within the European Community (which includes all the countries in which the Company conducts its operations), the European Timeshare Directive of 1994 regulates vacation ownership activities. The terms of the Directive require the Company to issue a disclosure statement providing specific information about its resorts and its vacation ownership operations as well as making mandatory a 10-day rescission period and a prohibition on the taking of advance payments prior to the expiration of that rescission period. Member States are permitted to introduce legislation that is more protective of the consumer when implementing the European Timeshare Directive. In the United Kingdom, where the majority of the Company's marketing and sales operations take place, the Directive has been implemented by way of an amendment to the Timeshare Act 1992. In the United Kingdom, a 14-day rescission period is mandatory. There are other United Kingdom laws which the Company is or may be subject to including the Consumer Credit Act 1974, the Unfair Terms in Consumer Contracts Regulations 1995 and the Package Travel, Package Holidays and Package Tours Regulations 1992. The Timeshare Act 1992 does appear to have extra-territorial effect in that United Kingdom resident purchasers buying timeshare in other European Economic Area States may rely upon it. All the countries in which the Company operates have consumer and other laws which regulate its activities in those countries. The Company is member of the Timeshare Council which is the United Kingdom's self regulating trade body for vacation ownership companies. As a member, it is obligated to comply with all laws as well as with certain codes of conduct (including a code of conduct for the operating of points systems) promulgated by the Timeshare Council. Environmental Matters. Under various federal, state, local and foreign environmental, health, safety and land use laws, ordinances, regulations and similar requirements (collectively, "Environmental Laws"), a current or previous owner or operator of real property may be required to investigate and clean up hazardous or toxic substances or wastes or releases of petroleum products or wastes at such property, and may be held liable to a governmental entity or to third parties for associated damages and for investigation and clean-up costs incurred by such parties in connection with the contamination. Such laws may impose clean-up responsibility and liability without regard to whether the owner knew of or caused the presence of the contaminants, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The cost of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate the contamination on such property, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. In addition, persons who arrange for the disposal or treatment of hazardous or toxic substances at a disposal or treatment facility may also be liable for the costs of removal or remediation of a release of hazardous or toxic substances or wastes at such disposal or treatment facility, whether or not such facility is owned or operated by such person. In addition, some Environmental Laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Finally, the owner of a site may be subject to statutory or common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. In connection with its ownership and operation of its properties, the Company potentially may be liable for such costs. In addition, as a result of the consummation of the Acquisitions, the Company could be held liable for the pre-existing environmental and other liabilities of the acquired companies, if any. Certain Environmental Laws govern the removal, encapsulation or disturbance of asbestos-containing materials ("ACMs") when such materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. Such laws may impose liability for release of ACMs and may provide for third parties to seek recovery from owners and operators of real properties for personal injury associated with ACMs. In connection with its ownership and operation of its properties, the Company potentially may be liable for such costs. In addition, recent studies have linked radon, a naturally-occurring substance, to increased risks of lung cancer. While there are currently no state or federal requirements regarding the monitoring for, presence of, or exposure to, radon in indoor air, the EPA and the Surgeon General recommend testing residences for the 13 15 presence of radon in indoor air, and the EPA further recommends that concentrations of radon in indoor air be limited to less than 4 picocuries per liter of air (pCI/L) (the "Recommended Action Level"). The presence of radon in concentrations equal to or greater than the Recommended Action Level in one or more of the Company's resorts may adversely affect the Company's ability to sell vacation interests at such resorts and the market value of such resort. In addition, the Company is required to disclose to potential purchasers and owners of vacation interests at the Company's resorts that were constructed prior to 1978 any known lead-paint hazards and failure to so notify could impose damages on the Company. The Company has conducted Phase I environmental assessments (which typically involve inspection without soil sampling or groundwater analysis) performed by independent environmental consultants at each of the resort locations at which it has sold or owns a material amount of inventory in order to identify potential environmental concerns. These Phase I assessments have been carried out in accordance with accepted industry practices, and generally have included a preliminary investigation of the sites and identification of publicly known conditions concerning properties in the vicinity of the sites, physical site inspections, review of aerial photographs and relevant governmental records where readily available, interviews with knowledgeable parties, investigation for the presence of above ground and underground storage tanks presently or formerly at the sites, a visual inspection of potential lead-based paint and suspect friable ACMs where appropriate, and the preparation and issuance of written reports. The Company's assessments of its resorts have not revealed any environmental liability that the Company believes would have a material adverse effect on the Company's business, assets or results of operations, nor is the Company aware of any such material environmental liability. Nevertheless, it is possible that the Company's assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. The Company believes that its properties are in compliance in all material respects with all Environmental Laws regarding hazardous or toxic substances or wastes. The Company does not believe that continued compliance with applicable Environmental Laws or regulations will have a material adverse effect on the Company or its financial condition or results of operations. In connection with the acquisition and development of the EVR Lake Tahoe and the Sunterra Resorts San Luis Bay, several areas of environmental concern have been identified. The areas of concern at the EVR Lake Tahoe relate to possible soil and groundwater contamination that has migrated onto the resort site from an upgradient source; in addition, residual contamination may exist on the resort site as a result of leaking underground storage tanks that were removed prior to the Company's acquisition of the resort site. California regulatory authorities are monitoring the off-site contamination and have required or are in the process of requiring the responsible parties to undertake remedial action. The Company has been indemnified by Chevron (USA), Inc. for certain costs and expenses in connection with the off-site contamination. The Company does not believe that it will be held liable for this contamination and does not anticipate incurring material costs in connection therewith; however, there can be no assurance that the indemnitor will meet its obligations in a complete and timely manner. Sunterra Resorts San Luis Bay is located in an area of Avila Beach, California which has experienced soil and groundwater contamination resulting from a nearby oil refinery. California regulatory authorities have required the installation of groundwater monitoring wells on the beach near the resort site (among other locations). Remediation has commenced and negotiations with the oil refinery are underway as to possible damages the Company has suffered from the contamination and remediation activities. It is possible that the Company's operations could be adversely impacted, including possible temporary interference with access to the resort site and temporary loss of beach access, once remediation is underway. The Company does not believe that it is liable for this contamination and does not anticipate incurring material costs in connection therewith; however, there can be no assurance that claims will not be asserted against the Company with respect to this matter. Other Regulations. Under various state and federal laws governing housing and places of public accommodation the Company is required to meet certain requirements related to access and use by disabled persons. Many of these requirements did not take effect until after January 1, 1991. Although the Company's management believes that its facilities are substantially in compliance with present requirements of such laws, 14 16 the Company may incur additional costs of compliance. Additional legislation may impose further burdens or restriction on owners with respect to access by disabled persons. The ultimate amount of the cost of compliance with such legislation is not currently ascertainable, and, while such costs are not expected to have a material effect on the Company, such costs could be substantial. Limitations or restrictions on the completion of certain renovations may limit application of the Company's growth strategy in certain instances or reduce profit margins on the Company's operations. EMPLOYEES As of December 31, 1998, the Company had approximately 6,500 full and part time employees. The Company believes that its employee relations are good. With the exception of certain employees located at the St. Maarten, Netherlands Antilles resorts, none of the Company's employees are represented by a labor union. The Company sells Vacation Interests at its resorts through approximately 1,400 independent sales agents. INSURANCE The Company carries comprehensive liability, fire, hurricane, storm, earthquake and business interruption insurance with respect to the Company's resorts locations, with policy specifications, insured limits and deductibles customarily carried for similar properties which the Company believes are adequate. In September 1995 and July 1996, the Company's St. Maarten resorts were damaged by a hurricane. With respect to such September 1995 damage, the Company has recovered amounts from its insurance carriers sufficient to cover 100% of the property damage losses and is in the process of recovering amounts for business interruption. In August of 1998, the Company's Caribbean resorts were damaged by hurricane Georges. The Company is currently in the process of recovering amounts for hurricane damage and business interruption related to the hurricane. There are, however, certain types of losses (such as losses arising from acts of war) that are not generally insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose its capital invested in a resort, as well as the anticipated future revenues from such resort and would continue to be obligated on any mortgage indebtedness or other obligations related to the property. Any such loss could have a material adverse effect on the Company. TRADEMARKS While the Company owns and controls a number of trade secrets, confidential information, trademarks, trade names, copyrights and other intellectual property rights, including the "Sunterra" and "Own Your World" service marks which, in the aggregate, are of material importance to its business, it is believed that the Company's business, as a whole, is not materially dependent upon any one intellectual property or related group of such properties. The Company is licensed to use certain technology and other intellectual property rights owned and controlled by others, and, similarly, other companies are licensed to use certain technology and other intellectual property rights owned and controlled by the Company. CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Certain statements in this Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the "10-K") that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing such forward-looking statements may be found in the material set forth under "Business and Properties," as well as within this 10-K generally. In addition, when used in this 10-K the words "believes," "anticipates," "expects," "intends" and similar expressions are intended to identify forward-looking statements. Such statements are subject to a number of risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below and the matters set forth in this 10-K generally. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. 15 17 RISK OF INCREASING LEVERAGE; LIQUIDITY The Company finances approximately 65% of its Vacation Interest sales and prior to 1998, chose to retain the originated mortgages receivable rather than sell or securitize them. As a result, the Company was required to increase its levels of indebtedness to fund its operations. At December 31, 1998, the Company had approximately $627.1 million of outstanding indebtedness (excluding trading payables). During 1998, the Company began selling or securitizing its mortgages receivable. During the year, the Company (i) completed a $100.3 million on-balance sheet asset-backed securitization in the second quarter of 1998, (ii) sold $101.9 million of mortgages receivable in the third quarter of 1998 and (iii) sold $79.0 million of mortgages receivable into a conduit facility in the fourth quarter of 1998. The Company intends to continue to convert its mortgages receivable to cash through (i) outright mortgages receivable sales, (ii) off-balance sheet asset-backed securitizations of mortgages receivable or (iii) the origination of mortgages receivable for, or by, a third party institution, and receipt of an origination fee, as the Company currently does in its Sunterra Europe operations. Such transactions are expected to be without recourse to the Company, thereby reducing the Company's risk of default on the underlying mortgages receivable. The Company may further increase levels of indebtedness by utilizing its $117.5 million senior bank credit facility with Bank of America Corporation, as administrative lender which was entered into on February 18, 1998 (as amended, the "Senior Credit Facility") to warehouse mortgages receivable until such mortgages receivable are sold in an off-balance sheet asset-backed securitization. In addition, the Company may incur indebtedness for (i) future acquisitions or (ii) to finance construction of certain resort locations. As of December 31, 1998, the Company had approximately $98.2 million available on its Senior Credit Facility and $24.9 million available on its $100.0 million mortgages receivable conduit facility (the "Conduit Facility"). In addition, the Company is currently negotiating a new conduit facility and an off-balance sheet asset-backed securitization. Both transactions are expected to close in the second quarter of 1999. Markets for the Company's mortgages receivable include the asset-backed securitization market, the commercial paper market (utilized by the Conduit Facility) and the commercial bank and finance company markets. A decline in all of these markets could materially adversely affect the Company's results of operations, cash flows and capital resources. The indentures for the Company's $140 million 9 1/4% Senior Notes due 2006 (the "Senior Notes") and the $200 million 9 3/4% Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes") contain certain covenants that, among other things, limit and/or condition the ability of the Company and its restricted subsidiaries to (i) incur additional indebtedness, (ii) pay dividends or make other distributions with respect to capital stock of the Company and its restricted subsidiaries, (iii) create certain liens, (iv) sell certain assets of the company or its restricted subsidiaries and (v) enter into certain mergers and consolidations. In addition, certain of the Company's other indebtedness that is not subordinated by its terms in right of payment to any indebtedness or other obligation of the Company ("Senior Indebtedness"), contain other and more restrictive covenants that, among other things, restrict and/or condition the following: the making of investments, loans, and advances and the paying of dividends and other restricted payments; the incurrence of additional indebtedness; the granting of liens, other than certain permitted liens; mergers, consolidations and sales of all or a substantial part of the Company's business or property; the sale of assets; and the making of capital expenditures. Certain of the Company's Senior Indebtedness, including the Senior Credit Facility, also require the Company to maintain certain financial ratios, including interest coverage, leverage and fixed charge ratios. There can be no assurance that these requirements will be met in the future. If they are not, the holders of the indebtedness under certain of the Company's other Senior Indebtedness may be entitled to declare such indebtedness immediately due and payable. 16 18 RISKS ASSOCIATED WITH CUSTOMER FINANCING The Company offers customer financing to the purchasers of Vacation Interests at the Company's resort locations and off-site sales centers who make a down payment generally equal to at least 10% of the purchase price. This financing generally bears interest at fixed rates and is collateralized by the underlying Vacation Interests. The Company has entered into agreements with lenders for the financing and sale of customer receivables. The Company has historically derived income from its financing activities. At December 31, 1998, the Company's mortgages receivable portfolio included approximately 52,000 promissory notes totaling approximately $358.9 million, with a stated maturity of typically seven to ten years and a weighted average interest rate of 14.5% per annum. Additionally, at December 31, 1998, the weighted average maturity of all outstanding consumer loans was approximately 9.5 years and the total borrowings secured by promissory notes were approximately $142 million, bearing a weighted average interest rate of 7.5%. However, because the Company's borrowings bear interest at variable rates and the Company's loans to buyers of Vacation Interests bear interest at fixed rates (which, as of December 31, 1998, equaled 14.5% per annum on a weighted average basis), the Company bears the risk of increases in interest rates with respect to the loans it has from its lenders. The promissory notes are prepayable at any time without penalty. To the extent interest rates on the Company's borrowings decrease, the Company faces an increased risk that customers will pre-pay their loans and reduce the Company's income from financing. The Company bears the risk of defaults by buyers who financed the purchase of their Vacation Interests through the Company. The Company does not, however, bear the risk of defaults with respect to mortgages receivable that it has sold to third parties. Consumer loans in excess of 60 days past due, including defaulted loans and loans in the deed-in-lieu process, at December 31, 1998 were 7.4%, as a percentage of gross mortgages receivable. The Company's allowance for doubtful accounts, which is net of recoveries, was 6.4% as a percentage of gross mortgages receivable. Management believes that this percentage is an adequate reserve for expected loan losses because the past due loan amounts do not include amounts recovered from the underlying Vacation Interests nor do all past due loans become defaulted loans. If a buyer of a Vacation Interest defaults on a mortgage receivable, the Company may foreclose and recover the underlying Vacation Interest. However, the Company will incur relatively substantial costs in foreclosing on the Vacation Interest, returning it to inventory and reselling it. Although private mortgage insurance or its equivalent is available to cover Vacation Interests, the Company has never purchased such insurance and has no present intention of doing so. In addition, although the Company in many cases may have recourse against Vacation Interest purchasers and sales agents for the purchase price paid and for commissions paid, respectively, no assurance can be given that the Vacation Interest purchase price or any commissions will be fully or partially recovered in the event of a buyer default under a mortgage receivable. The Company is subject to the costs and delays associated with the foreclosure process and no assurance can be given that the value of the underlying Vacation Interests being foreclosed upon at the time of resale will exceed the purchase price of the defaulted loans, taking into consideration the costs of foreclosure and resale or that the costs of any such foreclosures will not have a material adverse effect on the Company's results of operations. RISKS RELATED TO THE DEVELOPMENT AND INTEGRATION OF A POINTS-BASED VACATION OWNERSHIP SYSTEM The Company has developed its Club Sunterra points-based vacation exchange system which will offer points-based exchanges throughout the Company's worldwide network of resort locations. Although the Company has purchased and operated points-based vacation ownership systems through the Sunterra Pacifica, LSI and Global Acquisitions, the Company has not developed a company-wide points-based vacation ownership system and no assurance can be given as to management's ability to efficiently develop or operate such a company-wide system. Although management believes such system will be in place at all Sunterra resort locations by the end of 1999, there can be no assurance that such system will be placed into operation by such time. Risks associated with the operation of the Company's Club Sunterra company-wide points-based vacation ownership system, include the risks that: the Company cannot effectively develop or acquire the 17 19 computer software necessary to operate Club Sunterra; the North American points-based vacation ownership systems cannot be efficiently combined or operated with the Company's current vacation ownership operations; and the North American points-based vacation ownership systems may be or become subject to extensive regulation by federal, state and local jurisdictions, possibly making such points-based vacation ownership systems uneconomical or unprofitable. VARIABILITY OF QUARTERLY RESULTS The Company has historically experienced and expects to continue to experience seasonal fluctuations in its gross revenues and net income from the sale of Vacation Interests. This seasonality may cause significant variations in quarterly operating results. If sales of Vacation Interests are below seasonal normality during a particular period, the Company's annual operating results could be materially adversely affected. Due to the foregoing and other factors, the Company believes that its quarterly and annual revenues, expenses and operating results could vary significantly in the future and that period-to-period comparisons should not be relied upon as indications of future performance. Because of the above factors, it is possible that the Company's operating results will be below the expectations of securities market analysts and investors, which could have an adverse effect on the market value of the Company's Common Stock. Numerous factors, including announcements of fluctuations in the Company's or its competitors' operating results and market conditions for hospitality and vacation ownership industry securities in general, could have a significant impact on the future price of the Common Stock. In addition, the securities market in recent years has experienced significant price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the market price of the Common Stock. RISKS OF DEVELOPMENT, CONSTRUCTION AND ACQUISITION ACTIVITIES; ACCOUNTING TREATMENT A principal component of the Company's strategy is to grow through development and construction of existing resort locations and acquisition of new resort locations. Risks associated with the Company's development, construction, acquisition and expansion activities may include the risks that: acquisition and/or development opportunities may be abandoned; construction costs of a resort may exceed original estimates, possibly making the resort uneconomical or unprofitable; sales of Vacation Interests at a newly completed or acquired resort may not be sufficient to make the resort profitable; financing may not be available on favorable terms for development, construction or acquisition of, or the continued sales of Vacation Interests at, a resort; and construction may not be completed on schedule, resulting in decreased revenues and increased interest expense. The failure of the Company to successfully complete its development, construction, redevelopment, conversion, acquisition and expansion activities may have a material adverse effect on the Company's results of operations. The AVCOM, PRG and LSI Acquisitions have been accounted for by the Company by the pooling-of-interests method of accounting. Under this method of accounting, the recorded assets and liabilities of the Company, AVCOM, PRG and LSI have been carried forward at their book values to the Company and the reported income of the Company, AVCOM, PRG and LSI for prior periods has been combined and restated as income of the Company. Although the Company has received an opinion from its independent public accountants that the AVCOM, PRG and LSI Acquisitions will qualify for pooling-of-interests accounting treatment, opinions of accountants are not binding upon the Commission, and there can be no assurance that the Commission will not successfully assert a contrary position. In such case, the purchase method of accounting would be applicable. Under the purchase method, the book value of AVCOM's, PRG's and LSI's assets would be increased to their fair values, which could result in higher operating costs and expenses as the excess of the purchase price over the fair value of AVCOM's, PRG's and LSI's assets would be amortized and expensed over a period of years, which would adversely affect the Company's future earnings. The Sunterra Pacific, Marc, Global, MMG and HTD Acquisitions were each accounted for using the purchase method of accounting. 18 20 GENERAL ECONOMIC CONDITIONS, CONCENTRATION AND COMPETITION IN VACATION OWNERSHIP INDUSTRY Any downturn in economic conditions or any price increases (e.g., airfares) related to the travel and tourism industry could depress discretionary consumer spending and have a material adverse effect on the Company's business. Any such economic conditions, including recession, may also adversely affect the future availability of attractive financing rates for the Company or its customers and may materially adversely affect the Company's business. Furthermore, changes in general economic conditions may adversely affect the Company's ability to collect its loans to Vacation Interest buyers. Because the Company's operations are conducted solely within the vacation ownership industry, any adverse changes affecting the industry (such as an oversupply of vacation ownership units, a reduction in demand for such units, changes in travel and vacation patterns, changes in governmental regulations of the industry and increases in construction costs or taxes, as well as negative publicity for the industry) could have a material adverse effect on the Company's operations. The Company is subject to significant competition at each of its resorts from other entities engaged in the business of resort development, sales and operation, including Vacation Interest ownership, condominiums, hotels and motels. Many of the world's most recognized lodging, hospitality and entertainment companies have begun to develop and sell Vacation Interests in resort properties. Other major companies that now operate or are developing or planning to develop vacation ownership resorts include Marriott, Disney, Hilton, Hyatt, Four Seasons, Inter-Continental, Carlson Companies, Promus and Starwood. Many of these entities possess significantly greater financial, marketing, personnel and other resources than those of the Company and may be able to grow at a more rapid rate or more profitably as a result. The Company also competes with other established vacation ownership companies. In addition, the Company competes with the buyers of its Vacation Intervals who subsequently decide to resell those Vacation Intervals. While the Company believes, based on experience at its resorts, that the market for resale of Vacation Intervals by buyers is presently limited, such resales are typically at prices substantially less than the original purchase price. The market price of Vacation Intervals sold by the Company at a given resort or by its competitors in the market in which each resort is located could be depressed by a substantial number of Vacation Intervals offered for resale. See "-- Competition." DEPENDENCE ON VACATION INTERVAL EXCHANGE NETWORKS; RISK OF INABILITY TO QUALIFY RESORTS The attractiveness of Vacation Interest ownership is enhanced significantly by the availability of exchange networks that allow Vacation Interest owners to exchange in a particular year the occupancy right in their Vacation Interest for an occupancy right in another participating network resort. According to ARDA, the ability to exchange Vacation Interests was cited by buyers as a primary reason for purchasing a Vacation Interest. RCI and II provide broad-based Vacation Interest exchange services and the Company's resort locations are currently qualified for participation in either the RCI and II exchange networks. If such exchange networks cease to function effectively, or if the Company's resorts are no longer included in such exchange networks, the Company's sales of Vacation Interests could be materially adversely affected. See "-- Participation in Vacation Interest Exchange Networks." However, this risk is greatly reduced as the Company completes the roll-out of Club Sunterra and owners have the choice to vacation at any of the Company's 89 resorts locations. APPLICABILITY OF FEDERAL SECURITIES LAWS TO THE SALE OF VACATION INTERESTS It is possible that the Vacation Interests may be deemed to be a security as defined in Section 2(1) of the Securities Act. If the Vacation Interests were determined to be a security for such purpose, their sale would require registration under the Securities Act. The Company has not registered the sale of the Vacation Interests under the Securities Act and does not intend to do so in the future. If the sale of the Vacation Interests were found to have violated the registration provisions of the Securities Act, purchasers of the Vacation Interests would have the right to rescind their purchases of Vacation Interests. If a substantial number of purchasers sought rescission and were successful, the Company's business, results of operations and financial condition could be materially adversely affected. The Company has been advised by its vacation 19 21 ownership counsel, Schreeder, Wheeler & Flint, LLP, that in the opinion of such counsel, based on its review of the Company's Vacation Interests programs and the sales practices utilized in such program, the Vacation Interests do not constitute a security within the meaning of Section 2(1) of the Securities Act. REGULATION OF MARKETING AND SALES OF VACATION INTERESTS; OTHER LAWS As described under "-- Governmental Regulation -- General" above, the Company's marketing and sales of Vacation Interests and other operations are subject to extensive regulation by the federal government and the states and foreign jurisdictions in which its resorts are located and in which Vacation Interests are marketed and sold. The Company believes that it is in material compliance with all federal, state, local and foreign laws and regulations to which it is currently subject. However, no assurance can be given that the cost of qualifying under vacation ownership regulations in all jurisdictions in which the Company desires to conduct sales will not be significant or that the Company is in fact in compliance with all applicable federal, state, local and foreign laws and regulations. Any failure to comply with applicable laws or regulations could have a material adverse effect on the Company. POSSIBLE ENVIRONMENTAL LIABILITIES; UNINSURED LOSSES As described under "-- Governmental Regulation -- Environmental Matters" above, under various Environmental Laws, the owner or operator of real property may be liable for the costs of removal or remediation of certain hazardous or toxic substances or wastes located on or in, or emanating from, such property, as well as related costs of investigation and associated damages. The Company is not aware of environmental liability that would have a material adverse effect on the Company's business, assets or results of operations, nor has the Company been notified by any governmental authority or any third party, and is not otherwise aware, of any material noncompliance, liability or other claim relating to hazardous or toxic substance or petroleum products in connection with any of its present or former properties. The Company believes that it is in compliance in all material respects with all Environmental Laws. No assurance, however, can be given that the Company will remain in compliance with all Environmental Laws or that it is aware of all environmental liabilities that relate to all of its present and former properties. In 1992, prior to the Company's purchase of an interest in the EVR Poipu Point, the resort was substantially destroyed by Hurricane Iniki. The resort was rebuilt with insurance proceeds before the Company acquired its interest in the resort, but could suffer similar damage in the future. In September 1995 and July 1996, the Company's St. Maarten resorts were damaged by hurricanes and could suffer similar damage in the future. In August 1998, the Company's caribbean resorts were damaged by hurricane Georges. The Company is currently in the process of recovering amounts for hurricane damage and business interruption related to the hurricane. In addition, the Company's other resorts may be subject to hurricanes and damaged as a result thereof. The Company's resorts located in California and Hawaii may be subject to damage resulting from earthquakes. The Company currently maintains insurance coverage that, in management's opinion, is at least as comprehensive as the coverage maintained by other prudent entities in the Company's line of business. However, there are certain types of losses (such as losses arising from acts of war and civil unrest) that are not generally insured because they are either uninsurable or not economically insurable and for which the Company does not have insurance coverage. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose its capital invested in a resort, as well as the anticipated future revenues from such resort and would continue to be obligated on any mortgage indebtedness or other obligations related to the property. Any such loss could have a material adverse effect on the Company. EFFECTIVE VOTING CONTROL BY EXISTING STOCKHOLDERS The Company's founders, Messrs. Kaneko, Gessow and Kenninger, hold substantial shares of Common Stock, (9.5%, 9.9% and 3.0%, respectively, as of the date hereof) which may allow them, collectively, to exert substantial influence over the election of directors and the management and affairs of the Company. Accordingly, if such persons vote their shares of Common Stock in the same manner, they may have sufficient voting power to determine the outcome of various matters submitted to the stockholders for approval, 20 22 including mergers, consolidations and the sale of substantially all of the Company's assets. Such control may result in decisions that are not in the best interest of the Company. ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S CHARTER AND BYLAWS Certain provisions of the Company's articles of incorporation, as amended, (the "Charter") and bylaws, as amended, (the "Bylaws"), as well as Maryland corporate law, may be deemed to have anti-takeover effects and may delay, defer or prevent a takeover attempt that a stockholder might consider to be in the stockholder's best interest. For example, such provisions may (i) deter tender offers for Common Stock, which offers may be beneficial to stockholders or (ii) deter purchases of large blocks of Common Stock, thereby limiting the opportunity for stockholders to receive a premium for their Common Stock over then-prevailing market prices. These provisions include the following: Preferred Shares. The Charter authorizes the Board of Directors to issue preferred stock in one or more classes and to establish the preferences and rights (including the right to vote and the right to convert into Common Stock) of any class of preferred stock issued. No preferred stock is issued or outstanding. Staggered Board. The Board of Directors of the Company has three classes of directors each serving a staggered term so that the directors' terms currently will expire in 1999, 2000 and 2001. Directors for each class will be chosen for a three-year term upon the expiration of the term of the current class. The affirmative vote of two-thirds of the outstanding Common Stock is required to remove a director. Maryland Business Combination Statute. Under the Maryland General Corporation Law ("MGCL"), certain "business combinations" (including the issuance of equity securities) between a Maryland corporation and any person who owns, directly or indirectly, 10% or more of the voting power of the corporation's shares of capital stock (an "Interested Stockholder") must be approved by a supermajority (i.e., 80%) of voting shares. In addition, an Interested Stockholder may not engage in a business combination for five years following the date he or she became an Interested Stockholder. Maryland Control Share Acquisition. Maryland law provides that "Control Shares" of a corporation acquired in a "Control Share Acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes eligible under the statute to be cast on the matter. "Control Shares" are voting shares of beneficial interest which, if aggregated with all other such shares of beneficial interest previously acquired by the acquirer, would entitle the acquirer directly or indirectly to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority or (iii) a majority of all voting power. Control Shares do not include shares of beneficial interest the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "Control Share Acquisition" means the acquisition of Control Shares, subject to certain exceptions. If voting rights are not approved at a meeting of stockholders then, subject to certain conditions and limitations, the issuer may redeem any or all of the Control Shares (except those for which voting rights have previously been approved) for fair value. If voting rights for Control Shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares of beneficial interest entitled to vote, all other stockholders may exercise appraisal rights. RISKS OF YEAR 2000 SOFTWARE COMPATIBILITY 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 Planning and Awareness and Inventory Phases are currently 90% complete, and, with respect to certain information systems and products, the Detailed Assessment Phase is currently 65% 21 23 complete. 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 or airlines, 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. ITEM 3. LEGAL PROCEEDINGS The Company is currently subject to litigation and claims respecting employment, tort, contract, construction and commissions, among others. In the judgment of the Company's management, none of such lawsuits or claims against the Company is likely to have a material adverse effect on the Company or its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's equity holders during the fourth quarter of 1998. 22 24 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the New York Stock Exchange under the symbol "OWN." The following table sets forth, the high and low sale prices for the Common Stock for each quarter during the fiscal years ended December 31, 1998 and December 31, 1997.
HIGH LOW ------ ------ YEAR ENDED DECEMBER 31, 1998 Fourth Quarter............................................. $15.25 $ 4.06 Third Quarter.............................................. 15.81 6.50 Second Quarter............................................. 19.81 13.75 First Quarter.............................................. 25.75 19.06 YEAR ENDED DECEMBER 31, 1997(1) Fourth Quarter............................................. 31.75 20.75 Third Quarter.............................................. 32.00 20.92 Second Quarter............................................. 23.50 13.00 First Quarter.............................................. 25.08 14.50
- --------------- (1) As adjusted for the Company's three-for-two stock split on October 27, 1997. On March 1, 1999, there were approximately 192 holders of record of the Company's Common Stock and the approximate number of beneficial stockholders was 3,572. The Company has never declared or paid any cash dividends on its capital stock and does not anticipate paying cash dividends on its Common Stock. The Company currently intends to retain future earnings to finance its operations and fund the growth of its business. Any payment of future dividends will be at the discretion of the Board of Directors of the Company and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions in respect of the payment of dividends and other factors that the Company's Board of Directors deems relevant. The Company's ability to pay dividends is restricted. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 23 25 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth summarized consolidated financial data of the Company and gives effect to the Company's initial public offering, which was consummated in August 1996. For all of the periods presented, the financial data presented below gives effect to the AVCOM, PRG and LSI Acquisitions by combining the historical information of AVCOM, PRG, LSI and the Company and restating the historical financial data of the Company using the pooling-of-interests method of accounting. The following financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements for the Company and the notes thereto, each of which are contained elsewhere in this 10-K.
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1998 1997 1996 1995 1994 ---------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) INCOME STATEMENT DATA: Revenues: Vacation Interests sales........... $ 359,426 $281,063 $182,300 $139,426 $116,356 Interest income.................... 52,529 42,856 25,415 20,339 15,965 Gain on sales of mortgages receivable...................... 6,698 -- -- -- -- Other income....................... 31,301 13,774 12,132 8,553 1,547 ---------- -------- -------- -------- -------- Total revenues............. 449,954 337,693 219,847 168,318 133,868 ---------- -------- -------- -------- -------- Costs and Operating Expenses: Vacation Interests cost of sales... 85,649 71,437 48,218 39,810 33,082 Advertising, sales and marketing... 163,828 126,739 89,040 62,258 54,098 Loan portfolio: Provision for doubtful accounts(a)..................... 12,616 8,579 8,311 3,666 2,045 Other expenses..................... 3,680 5,522 4,523 2,034 1,466 General and administrative(a)...... 50,699 42,254 37,436 19,263 12,629 Depreciation and amortization(a)... 11,188 6,499 5,027 2,514 1,196 Merger costs, organizational costs and asset writedowns(a)(b)...... 5,056 9,973 2,620 -- -- ---------- -------- -------- -------- -------- Total costs and operating expenses................. 332,716 271,003 195,175 129,545 104,516 ---------- -------- -------- -------- -------- Income from operations............. 117,238 66,690 24,672 38,773 29,352 Interest expense, net................ 43,767 22,426 17,245 11,805 9,741 Equity loss on investment in joint ventures........................... 708 639 299 1,649 271 Minority interest in income of consolidated limited partnership... 18 181 199 -- -- ---------- -------- -------- -------- -------- Income before provision (benefit) for income taxes, extraordinary items and cumulative effect of change in accounting principle....................... 72,745 43,444 6,929 25,319 19,340 ---------- -------- -------- -------- -------- Provision (benefit) for income taxes from continuing operations......... 28,371 17,196 (4,105) 4,020 2,768 Provision for deferred income taxes resulting from the cumulative effect of previously non-taxable acquired entities.................. -- 5,960 -- -- -- ---------- -------- -------- -------- -------- Total provision (benefit) for income taxes............... 28,371 23,156 (4,105) 4,020 2,768 ---------- -------- -------- -------- -------- Income before extraordinary item and cumulative effect of change in accounting principle......... 44,374 20,288 11,034 21,299 16,572
24 26
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1998 1997 1996 1995 1994 ---------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Extraordinary items, net of tax.... 129 766 -- -- -- Cumulative effect of change in accounting principle, net of taxes........................... 1,466 -- -- -- -- ---------- -------- -------- -------- -------- Net income...................... $ 42,779 $ 19,522 $ 11,034 $ 21,299 $ 16,572 ========== ======== ======== ======== ======== Pro forma net income(c)............ $ 4,380 $ 15,310 $ 11,954 OTHER DATA (UNAUDITED FOR ALL PERIODS): EBITDA(d).......................... $ 136,211 $ 85,424 $ 44,622 $ 41,553 $ 31,553 Number of resort locations at period end...................... 87 70 31 20 16 Number of Vacation Intervals sold............................ 17,379 17,271 11,946 10,024 10,695 Number of Vacation Intervals in inventory at period end......... 31,563(e) 29,168 30,399 23,439 6,915 Average price of Vacation Intervals sold............................ $ 14,806 $ 13,885 $ 13,146 $ 12,298 $ 10,078 Number of Vacation Points sold Club Sunterra................... 2,809,333 -- -- -- -- Sunterra Europe -- GVC.......... 351,881 180,426(f) 132,878 102,270 65,325 Sunterra Pacific -- VTS Program....................... 171,557 13,629 -- -- -- Sunterra Japan -- SJVC.......... 11,810 -- -- -- -- Number of Vacation Points in Inventory at Period End Club Sunterra................... --(e) -- -- -- -- Sunterra Europe -- GVC.......... 470,302 461,473(f) 291,674 205,943 233,802 Sunterra Pacific -- VTS Program....................... 169,674 138,081 -- -- -- Sunterra Japan -- SJVC.......... 180,708 -- -- -- -- Average Price of Vacation Points sold............................ Club Sunterra................... $ 2 -- -- -- -- Sunterra Europe -- GVC.......... 211 $ 220(f) $ 186 $ 181 $ 198 Sunterra Pacific -- VTS Program....................... 119 119 -- -- -- Sunterra Japan -- SJVC.......... 93 -- -- -- -- BALANCE SHEET DATA (AT END OF PERIOD): Cash and cash equivalents, including escrow and restricted cash............................ $ 54,201 $ 47,972 $ 22,469 $ 22,779 $ 17,015 Mortgages receivable, net.......... 335,982 331,735 215,518 147,405 102,470 Total assets....................... 1,021,132 761,145 445,884 295,771 210,218 Total debt......................... 627,089 435,208 236,122 177,032 123,009 Stockholders' equity............... 251,713 207,910 126,425 75,448 61,187
- --------------- (a) Non recurring costs for the year ended 1998 include $5.1 million relating to the consolidation of certain administrative functions to Orlando, Florida and the writedown of certain assets. Non-recurring costs for the year ended December 31, 1997 are merger costs relating to the AVCOM, PRG and LSI Acquisitions. Non-recurring costs for the year ended December 31, 1996 include costs incurred at AVCOM for (i) an increase in the provision for doubtful accounts of $2.0 million, (ii) $9.1 million in severance costs, lease cancellations, litigation reserves and other integration costs and a reserve for losses associated with certain property management and related contracts, (iii) a $2.6 million writedown of certain property to estimated fair market value, and (iv) a $0.7 million charge relating to amortization of start-up costs over a period of one year. (b) Merger-related costs include expenses related to fees paid to financial advisors, legal fees, and other transaction expenses in connection with the AVCOM, PRG and LSI Acquisitions. 25 27 (c) Reflects the effect on the historical statement of operations data, assuming the combined Company had been treated as a C corporation rather than as individual limited partnerships and limited liability companies for federal income tax purposes. (d) EBITDA represents net income before interest expense, income taxes, non-recurring costs and depreciation and amortization. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service and/or incur indebtedness. However, EBITDA should not be construed as a substitute for income from operations, net income or cash flows from operating activities in analyzing the Company's operating performance, financial position and cash flows. The EBITDA measure presented herein may not be comparable to EBITDA as presented by other companies. The following table reconciles EBITDA to net income:
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Net income.............................. $ 42,779 $19,522 $11,034 $21,299 $16,572 Interest expense........................ 43,767 22,426 17,245 11,805 9,741 Capitalized interest expense included in Vacation Interest cost of sales......................... 3,455 3,082 1,718 1,915 1,276 Income taxes (benefit).................. 28,371 23,156 (4,105) 4,020 2,768 Non-recurring costs..................... 5,056(g) 9,973(g) 14,381(g) -- -- Depreciation and amortization........... 11,188 6,499 4,349(g) 2,514 1,196 Extraordinary items, net of tax......... 129 766 -- -- -- Cumulative effect of change in accounting principle.................. 1,466 -- -- -- -- -------- ------- ------- ------- ------- EBITDA............................. $136,211 $85,424 $44,622 $41,553 $31,553 ======== ======= ======= ======= =======
- --------------- (e) All Vacation Interests to be sold as SunOptions in Club Sunterra have been included as Vacation Interval inventory. (f) Vacation Points assumed through the Global Acquisition have been converted to GVC at a rate of ten to one. (g) Non-recurring costs for the year ended December 31, 1998 include $5.1 million for certain consolidation activities and the write-down of certain assets. Non-recurring costs for the year ended December 31, 1997 are merger costs relating to the AVCOM, PRG and LSI Acquisitions. Non-recurring costs for the year ended December 31, 1996 include costs incurred at AVCOM for (i) an increase in the provision for doubtful accounts of $2.0 million, (ii) $9.1 million in severance costs, lease cancellations, litigation reserves and other integration costs and a reserve for losses associated with certain property management and related contracts, (iii) a $2.6 million writedown of certain property to estimated fair market value, and (iv) a $0.7 million charge relating to amortization of start-up costs over a period of one year. 26 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the preceding Selected Financial Data and the Company's Financial Statements and the notes thereto and the other financial data included elsewhere in this 10-K. Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in "Business and Properties." RESULTS OF OPERATIONS The following discussion of the results of operations includes the Company's corporate and partnership predecessors and wholly-owned subsidiaries and affiliates including AVCOM, PRG, LSI and their subsidiaries. The AVCOM (10 resort locations), PRG (two resort locations) and LSI (11 resort locations) Acquisitions were consummated in February, May and August 1997, respectively, and were accounted for using pooling-of-interests accounting treatment for business combinations. Under such accounting treatment, the results of operations are restated to include the operations of each acquired entity for the years ended December 31, 1997 and 1996. The following discussion also includes the results of operations for Marc, Sunterra Pacific, the Global Group, MMG and HTD. The Marc, Sunterra Pacific, Global, MMG and HTD Acquisitions were each accounted for using the purchase method of accounting for the business combinations. The Marc (22 managed resort locations), Sunterra Pacific (21 resort locations) and Global (13 resort locations) Acquisitions were consummated in October, November and December 1997, respectively, for a combined purchase price of $68.9 million in assets and assumption of $31.6 million in liabilities. The MMG (6 resort locations) and HTD (one resort location) Acquisitions were consummated in February and July 1998, respectively, for a combined purchase price of $143.9 million in assets and assumption of $44.5 million in liabilities. Prior to its acquisition by the Company on February 7, 1997, AVCOM recognized a net loss of $12.4 million for the year ended December 31, 1996. As a result of applying pooling-of-interests accounting treatment to the AVCOM Acquisition, this net loss has been reflected in the Company's consolidated financial statements for the year ended December 31, 1996, reducing the Company's 1996 reported consolidated net income. In addition, as a result of the Company's 1997 merger costs and 1998 organization and asset writedown charges, the Company incurred non-recurring costs, reducing the Company's 1997 and 1998 reported consolidated net income. Therefore, to allow for a more meaningful comparison of the 1998, 1997 and 1996 financial results and management's discussion and analysis of such financial results, reported total revenues and operating expenses have been adjusted for non-recurring charges resulting from the 27 29 aforementioned activities. The following table details the adjustments to reported total revenues and costs and operating expenses for such non-recurring charges and revenues:
YEAR ENDED DECEMBER 31, -------------------------- 1998 1997 1996 ------ ------ ------ (DOLLARS IN MILLIONS) Total reported revenues.......................... $450.0 $337.7 $219.8 Other income(a).................................. -- -- (1.7) ------ ------ ------ Adjusted total revenues........................ $450.0 $337.7 $218.1 ------ ------ ------ Total reported costs and expenses................ $332.7 $271.0 $195.2 Provision for doubtful accounts(b)............... -- -- (2.0) General and administrative expenses(b)........... -- -- (9.1) Merger costs, organizational costs, and assets writedowns(b)(c)(d).................. (5.1) (10.0) (2.6) Amortization of start-up costs(b)................ -- -- (0.7) ------ ------ ------ Adjusted total costs and expenses.............. $327.6 $261.0 $180.8 ====== ====== ====== Adjusted income from operations................ $122.4 $ 76.7 $ 37.3 ====== ====== ======
- --------------- (a) For the year ended December 31, 1996, the Company recognized $1.7 million of other income as the result of the settlement of certain receivables from the former owners of the St. Maarten Resorts. (b) As the result of the AVCOM Acquisition, the Company recognized the following non-recurring charges for the year ended December 31, 1996: (i) $2.0 million in the provision for doubtful accounts; (ii) $9.1 million in general and administrative expenses for severance costs, lease cancellations, litigation reserves, and a reserve for losses associated with certain property management and related expenses; (iii) $2.6 million in resort property valuation allowance for the write-down of certain property to fair market value; and (iv) $0.7 million in depreciation and amortization for the amortization of startup costs over a period of one year. (c) For the year ended December 31, 1997, the Company recognized $10.0 million in non-recurring merger costs for the AVCOM, PRG and LSI Acquisitions. These charges include investment banking, legal, accounting and other professional fees. (d) For the year ended December 31, 1998, the Company expensed $5.1 million for certain consolidation activities and the writedown of certain assets. The following table sets forth certain operating information, as adjusted for the non-recurring charges and revenues described above.
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ---------- -------- -------- AS A PERCENTAGE OF TOTAL REVENUES: Vacation Interests sales................ 79.8% 83.2% 83.6% Interest income......................... 11.7% 12.7% 11.6% Gain of sales of mortgages receivable... 1.5% -- -- Other income............................ 7.0% 4.1% 4.8% ---------- -------- -------- Total revenues................ 100.0% 100.0% 100.0% AS A PERCENTAGE OF VACATION INTERESTS SALES: Vacation Interests costs of sales....... 23.8% 25.4% 26.4% Advertising, sales and marketing........ 45.6% 45.1% 48.8% AS A PERCENTAGE OF TOTAL REVENUES: General and administrative.............. 11.3% 12.5% 13.0%
28 30 COMPARISON OF 1998 TO 1997 Comparison of the Year Ended December 31, 1998 to the Year Ended December 31, 1997 Total revenues for the year ended December 31, 1998 were $450.0 million compared with $337.7 million in 1997, an increase of $112.3 million, or 33%. Vacation Interests sales increased 28% to $359.4 million from $281.1 million. The increase in Vacation Interests sales reflects increased prices for both Vacation Points and Vacation Intervals at the Company's resorts, increased sales activities at certain of the Company's resorts, the recording of Vacation Points sales resulting from the Sunterra Pacific and Global Acquisitions, both of which were consummated in the fourth quarter of 1997, and the recording of Vacation Interval sales resulting from the MMG Acquisition which was consummated in February 1998. Included in Vacation Interests sales in 1998 are approximately $6.4 million of Vacation Point sales from Club Sunterra, the Company's new points-based vacation ownership system that was implemented at certain resorts and off-site sales locations during the fourth quarter of 1998. Interest income increased 23% to $52.5 million during 1998 from $42.9 million during 1997, reflecting the increase in net mortgages receivable of $83.2 million, or 25%, prior to the December 1998 sale of approximately $79.0 million into the Conduit Facility. During 1998, the Company recorded gains from the sale of mortgages receivable of $6.7 million as the result of four transactions. During the third quarter of 1998 the Company closed three receivable sales consisting of $69.1, $21.5, and $11.3 million face value of mortgages receivable. In connection with the HTD Acquisition in July 1998, the Company sold $69.1 million of mortgages receivable at 96% of par, while retaining a majority interest in the excess interest spread. Additionally, in the third quarter of 1998, the Company sold $21.5 million of mortgages receivable at face value and retained a majority interest in the excess spread. During the third quarter, the Company sold $11.3 million of mortgages receivable at face value for 105% of par. During the fourth quarter of 1998, the Company entered into the Conduit Facility and recorded a $5.6 million pre-tax gain on a sale of $79.0 million of mortgages receivable. During the three-year term of the Conduit Facility, the Company will sell mortgages receivable through a wholly-owned special purpose entity at 95% of face value without recourse. On these sales, the Company will pay interest at the commercial paper rate plus 0.60% and retain 100% interest in the excess spread. The Company did not sell mortgages receivable during 1997. Other income increased 127% to $31.3 million during 1998 from $13.8 million during 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 7% during 1998, from 4% during 1997. As a percentage of adjusted total revenues, adjusted total costs and operating expenses improved to 73% during 1998 from 77% during 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. Adjusted total costs and operating expenses increased 26% to $327.6 million during 1998 from $261.0 million during 1997. As a percentage of Vacation Interests sales, Vacation Interests cost of sales improved to 24% during 1998 from 25% during 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 of its European operations. Vacation Interests cost of sales increased 20% to $85.6 million during 1998 from $71.4 million during 1997. As a percentage of Vacation Interests sales, advertising, sales and marketing expenses increased slightly to 46% from 45%, due to higher marketing expenses incurred to ramp up sales at Sunterra Pacific, which was acquired during the fourth quarter of 1997. In addition, the Company is building infrastructure in off-site sales centers in the U.S. and Europe, the costs of which were expensed during 1998, as well as other marketing initiatives to support the transition to Club Sunterra, the Company's new points-based vacation ownership 29 31 system. Advertising, sales and marketing expenses increased 29% to $163.8 million during 1998 from $126.7 million during 1997. Other loan portfolio expenses decreased to $3.7 million from $5.5 million, due largely to the cost savings associated with centralizing the servicing efforts of PRG and AVCOM. The provision for doubtful accounts increased $4.0 million to $12.6 million during 1998 from $8.6 million during 1997. As a percentage of total revenues, the provision for doubtful accounts was 3% during 1998 and 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 adjusted total revenues, general and administrative expenses improved to 11% during 1998 from 13% in 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 20% to $50.7 million during 1998 from $42.3 million during 1997. The increase in general and administrative expenses was due primarily to the acquisition of additional resorts and the development of Club Sunterra in the past year. Depreciation and amortization increased $4.7 million, or 72%, to $11.2 million during 1998 from $6.5 million in 1997. As a percentage of adjusted total revenues, depreciation and amortization increased to 3% during 1998 from 2% for 1997. The increase in depreciation and amortization was driven by the amortization of goodwill associated with the Marc, Sunterra Pacific, Global and MMG Acquisitions, 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 points-based vacation ownership system and other infrastructure additions. Interest expense, net of capitalized interest, increased $21.4 million, or 95%, to $43.8 million during 1998 from $22.4 million during 1997. The increase was due primarily to increases in debt from public securities offerings and borrowings under its Senior Credit Facility, and from the Company's privately placed on-balance sheet asset-backed securitization issued in June 1998. Adjusted income from operations increased to $122.4 million during the year ended December 31, 1998 from $76.7 million for the year ended December 31, 1997. Income before provision for income taxes, excluding merger, organization, and asset writedown costs, increased 46% to $77.8 million during the year ended December 31, 1998 from $53.4 million for the year ended December 31, 1997. During the fourth quarter of 1998, the Company recorded a $1.5 million cumulative effect of change in accounting principle, net of taxes, as the result of the early adoption of the AICPA's Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-up Activities." The SOP required the Company to expense all previously capitalized start-up costs as of January 1, 1998 and requires the Company to expense all such expenses as incurred after January 1, 1998. The Company's income tax rate was 39% for both years ending December 31, 1998 and 1997, resulting in net income of $42.8 million for the year ending December 31, 1998, a 119% increase over $19.5 million for the year ended December 31, 1997. COMPARISON OF 1997 TO 1996 The following discussion of financial results adjusts the reported statement of operations data for the non-recurring charges incurred during the years ended December 31, 1997 and 1996. For the year ended December 31, 1997, the Company recognized $10.0 million in non-recurring merger-related expenses for the acquisition by merger of AVCOM, PRG and LSI and a $6.0 million charge to record deferred taxes related to cumulative temporary differences between financial and tax reporting for entities acquired in the PRG Acquisition that were previously taxed as partnerships at the partner level. For the year ended December 31, 1996, the Company incurred the following non-recurring charges related to the AVCOM Acquisition: 30 32 (i) general and administrative expense increased by $9.1 million for severance costs, lease cancellations, litigation reserves, reserves for losses associated with certain property management and related contracts; (ii) provision for doubtful accounts increased by $2.0 million; (iii) resort property valuation allowance increased by $2.6 million to write down certain property to market value for projects initiated by AVCOM which were subsequently abandoned; and (iv) depreciation and amortization increased by $0.7 million related to the amortization of start-up costs over a period of one year. Also, in 1996, the Company recognized $1.7 million of other income as the result of a settlement of certain receivables from the former owners of the St. Maarten resorts. Total reported revenues for the year ended December 31, 1997 were $337.7 million, compared with adjusted total revenues of $218.1 million in 1996, an increase of $119.6 million, or 55%. Vacation Interests sales increased 54% to $281.1 million from $182.3 million. The increase in Vacation Interest sales reflects increased prices for both Vacation Intervals and Vacation Points at the Company's resorts and increased sales activities at certain of the Company's resorts. Vacation Points sales during 1997 increased 66% to $41.1 million from $24.7 million in 1996. The increase in the number of Vacation Points sold in 1997 is the result of a 30% increase in Vacation Points sold in LSI, along with the addition of Vacation Points sales resulting from the Sunterra Pacific and Global Acquisitions which were consummated in the fourth quarter of 1997. Interest income increased 69% to $42.9 million from $25.4 million in 1996, reflecting the increase in net mortgages receivable of $116.2 million, or 54%. Other income, which includes rental income, management fees, commissions on the sale of European receivables, and other interest income, increased $3.4 million to reported other income of $13.8 million in 1997 from adjusted other income of $10.4 million in 1996, an increase of 33%. Vacation Interests cost of sales, as a percentage of Vacation Interests sales, was 25% for 1997, compared with 26% for the prior year as the Company continued to purchase and construct vacation units at a discount to historical development costs, reducing the unit cost on average for each Vacation Interest sold. Advertising, sales and marketing expenses increased $37.7 million to $126.7 million for 1997 from $89.0 million for 1996. As a percentage of Vacation Interests sales, advertising, sales and marketing expenses decreased to 45% for 1997 from 49% for 1996. The decrease resulted primarily from decreased expenses at the resorts acquired in the AVCOM Acquisition as well as from the company-wide application of best marketing practices taken from the Company's best performing resorts. The provision for doubtful accounts increased $2.3 million during 1997 to $8.6 million at year end from an adjusted $6.3 million at the end of 1996. The allowance for doubtful accounts as a percentage of gross mortgages receivable decreased to a reported 6.5% at December 31, 1997 from an adjusted 6.6% at December 31, 1996. General and administrative expenses increased to a reported $42.3 million in 1997 from adjusted general and administrative expenses of $28.3 million in 1996, an increase of 49%. General and administrative expenses were 13% of 1997 reported total revenues and 1996 adjusted total revenues. The increase in general and administrative expenses was the result of (i) the addition of a number of senior officers and key executives in order to build the management and organizational infrastructure necessary to efficiently manage the Company's growth, (ii) increased overhead due to the acquisition of additional resorts, and (iii) added salary, travel and office expenses attributable to the growth in the size of the Company. Depreciation and amortization increased $2.2 million, or 51%, to a reported $6.5 million during 1997 from adjusted depreciation and amortization of $4.3 million in 1996, reflecting an increase in capital expenditures and intangible assets. Depreciation and amortization was 2% of reported total revenues in 1997 and 2.0% of adjusted total revenues in 1996. Interest expense, net of capitalized interest of $6.8 million and $6.7 million at December 31, 1997 and 1996, respectively, increased $5.2 million, or 30%, to $22.4 million for 1997 from $17.2 million in 1996. The 31 33 increase was due primarily to the interest on the Convertible Notes and the Senior Subordinated Notes issued in 1997. As a result of the factors discussed above and the $2.6 million resort property valuation allowance, total costs and operating expenses increased by $80.2 million, or 44%, to an adjusted $261.0 million in 1997 from an adjusted $180.8 million in 1996. Total adjusted costs and operating expenses as a percentage of reported total revenues were 77% in 1997. This represents a decrease of 8% from adjusted total costs and operating expenses as a percentage of adjusted total revenues of 83% in 1996. In addition, as a result of the factors discussed above, adjusted income before provision for income taxes and extraordinary item and non-recurring costs increased 172% to $53.4 million in 1997 from $19.6 million for 1996. An extraordinary item of $0.8 million, net of income taxes, was charged to net income in 1997 as the result of the early retirement of notes payable to financial institutions. For 1997, income taxes increased $27.3 million over 1996, reflecting a change in the Company's status to a C corporation subsequent to its August 1996 initial public offering, as well as a $6.0 million charge to income tax expense taken in the fourth quarter resulting from recording deferred taxes for previously non-taxable entities acquired in the PRG Acquisition. Previously, the Company's predecessor entities only incurred federal income taxes with regard to AVCOM and foreign income taxes with respect to LSI and the Company's wholly-owned subsidiaries located in St. Maarten, Netherlands Antilles. Reported income before extraordinary items and cumulative effect of change in accounting principle was $20.3 million for 1997, an increase of $9.3 million, or 85%, from $11.0 million in 1996. Reported net income was $19.5 million for 1997, compared with $11.0 million for 1996, an increase of $8.5 million or 77%. Assuming the Company had been taxed as a C corporation in 1996, pro forma net income would have been $4.4 million, compared with $19.5 million net income for 1997, an increase of 343%. LIQUIDITY AND CAPITAL RESOURCES The Company generates cash from (i) cash sales and cash down payments from sales of Vacation Interests, (ii) sales of the Company's mortgages receivable through its Conduit Facility, asset-backed securitizations or whole loan sales, (iii) principal payments and customer prepayments of principal from its mortgages receivable portfolio, (iv) interest from its mortgages receivable portfolio, (v) rental of unsold Vacation Interests, (vi) receipt of management, reservations and points-based vacation club fees, and (vii) 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. For the years ended December 31, 1998 and 1997, the Company used $54.1 million and $50.0 million in cash flows from operations, respectively. Excluding investment in real estate and development costs of $183.1 million and $137.0 million, respectively, the Company generated cash flows from operations of $129.0 million and $87.0 million for the year ended December 31, 1998 and 1997, respectively. Approximately 80% of the Company's total revenues during 1998 were from Vacation Interests sales during which period the Company financed approximately 65% of its Vacation Interests sales, with the 35% balance being cash sales. The Company finances Vacation Interests sales and holds the related mortgages receivable to generate profit from such financing activities. As a result of the Company's significant mortgages receivable financing activity, operating costs exceed the initial cash proceeds received from the sales of Vacation Interests. Prior to 1998, this strategy required the Company to increase its levels of indebtedness on its Senior Credit Facility or other existing revolving lines of credit. During 1998, the Company began selling or securitizing its mortgages receivable. The Company (i) completed a $100.3 million on-balance sheet asset-backed securitization in the second quarter of 1998, (ii) sold $101.9 million in the third quarter of 1998 and (iii) sold $79.0 million through the Conduit Facility in the fourth quarter of 1998. 32 34 The Company intends to continue to convert its mortgages receivable to cash through (i) whole mortgages receivable sales, (ii) off-balance sheet asset-backed securitizations or (iii) the origination of mortgages receivable for a third party institution and receipt of an origination fee, as the Company currently does in its European operations. The Company may warehouse mortgages receivable through the existing Senior Credit Facility or Conduit Facility, until such mortgages receivable are sold. The proceeds of the mortgages receivable sale would be used to repay the Senior Credit Facility or Conduit Facility. As of December 31, 1998, the Company had approximately $98.2 million available on its Senior Credit Facility and $24.9 million on its Conduit Facility. The Company also had available approximately $209.0 million of unencumbered mortgages receivable. In addition, the Company is currently negotiating an additional conduit facility and an off-balance sheet asset-backed securitization. Both transactions are expected to close in the second quarter of 1999. In April 1998, the Company completed its offering of $140 million aggregate principal amount of its Senior Notes. 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 resort locations and vacation ownership related assets, and for working capital and other general corporate purposes. On December 31, 1998, the Company entered into the Conduit Facility. During the three year term of the Conduit Facility, the Company intends to sell mortgages receivable through a wholly-owned special purpose entity at 95% of face value. On these sales, the Company will pay interest at the commercial paper rate plus 0.60% and retain 100% of the excess interest spread. This sale will be without recourse to the Company for defaults experienced by the mortgages receivable portfolios. During 1998, the Company spent $99.3 million for the acquisition of additional resort locations; $44.2 million for property and equipment, primarily for the development of computer systems for property and Club Sunterra management systems; and $183.1 million for expansion and development activities at the Company's resort locations. The Company funded these activities through (i) the issuance of $140 million Senior Notes, (ii) $101.9 million in mortgages receivable sales, (iii) the $100.3 million on-balance sheet securitization and (iv) borrowings on the Senior Credit Facility and (v) the sale of $79.0 million of mortgages receivable through the Conduit Facility. The Company expects to incur approximately $100.8 million in 1999 to complete real estate and development projects, including $14.3 million to complete projects currently under construction and $86.5 million for projects planned to be constructed in 1999. However, the Company has not made any binding commitments for such planned construction. The Company believes that, with respect to its current operations, the Senior Credit Facility and the Conduit Facility, together with cash on hand and cash generated from operations, future borrowings, the sale or securitization 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 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 December 31, 1998, the Company was in compliance with all applicable covenants in its debt agreements. The indentures for the Company's Senior Notes and Senior Subordinated Notes contain certain covenants that, among other things, limit and/or condition the ability of the Company and its restricted subsidiaries to (i) incur additional indebtedness, (ii) pay dividends or make other distributions with respect to capital stock of the Company and its restricted subsidiaries, (iii) create certain liens, (iv) sell certain assets of the company or its restricted subsidiaries and (v) enter into certain mergers and consolidations. In addition, certain of the Company's Senior Indebtedness, contain other and more restrictive covenants that, among other 33 35 things, restrict and/or condition the following: the making of investments, loans, and advances and the paying of dividends and other restricted payments; the incurrence of additional indebtedness; the granting of liens, other than certain permitted liens; mergers, consolidations and sales of all or a substantial part of the Company's business or property; the sale of assets; and the making of capital expenditures. Certain of the Company's Senior Indebtedness, including the Senior Credit Facility, also require the Company to maintain certain financial ratios, including interest coverage, leverage and fixed charge ratios. 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 is expected to be completed by the fourth quarter of 1999 and 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. The Company believes it is currently approximately 90% complete with Phase 1, based on all currently identified tasks. 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. The Company believes it is approximately 65% complete with Phase 2 based on all currently identified tasks. 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. The Company believes it is approximately 60% complete with Phase 3 based on all currently identified tasks. 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. The Company believes it is approximately 25% complete with Phase 4 based on all currently identified tasks. 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 34 36 coordinate with third parties and electronic partner interfaces, formulate contingency plans, and obtain and construct mirror test environments and data. The Company believes it is approximately 35% complete with Phase 5 based on all currently identified tasks. 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. The Company believes it is approximately 35% complete with Phase 6 based on all currently identified tasks. 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. The Company believes it is approximately 20% complete with Phase 7 based on all currently identified tasks. 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. Phase 8 is being conducted as Phases 1 to 7 progress. Status. As part of an enterprise-wide process, the Company has begun integrating resorts to a common platform. The Company is replacing a substantial portion of its existing information systems with a fully integrated enterprise information system. A vendor has warranted the Company's financial portion of this system to be Year 2000 compliant. The Company has been reviewing and will continue to review its financial and operating systems at each of its offices and resort locations. The assessment, testing and resolution phases of the project are being performed concurrently. As each mission critical system is tested, the remediation, upgrade, or replacement if needed is begun. The Company currently has found that four of its priority applications are Year 2000 compliant based on the vendor representation or through testing by the Company. Two priority applications are currently being remediated and the remaining ten applications are in the process of being tested. It is the Company's goal to have the Project completed for mission critical systems by the fourth quarter of 1999. Based upon the analyses conducted to date, the Company believes the mission critical systems at the Company's offices and resort locations are either currently compliant or will be compliant by the fourth quarter of 1999. Costs. The Company has prepared a preliminary estimate of costs with regard to making its mission critical systems Year 2000 compliant. At this time, the Company's preliminary estimate of such is approximately $6 million. The Company incurred approximately $0.8 million in 1998 and expects to incur an additional $5.2 million in 1999 in costs associated with Year 2000 issues. The Company expects that expenditures relating these issues will be funded from operating cash flows. The preliminary estimate of costs includes administrative expenses, testing, and hardware, software and facility replacement costs. The Company will capitalize and depreciate the cost of any hardware, software and facility replacement cost 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. The preceding discussion should be read in conjunction with the financial statements and notes included elsewhere in this 10-K. 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 this 10-K. 35 37 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency Risk The Company's total revenues denominated in a currency other than U.S. dollars for the year ended December 31, 1998 (primarily revenues derived from the United Kingdom and Japan) were approximately 26% of total revenues. The Company's net assets maintained in a functional currency other than U.S. dollars at December 31, 1998 (primarily assets located in western Europe and Japan) were approximately 8% of total net assets. The effects of changes in foreign currency exchange rates has not historically been significant to the Company's operations or net assets. Interest Rate Risks As of December 31, 1998, the Company had fixed interest rate debt of approximately $572.4 million and floating interest rate debt of approximately $54.7 million. The floating interest rates are based upon the prevailing LIBOR rate or the prevailing prime interest rate for the Company's Senior Credit Facility and endpaper debt, respectively. In addition, the Company sold $79.0 million of mortgages receivable through its Conduit Facility. The gain on sale recognized by the Company is based upon the prevailing commercial paper rates. For floating rate debt, interest rate changes do not generally effect the market value of debt but do impact future earnings and cash flows, assuming other factors are held constant. Conversely, for fixed rate debt, interest rate changes do effect the market value of debt but do not impact earnings or cash flows. A hypothetical one-percentage change in the prevailing LIBOR, prime or commercial paper rate would impact after-tax earnings of the Company by less than $0.8 million per year. A similar change in the interest rate would impact the total fair value of the Company's fixed rate debt, excluding the Convertible Notes, by approximately $22 million. The conversion feature to Common Stock makes it impractical to estimate the effect of a change in interest rates on the Company's Convertible Notes. There is a high correlation between the fair value of the Convertible Notes and the Company's Common Stock. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the information set forth on Index to Financial Statements appearing on page F-1 of the 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item will be set forth under "Directors and Executive Officers" and "Proxy Statement -- Compliance with Section 16(a) Under the Securities Exchange Act of 1934" in the Company's Definitive Proxy Statement and reference is expressly made thereto for the specific information incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item will be set forth under "Executive Compensation" in the Company's Definitive Proxy Statement and reference is expressly made thereto for the specific information incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item will be set forth under "Proxy Statement -- Share Ownership of Directors and Executive Officers," "Other Information -- Certain Stockholders" and "Proposal No. 1: 36 38 Election of Directors -- Compensation of Directors" in the Company's Definitive Proxy Statement and reference is expressly made thereto for the specific information incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS The information required by this Item will be set forth under "Certain Transactions" in the Company's Definitive Proxy Statement, and reference is expressly made thereto for the specific information incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report:
EXHIBIT NUMBER DESCRIPTION ------- ----------- *3.1 Restated Articles of Incorporation of Sunterra Corporation 3.2 Bylaws of Sunterra Corporation, as amended (incorporated by reference to Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996) 4.1 Indenture dated as of January 15, 1997 by and between Sunterra Corporation and Norwest Bank Minnesota, National Association, as trustee, for the 5 3/4% Convertible Subordinated Notes of Sunterra Corporation due 2007 (incorporated by reference to Exhibit 4 to Registrant's Registration Statement on Form S-1 (No. 333-30285)) 4.2 Indenture dated as of August 1, 1997 by and between Sunterra Corporation and Norwest Bank Minnesota, National Association, as trustee, for the 9 3/4% Senior Subordinated Notes of Sunterra Corporation due 2007 (incorporated by reference to Exhibit 4.2 to Amendment No. 1 on Form S-3 to Registrant's Registration Statement on Form S-1 (No. 333-30285)) 4.3 Indenture dated as of April 15, 1998 by and between Sunterra Corporation and Norwest Bank Minnesota, National Association, as trustee for the 9 1/4% Senior Notes of Sunterra Corporation due 2006 (incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-4 (No. 333-51803)) 4.4 Indenture dated a of May 1, 1998, by and between Sunterra Finance L.L.C. as issuer of the bonds, Sunterra Corporation as Servicer, and LaSalle National Bank as Trustee and Back-up Servicer for Signature Resorts Vacation Ownership Receivables -- Backed Notes 1998-A (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998) *10.1 Credit Agreement dated as of February 18, 1998 by and among Sunterra Corporation, certain lender parties thereto, NationsBank of Texas, N.A., as administrative lender and Societe Generale, as document agent, including Amendments 1, 2 and 3 thereto 10.2 Servicing Agreement dated as of May 1, 1998, by and between Sunterra Finance L.L.C. as issuer of the bonds, Sunterra Corporation as Servicer, and LaSalle National Bank as Trustee and Back-up Servicer for Signature Resorts Vacation Ownership Receivables -- Backed Notes 1998-A (incorporated by reference to Exhibit 10.8 to the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1998) *10.3 Receivables Purchase Agreement dated as of December 17, 1998 among Blue Bison Funding Corp., Sunterra Corporation and Barton Capital Corporation
37 39
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.4 Construction Loan Agreement between Lake Tahoe Resort Partners, LLC, and FINOVA Capital Corporation dated as of April 29, 1996 (incorporated by reference to Exhibit 10.8.8 to Registrant's Registration Statement on Form S-1 (No. 333-18447)) 10.5 Agreement of Limited Partnership of Pointe Resort Partners, L.P. (subsequently renamed Poipu Resort Partners L.P.) dated October 11, 1994 (incorporated by reference to Exhibit 10.4 to Registrant's Registration Statement on Form S-1 (No. 333-06027)) 10.6 Joint Development Agreement dated as of January 16, 1998 between Westin Hotel Company and Sunterra Corporation (incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 20, 1998)) 10.7 Registration Rights Agreement dated as of August 20, 1996 by and among Sunterra Corporation and the persons named therein (incorporated by reference to Exhibit 10.1 to Registrant's Registration Statement on Form S-1 (No. 333-30285)) 10.8 Registration Rights Agreement dated as of May 15, 1997 by and among Signature Resorts Inc. and the persons named therein (incorporated by reference to Exhibit 4 to Registrant's current report on Form 8-K filed with the Commission on May 29, 1997) 10.9 Registration Rights Agreement dated as of August 28, 1997 by and among Sunterra Corporation and Ian K. Ganney and Richard Harrington (incorporated by reference to Exhibit 10.10 to Amendment No. 1 on Form S-3 to Registrant's Registration Statement on Form S-1 (No. 333-30285)) 10.10 Registration Rights Agreement dated as of October 10, 1997 by and among Sunterra Corporation and Michael V. Paulin, Rosemarie Paulin, Maya K. Paulin and Annemarie H. Paulin (incorporated by reference to Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997) 10.11 Employment Agreement between Sunterra Corporation and Andrew J. Gessow (incorporated by reference to Exhibit 10.2.2 to Registrant's Registration Statement on Form S-1 (No. 333-30285)) 10.12 Employment Agreement between Sunterra Corporation and Steven C. Kenninger (incorporated by reference to Exhibit 10.2.3 to Registrant's Registration Statement on Form S-1 (No. 333-30285)) 10.13 Employment Agreement between Sunterra Corporation and L. Steven Miller (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) *10.14 Employment Agreement between Sunterra Corporation and Richard Goodman 10.15 Employment Agreement between Sunterra Corporation and James E. Noyes (incorporated by reference to Exhibit 10.2.4 to Registrant's Registration Statement on Form S-1 (No. 333-06027)) *10.16 Amended and Restated 1996 Equity Participation Plan of Sunterra Corporation, including form of stock option agreement thereunder 10.17 Sunterra Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.5 to Registrant's Registration Statement on Form S-1 (No. 333-06027)) 10.18 First Amendment to Employee Stock Plan of Sunterra Corporation effective as of November 1, 1997 (incorporated by reference to Exhibit 10.2 to Registrant's Registration Statement on Form S-8 (No. 333-15361)) *10.19 1998 New-Hire Stock Option Plan of Sunterra Corporation
38 40
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.20 Amended Consulting Agreement dated as of August 1, 1997 by and between Sunterra Corporation, Resort Services, Inc. and Dr. Kay F. Gow and Robert T. Gow (incorporated by reference to Exhibit 10.12 to Amendment No. 1 on Form S-3 to Registrant's Registration Statement on Form S-1 (No. 333-30285)) *21 Subsidiaries of Sunterra Corporation *23.1 Consent of Arthur Andersen LLP *23.2 Consent of KPMG *23.3 Consent of Schreeder, Wheeler & Flint, LLP *27 Financial Data Schedule (for the fiscal year ended December 31, 1998)
- --------------- * Filed herewith (b) Reports on Form 8-K. Current Report on Form 8-K dated November 4, 1998 filed with the Commission on November 10, 1998 relating to the announcement of the Company's third quarter 1998 earnings. (c) The exhibits required by Item 601 of Regulation S-K have been listed above. (d) Financial Statement Schedules None. Schedules are omitted because of the absence of the conditions under which they are required or because the information required by such omitted schedules is set forth in the financial statements or the notes thereto. 39 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. SUNTERRA CORPORATION By: /s/ THOMAS A. BELL ------------------------------------ Thomas A. Bell Senior Vice President, General Counsel and Secretary Dated: March 31, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ANDREW J. GESSOW Co-Chairman of the Board March 31, 1999 - ----------------------------------------------------- Andrew J. Gessow /s/ STEVEN C. KENNINGER Co-Chairman of the Board March 31, 1999 - ----------------------------------------------------- Steven C. Kenninger /s/ L. STEVEN MILLER Director, President and Chief March 31, 1999 - ----------------------------------------------------- Executive Officer (Principal L. Steven Miller Executive Officer) /s/ RICHARD GOODMAN Executive Vice President and March 31, 1999 - ----------------------------------------------------- Chief Financial Officer Richard Goodman (Principal Financial and Accounting Officer) /s/ JAMES E. NOYES Executive Vice March 31, 1999 - ----------------------------------------------------- President -- Sales and Director James E. Noyes /s/ OSAMU KANEKO Director March 31, 1999 - ----------------------------------------------------- Osamu Kaneko /s/ ADAM M. ARON Director March 31, 1999 - ----------------------------------------------------- Adam M. Aron /s/ SANFORD R. CLIMAN Director March 31, 1999 - ----------------------------------------------------- Sanford R. Climan /s/ J. TAYLOR CRANDALL Director March 31, 1999 - ----------------------------------------------------- J. Taylor Crandall /s/ JOSHUA S. FRIEDMAN Director March 31, 1999 - ----------------------------------------------------- Joshua S. Friedman /s/ W. LEO KIELY III Director March 31, 1999 - ----------------------------------------------------- W. Leo Kiely III
40 42 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Sunterra Corporation and Subsidiaries Report of Independent Certified Public Accountants (Sunterra Corporation for the years ending 1998, 1997, 1996)........ F-2 Independent Auditors' Report (LSI Group Holdings plc for the year ended 1996).......................................... F-3 Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... F-4 Consolidated Statements of Income for each of the three years ended December 31, 1998............................. F-5 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1998............................. F-6 Consolidated Statements of Equity for each of the three years ended December 31, 1998............................. F-7 Notes to Consolidated Financial Statements.................. F-8
F-1 43 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To Sunterra Corporation: We have audited the accompanying consolidated balance sheets of Sunterra Corporation (formerly Signature Resorts, Inc.) (a Maryland corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, equity and cash flows for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1996 financial statements of LSI Group Holdings plc, a company acquired during 1997 in a transaction accounted for as a pooling of interests, as discussed in Note 17. Such statements are included in the consolidated financial statements of Sunterra Corporation and subsidiaries and reflect total revenues of 13 percent of the consolidated totals. These statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts included for LSI Group Holdings plc, is based solely upon the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Sunterra Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Arthur Andersen LLP Orlando, Florida, February 10, 1999 F-2 44 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders LSI Group Holdings Plc We have audited the consolidated balance sheet of LSI Group Holdings plc and subsidiaries as of December 31, 1996, and the related consolidated statements of income, equity, and cash flows for the year ended December 31, 1996 (not presented separately herein). These financial statements are the responsibility of Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LSI Group Holdings plc and subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for the year ended December 31, 1996, in conformity with generally accepted accounting principles in the United States of America. KPMG Chartered Accountants Registered Auditors Preston, England March 27, 1997 F-3 45 CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) ASSETS
DECEMBER 31, ---------------------- 1998 1997 ---------- -------- Cash and cash equivalents................................... $ 28,250 $ 38,487 Cash in escrow and restricted cash.......................... 25,951 9,485 Mortgages receivable, net of an allowance of $22,869 and $22,916 at December 31, 1998 and 1997, respectively....... 335,982 331,735 Retained interests.......................................... 12,518 -- Due from related parties.................................... 25,849 25,576 Other receivables, net...................................... 38,207 17,669 Income tax refund receivable................................ -- 4,719 Prepaid expenses and other assets........................... 22,031 13,047 Investment in joint ventures................................ 17,876 15,657 Real estate and development costs........................... 336,620 219,299 Property and equipment, net................................. 81,125 35,024 Intangible assets, net...................................... 96,723 50,447 ---------- -------- Total assets...................................... $1,021,132 $761,145 ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable............................................ 21,864 $ 25,196 Accrued liabilities......................................... 80,242 68,047 Due to related parties...................................... -- 1,032 Income taxes payable........................................ 9,240 -- Deferred taxes.............................................. 30,984 23,752 Notes payable............................................... 627,089 435,208 ---------- -------- Total liabilities................................. 769,419 553,235 ---------- -------- Commitments and contingencies (Note 11) Stockholders' equity: Preferred stock (25,000,000 shares authorized; none issued or outstanding)........................................ -- -- Common stock ($0.01 par value, 50,000,000 shares authorized; 35,902,671 and 35,875,287 shares outstanding at December 31, 1998 and 1997, respectively).......................................... 359 359 Additional paid-in capital................................ 163,290 162,969 Retained earnings......................................... 86,581 43,797 Accumulated other comprehensive income.................... 1,483 785 ---------- -------- Total stockholders' equity........................ 251,713 207,910 ---------- -------- Total liabilities and stockholders' equity........ $1,021,132 $761,145 ========== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 46 CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- REVENUES: Vacation Interests sales.................................... $359,426 $281,063 $182,300 Interest income............................................. 52,529 42,856 25,415 Gain on sales of mortgages receivable....................... 6,698 -- -- Other income................................................ 31,301 13,774 12,132 -------- -------- -------- Total revenues..................................... 449,954 337,693 219,847 -------- -------- -------- COSTS AND OPERATING EXPENSES: Vacation Interest cost of sales............................. 85,649 71,437 48,218 Advertising, sales, and marketing........................... 163,828 126,739 89,040 Loan portfolio: Provision for doubtful accounts........................... 12,616 8,579 8,311 Other expenses............................................ 3,680 5,522 4,523 General and administrative.................................. 50,699 42,254 37,436 Depreciation and amortization............................... 11,188 6,499 5,027 Merger costs, organizational costs and asset writedowns..... 5,056 9,973 2,620 -------- -------- -------- Total costs and operating expenses................. 332,716 271,003 195,175 -------- -------- -------- Income from operations...................................... 117,238 66,690 24,672 Interest expense (net of capitalized interest of $8,942, $6,774, and $6,723 in 1998, 1997 and 1996, respectively)............................................. 43,767 22,426 17,245 Equity loss on investment in joint ventures................. 708 639 299 Minority interest in income of consolidated limited partnership............................................... 18 181 199 -------- -------- -------- Income before provision (benefit) for income taxes, extraordinary items and cumulative effect of change in accounting principle...................................... 72,745 43,444 6,929 -------- -------- -------- Provision (benefit) for income taxes from continuing operations................................................ 28,371 17,196 (4,105) Provision for deferred income taxes resulting from the cumulative effect of previously non-taxable acquired entities.................................................. -- 5,960 -- -------- -------- -------- Total provision (benefit) for income taxes......... 28,371 23,156 (4,105) -------- -------- -------- Income before extraordinary items and cumulative effect of change in accounting principle............................ 44,374 20,288 11,034 Extraordinary items, net of taxes........................... 129 766 -- Cumulative effect of change in accounting principle, net of taxes..................................................... 1,466 -- -- -------- -------- -------- Net income.................................................. $ 42,779 $ 19,522 $ 11,034 ======== ======== ======== PRO FORMA INCOME DATA (UNAUDITED): Income before provision for income taxes.................... $ 6,929 Provision for income taxes.................................. 2,549 -------- Pro forma net income........................................ $ 4,380 ======== EARNINGS PER SHARE (NOTE 3): Basic: Income before extraordinary item and cumulative effect of change in accounting principle.......................... $ 1.24 $ 0.57 $ 0.41 Extraordinary item, net of taxes.......................... -- (0.02) -- Cumulative effect of change in accounting principle, net of taxes................................................ (0.05) -- -- -------- -------- -------- Net income.................................................. $ 1.19 $ 0.55 $ 0.41 ======== ======== ======== Diluted: Income before extraordinary item and cumulative effect of change in accounting principle.......................... $ 1.20 $ 0.56 $ 0.40 Extraordinary item, net of taxes.......................... -- (0.02) -- Cumulative effect of change in accounting principle, net of taxes................................................ (0.04) -- -- -------- -------- -------- Net income................................................ $ 1.16 $ 0.54 $ 0.40 ======== ======== ======== PRO FORMA EARNINGS PER SHARE: (UNAUDITED) Basic..................................................... $ 0.16 Diluted................................................... $ 0.16 Weighted average number of common shares outstanding (Note 3)........................................................ 35,888 35,373 27,232 Weighted average number of common and potentially dilutive common shares outstanding (Note 3)........................ 40,995 36,180 27,640
The accompanying notes are an integral part of these consolidated financial statements. F-5 47 CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- OPERATING ACTIVITIES: Net income.............................................. $ 42,779 $ 19,522 $ 11,034 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization......................... 11,188 6,499 5,027 Provision for doubtful accounts....................... 12,616 8,579 8,311 Gain on sales of mortgages receivable................. (6,698) -- -- Writedown of certain assets........................... 3,506 -- 2,620 Cumulative effect of change in accounting principle... 2,403 -- -- Equity loss on investment in joint venture............ 708 639 299 Minority interest in income of consolidated limited partnership........................................ 18 181 199 Other................................................. -- -- 573 Changes in operating assets and liabilities, net of effect of acquisitions: Cash in escrow and restricted cash................. (16,460) (6,916) 1,037 Due from related parties........................... (5,420) (12,504) (1,712) Prepaid expenses and other assets.................. (7,814) 2,068 (5,878) Investment in real estate and development costs.... (97,488) (65,595) (73,086) Other receivables, net............................. (20,119) (4,448) (2,017) Accounts payable and accrued liabilities........... 6,730 (10,398) 36,499 Income taxes....................................... 13,701 (6,518) 1,653 Deferred income taxes.............................. 7,237 19,481 (8,605) Due to related parties............................. (1,032) (636) (250) --------- --------- --------- Net cash used in operating activities................... (54,145) (50,046) (24,296) --------- --------- --------- INVESTING ACTIVITIES: Cash paid for acquisition of subsidiaries............... (99,340) (31,296) -- Property and equipment.................................. (44,241) (19,973) (8,214) Intangible assets....................................... (8,247) (1,637) (2,206) Mortgages receivable.................................... (117,526) (108,942) (76,424) Proceeds from sales of mortgages receivable............. 173,146 -- -- Investment in joint ventures............................ (1,347) (8,899) (63) --------- --------- --------- Net cash used in investing activities................... (97,555) (170,747) (86,907) --------- --------- --------- FINANCING ACTIVITIES: Proceeds from notes payable............................. 237,188 353,264 170,394 Payments on notes payable and mortgage-backed securities............................................ (112,697) (167,229) (101,436) Proceeds from Senior Credit Facility, net of debt issuance costs........................................ 240,568 -- -- Payments on Senior Credit Facility...................... (224,615) -- -- Proceeds from notes payable to related parties.......... -- -- 5,606 Payments on notes payable to related parties............ -- -- (15,074) Proceeds from stock offerings........................... -- 52,643 73,324 Acquisition of minority limited partners' interests..... -- -- (7,465) Distributions........................................... -- (738) (14,413) Other................................................... 321 648 420 --------- --------- --------- Net cash provided by financing activities............... 140,765 238,588 111,356 --------- --------- --------- Net (decrease)increase in cash and cash equivalents..... (10,935) 17,795 153 Effect of exchange rates on cash and cash equivalents... 698 (65) 574 Cash and cash equivalents, beginning of period.......... 38,487 20,757 20,030 --------- --------- --------- Cash and cash equivalents, end of period................ $ 28,250 $ 38,487 $ 20,757 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-6 48 CONSOLIDATED STATEMENTS OF EQUITY (AMOUNTS IN THOUSANDS)
ADDITIONAL GENERAL SHARES PAID-IN RETAINED MEMBERS PARTNERS' OUTSTANDING AMOUNT CAPITAL EARNINGS EQUITY (DEFICIT) EQUITY ----------- ------ ---------- -------- ---------------- --------- BALANCE AT DECEMBER 31, 1995................. 6,923 $ 89 $ 3,895 $35,607 $ (1,432) $ 4,176 ------ ---- -------- ------- -------- -------- Distributions of partnership equity and other equity interests........................... -- -- -- (7,191) (5,394) -- Conversion of convertible notes payable to AVCOM common stock......................... -- -- 400 -- -- -- Proceeds from the sale of common stock to the public, net of offering costs, including 16,212 shares issued in exchange for partners' and members' equity.............. 25,268 253 73,071 -- -- -- Stock issued and goodwill recorded in connection with the acquisition of investment in joint venture................ 820 8 4,981 -- -- -- Acquisition of minority limited partners' interests.................................. -- -- (7,465) -- -- -- Deferred taxes recorded in connection with the Consolidation Transactions............. -- -- (9,464) -- -- -- Net income (loss)............................ -- -- -- 3,875 3,568 (164) Exchange of partners' and members' equity for stock in connection with the consolidation transactions............................... -- (20) 37,380 (1,370) 3,258 (4,012) Assignment to venturers' of receivable due from related party......................... -- -- -- (3,449) -- -- Write-off of receivable from related party... -- -- -- (3,890) -- -- Other........................................ -- -- (820) (38) -- -- ------ ---- -------- ------- -------- -------- BALANCE AT DECEMBER 31, 1996................. 33,011 330 101,978 23,544 -- -- ------ ---- -------- ------- -------- -------- Comprehensive income for the year ending December 31, 1996.......................... Net income................................... -- -- -- 19,522 -- -- Proceeds from the sale of common stock, net of offering costs.......................... 2,400 24 52,619 -- -- -- Common stock issued in connection with purchase of subsidiary..................... 213 2 6,008 -- -- -- Distributions................................ -- -- -- (738) -- -- Other........................................ 251 3 2,364 1,469 -- -- ------ ---- -------- ------- -------- -------- BALANCE AT DECEMBER 31, 1997................. 35,875 359 162,969 43,797 -- -- ------ ---- -------- ------- -------- -------- Comprehensive income for the year ending December 31, 1997.......................... Net income................................... -- -- -- 42,779 -- -- Other........................................ 28 -- 321 5 -- -- ------ ---- -------- ------- -------- -------- BALANCE AT DECEMBER 31, 1998................. 35,903 $359 $163,290 $86,581 $ -- $ -- ====== ==== ======== ======= ======== ======== Comprehensive income for the year ending December 31, 1998.......................... ACCUMULATED LIMITED OTHER COM- PARTNERS' PREHENSIVE TOTAL COMPREHENSIVE EQUITY INCOME EQUITY INCOME --------- ----------- -------- ------------- BALANCE AT DECEMBER 31, 1995................. $ 33,114 $ (1) $ 75,448 -------- ------ -------- Distributions of partnership equity and other equity interests........................... (1,633) -- (14,218) Conversion of convertible notes payable to AVCOM common stock......................... -- -- 400 Proceeds from the sale of common stock to the public, net of offering costs, including 16,212 shares issued in exchange for partners' and members' equity.............. -- -- 73,324 Stock issued and goodwill recorded in connection with the acquisition of investment in joint venture................ -- -- 4,989 Acquisition of minority limited partners' interests.................................. -- -- (7,465) Deferred taxes recorded in connection with the Consolidation Transactions............. -- -- (9,464) Net income (loss)............................ 3,755 -- 11,034 $11,034 Exchange of partners' and members' equity for stock in connection with the consolidation transactions............................... (35,236) -- -- Assignment to venturers' of receivable due from related party......................... -- -- (3,449) Write-off of receivable from related party... -- -- (3,890) Other........................................ -- 574 (284) 574 -------- ------ -------- ------- BALANCE AT DECEMBER 31, 1996................. -- 573 126,425 -------- ------ -------- Comprehensive income for the year ending December 31, 1996.......................... $11,608 ======= Net income................................... -- -- 19,522 $19,522 Proceeds from the sale of common stock, net of offering costs.......................... -- -- 52,643 Common stock issued in connection with purchase of subsidiary..................... -- -- 6,010 Distributions................................ -- -- (738) Other........................................ -- 212 4,048 212 -------- ------ -------- ------- BALANCE AT DECEMBER 31, 1997................. -- 785 207,910 -------- ------ -------- Comprehensive income for the year ending December 31, 1997.......................... $19,734 ======= Net income................................... -- -- 42,779 $42,779 Other........................................ -- 698 1,024 698 -------- ------ -------- ------- BALANCE AT DECEMBER 31, 1998................. $ -- $1,483 $251,713 ======== ====== ======== Comprehensive income for the year ending December 31, 1998.......................... $43,477 =======
The accompanying notes are an integral part of these consolidated financial statements. F-7 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 1. NATURE OF BUSINESS Sunterra Corporation (formerly Signature Resorts, Inc.) and its wholly-owned subsidiaries ("the Company") generate revenues from the sale and financing of vacation ownership interests in its resorts, which entitle the buyer to use a fully-furnished vacation residence, generally for a one-week period each year, in perpetuity (Vacation Intervals). The Company's operations consist of (i) marketing and selling vacation ownership interests at its resort locations and off-site sales centers, 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 Interests"), (ii) acquiring, developing and operating vacation ownership resorts, (iii) providing consumer financing to individual purchasers for the purchase of Vacation Interests at its resort locations and off-site sales centers, and (iv) providing resort management and maintenance services for which it receives fees paid by the resorts' homeowners' associations. The Company was incorporated in May 1996. On August 20, 1996, the Company consummated an initial public offering of a portion of its Common Stock (the "Initial Public Offering") by offering 9,056,250 shares to the public. The gross proceeds from the public offering were $84.5 million. The Company incurred $11.2 million of costs associated with this offering. Concurrent with the Initial Public Offering, certain predecessor limited partnerships, limited liability companies and corporations (the "Entities") exchanged their direct or indirect interest in, and obligations of the entities, for 16,211,558 shares of the Company's common stock (the "Consolidation Transactions"). The accompanying consolidated financial statements reflect the financial position and results of operations of the Entities since the date they were acquired or formed, which range from November 1986 to June 1996. Concurrent with the Initial Public Offering, the Company exchanged 820,500 shares of Common Stock with the former holders of interests in the Embassy Vacation Resort at Poipu Point, Koloa, Kauai, Hawaii. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- The accompanying financial statements include the combined accounts of Sunterra Corporation and the Company's wholly-owned subsidiaries that were acquired or formed prior to August 20, 1996, which became wholly-owned subsidiaries in connection with the Consolidation Transactions. In addition, the financial statements give effect to the acquisitions of AVCOM International, Inc. ("AVCOM"), Plantation Resorts Group, Inc. ("PRG") and LSI Group Holdings plc ("LSI") that occurred during 1997 and were treated as poolings-of-interests (see Note 17). All significant intercompany transactions and balances have been eliminated from these consolidated financial statements. The Consolidation Transactions have been accounted for as a reorganization of entities under common control. Accordingly, the net assets of the Entities were recorded at the Entities' historical cost. In addition, the accompanying consolidated financial statements reflect the historical results of operations of the predecessor partnerships on a combined basis. Cash and Cash Equivalents -- Cash and cash equivalents consist of cash, money market, and all highly liquid investments purchased with an original maturity of three months or less. Cash in Escrow and Restricted Cash -- Cash in escrow is restricted cash consisting of deposits received on sales of Vacation Interests that are held in escrow until a certificate of occupancy is obtained or the legal rescission period has expired. Restricted cash includes a cash reserve of approximately $7.6 million required by the Securitized Notes (Note 8) and Conduit Facility (Note 5). Real Estate and Development Costs -- Real estate is valued at the lower of cost or net realizable value. Development costs include both hard and soft construction costs and together with real estate costs are allocated to Vacation Interests. Interest, taxes, and other carrying costs incurred during the construction period are capitalized. F-8 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 Property and Equipment -- Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful life of 3 to 7 years. Administrative office buildings are amortized over the estimated useful life of 40 years. Depreciation and amortization expense related to property and equipment was $6.5 million, $2.8 million and $1.5 million in 1998, 1997 and 1996, respectively. Investment in Joint Ventures -- The Company accounts for its investment in its various joint ventures under the equity method of accounting. Any goodwill associated with each joint venture is amortized as Vacation Interests are sold. Intangible Assets -- In 1996 and 1997, organizational costs incurred in connection with the formation of the Company were capitalized and were amortized on a straight-line basis over a period of three to five years. In 1996 and 1997, start-up costs related to costs incurred to develop marketing programs prior to receiving regulatory approval to market the related property were amortized on a straight-line basis over a period of one year. In 1998, the Company elected early adoption of the AICPA's Statement of Position 98-5 (SOP 98-5), "Reporting on Costs of Start-up Activities." As a result, the Company recorded a $1.5 million cumulative effect of change in accounting principle, net of taxes, which represented the writeoff of all organizational and start-up costs capitalized prior to January 1, 1998. All such costs were expensed as incurred in 1998. Financing, loan origination fees and debt issuance costs incurred in connection with obtaining funding for the Company have been capitalized and are being amortized over three to ten years as interest expense. Goodwill in connection with the acquisition of subsidiaries is being amortized over the estimated useful lives of 10 to 30 years. At each balance sheet date, the Company evaluates the reliability of its goodwill based upon expectations of undiscounted cash flows and operating income. Based upon its most recent analysis, the Company believes that no material impairment of its goodwill exists at December 31, 1998. Foreign Currency Translation -- Financial statements for the Company's subsidiaries outside the United States are translated into U.S. dollars at year-end exchange rates for assets and liabilities and weighted average exchange rates for income and expenses. The resulting translation adjustments are recorded as cumulative other comprehensive income in the consolidated statements of equity. Fourth Quarter Adjustments -- During the fourth quarter of 1998, the Company recorded certain organization charges and asset writedowns totaling $5.1 million. The organizational charges related to anticipated severance and other charges associated with its consolidation of certain corporate functions to the Company's headquarters in Orlando, Florida. Revenue Recognition -- The Company recognizes sales of Vacation Interests on an accrual basis after a binding sales contract has been executed, a 10% minimum down payment has been received, the rescission period has expired, construction is substantially complete, and certain minimum sales levels have been achieved. If all the criteria are met except that construction is not substantially complete, then revenues are recognized on the percentage-of-completion (cost to cost) basis. For sales that do not qualify for either accrual or percentage-of-completion accounting, all revenue is deferred using the deposit method. Income Taxes -- Prior to August 20, 1996, the Entities were taxed either as a corporation at the corporate level, as an S corporation taxable at the shareholder level, or as a partnership taxable at the partner level. The Company became subject to federal, state, and foreign income taxes from the effective date of the Initial Public Offering. The 1996 pro forma net income per common and common equivalent share uses the historical net income of the Company as adjusted by the unaudited pro forma provision for income taxes to reflect the net income per common and common equivalent share, as if the Company had been treated as a C corporation rather than as individual limited partnerships and limited liability companies for federal income tax purposes for the year ended December 31, 1996. F-9 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 The Company accounts for income taxes using an asset and liability approach in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which the related deferred tax assets or liabilities are expected to be settled or realized. Income tax expense consists of the taxes payable for the current period and the change during the period in deferred tax assets and liabilities. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Comprehensive Income -- In June 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130 establishes standards for reporting and the display of comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income as defined includes all changes in equity (net assets) during a period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gain/loss on available-for-sale securities. The disclosures prescribed by SFAS 130 were made beginning with the first quarter of fiscal 1998. Segment Reporting -- In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131). This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company adopted SFAS 131 during 1998. Reclassifications -- Certain reclassifications were made to the 1997 and 1996 accompanying consolidated financial statements to conform to the 1998 presentation. F-10 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 3. EARNINGS PER SHARE Basic earnings per share was calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share was calculated by dividing 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 each of the three years in the period ended December 31, 1998.
YEAR ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (AMOUNT IN THOUSANDS) Net income............................................ $42,779 $19,522 $11,034 Interest on convertible bonds(a)...................... 4,840 -- -- ------- ------- ------- Net income available to common stockholders after assumed conversion of dilutive securities(a)........ $47,619 $19,522 $11,034 ======= ======= ======= Weighted average number of common shares used in basic EPS................................................. 35,888 35,373 27,232 Effect of dilutive convertible bonds(a)............... 4,537 -- -- Effect of dilutive stock options...................... 570 807 408 ------- ------- ------- Weighted average number of common shares and dilutive potential common shares used in diluted EPS(a)...... 40,995 36,180 27,640 ======= ======= =======
- --------------- (a) The potential effect on net income and on common stock shares related to the Convertible Notes have not been included in the 1997 or 1996 calculation of net income or weighted average number of common shares and dilutive potential common shares outstanding used in diluted EPS because the effect would be anti-dilutive. 4. MORTGAGES RECEIVABLE, NET The Company provides financing to the purchasers of Vacation Interests that are collateralized by their interest in such Vacation Interests. The mortgages receivable generally bear interest at the time of issuance of between 12% and 17%, which remain fixed over the term of the loan, which typically averages seven to ten years. The mortgages receivable may be prepaid at any time without penalty. The weighted average rate of interest on outstanding mortgages receivable is 14.5% as of December 31, 1998. Consumer loans in excess of 60 days past due, including defaulted loans and loans in the deed-in-lieu process at December 31, 1998, were 7.4%, as a percentage of gross mortgages receivable. Additionally, the Company has accrued interest receivable related to mortgages receivable of $9.1 million and $4.1 million at December 31, 1998 and 1997, respectively. The accrued interest receivable at December 31, 1998 and 1997 is net of an allowance for doubtful accounts of $0.6 million and $1.0 million, respectively, and is included in other receivables, net. F-11 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 The following schedule reflects the scheduled contractual principal maturities of mortgages receivable (amounts in thousands): YEAR ENDING DECEMBER 31: 1999........................................................ $ 33,320 2000........................................................ 32,087 2001........................................................ 30,526 2002........................................................ 24,453 2003........................................................ 39,588 Thereafter.................................................. 198,877 -------- Total principal maturities of mortgages receivable.......... 358,851 Less allowance for doubtful accounts........................ (22,869) -------- Net principal maturities of mortgages receivable............ $335,982 ========
The activity in the mortgages receivable allowance for doubtful accounts is as follows (amounts in thousands):
DECEMBER 31, ---------------------- 1998 1997 ------- ------- Balance, beginning of the period............................ $22,916 $17,328 Decrease in allowance for purchased mortgages receivable.... (584) (718) Decrease in allowance for mortgages sold.................... (1,956) -- Increase in allowance for company acquired.................. 4,930 1,265 Provision for mortgages receivable doubtful accounts........ 11,409 7,234 Receivables charged off..................................... (13,846) (2,193) ------- ------- Balance, end of the period................................ $22,869 $22,916 ======= =======
The provision for doubtful accounts for 1998 and 1997 includes $1.2 million and $1.4 million, respectively, for other receivables. 5. SALES OF MORTGAGES RECEIVABLE On December 31, 1998, the Company sold $79.0 million of Mortgages Receivables as part of its $100.0 million Mortgage Receivable Conduit Facility ("Conduit Facility"). Under the terms of the Conduit Facility, the Company sells mortgages receivable through a wholly-owned special purpose entity at 95% of face value, without recourse. The Company then retains 100% of the excess spread over the commercial paper rate plus 0.60%. The Company recognized a gain on the sale of mortgages receivable of $5.6 million, net of expenses, as a result of the $79.0 million sale and a retained interest held for sale in these mortgages receivable of $11.3 million. The retained interest was valued by the Company assuming a 4.8% default rate (net of recoveries), a 15% prepayment rate, an 18% discount rate, a 2.5% interest rate on the 5% required reserve account, and a 6.5% annual interest rate on the monthly balance of the financing. In addition, the receivables had a 8.4 year weighted average remaining life and a weighted average interest rate of 15.1%. The retained interest is classified as held for sale based on management's intent and the existence of prepayment options. During 1998, the Company also sold $101.9 million of gross mortgages receivable for $99.7 million in cash in three separate transactions. As a result of these sales, the Company recorded a $1.1 million gain on the sale of mortgages receivable and a retained interest of $1.3 million. The Company sold these receivables at prices from 96% to 105% of par value with a participation in the remaining interest of 0% to 65%. F-12 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 6. REAL ESTATE AND DEVELOPMENT COSTS Real estate and development costs and accumulated Vacation Interests cost of sales consist of the following (amounts in thousands):
DECEMBER 31, -------------------------- 1998 1997 --------- --------- Land..................................................... 102,653 74,527 Development cost, excluding capitalized interest......... 536,053 370,151 Capitalized interest..................................... 28,992 20,050 --------- --------- Total real estate and development costs................ 667,698 464,728 Less accumulated Vacation Interest cost of sales......... (328,458) (242,809) Less resort property valuation allowance................. (2,620) (2,620) --------- --------- Net real estate and development costs.................. $ 336,620 $ 219,299 ========= =========
During 1996, the Company recorded a $2.6 million property valuation allowance to reduce real estate and development costs. During 1998 and 1997 there was no change in the resort property valuation allowance. As of December 31, 1998, the Company commenced sales of Vacation Interests at certain projects, or phases of certain projects, that are expected to be completed during 1999. The estimated cost to complete the projects, or the specific phases of the projects is approximately $14.3 million. 7. INTANGIBLE ASSETS Intangible assets and accumulated amortization consist of the following (amounts in thousands):
DECEMBER 31, ---------------------- 1998 1997 ------- ------- Goodwill.................................................... $74,600 $35,227 Debt issuance costs......................................... 22,119 15,257 Other....................................................... 10,364 7,471 ------- ------- Total intangible assets................................... 107,083 57,955 Less accumulated amortization............................... (10,360) (7,508) ------- ------- Net intangible assets..................................... $96,723 $50,447 ======= =======
Amortization expense was $4.7 million, $3.7 million and $3.5 million in 1998, 1997 and 1996, respectively. In addition, $2.7 million of amortized intangibles were retired from the related asset and accumulated amortization accounts in 1998. F-13 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 8. NOTES PAYABLE Notes payable consist of the following at December 31 (amounts in thousands):
1998 1997 -------- -------- Endpaper loans with interest payable monthly at prime plus 2% to prime plus 3% (9.75% to 10.75% at December 31, 1998), payable in monthly installments of principal and interest equal to 100% of all proceeds of the receivables collateral collected during the month; due from 2003 - 2007............................................... $ 30,537 $ 62,676 Endpaper loans collateralized by specific mortgages receivable with interest payable at prime plus 1.5% to prime plus 1.75% (9.25% to 9.5% at December 31, 1998) or LIBOR plus 4.25% (9.37% at December 31, 1998), payable in monthly installments of principal and interest equal to 100% of all proceeds of the receivables collateral collected during the month................................ -- 11,931 Senior Credit Facility of $117.5 million with interest payable quarterly at rates ranging from LIBOR plus 7/8% to LIBOR plus 1 3/8% (6.00 % to 6.50% on December 31, 1998); collateralized by specific mortgages receivable due February 2001............................................. 17,110 -- Securitized notes, collateralized by certain mortgages receivable. Interest and principal is payable monthly at an average interest rate of 6.7% due 2014................. 87,578 -- Securitized notes, collateralized by certain mortgages receivable. Interest and principal is payable monthly at an average interest rate of 7.75% due 2004................ 6,900 11,572 9.25% Senior Notes, interest due May and November, principal due May 2006.............................................. 140,000 -- 9.75% Senior Subordinated Notes, interest due April and October and principal due October 2007.................... 200,000 200,000 5.75% Convertible Subordinated Notes, interest payments due January and July, principal due January 2007.............. 138,000 138,000 Other notes payable......................................... 6,964 11,029 -------- -------- Total notes payable......................................... $627,089 $435,208 ======== ========
In 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 covenants, representations and warranties and conditions to borrow on the funds. At December 31, 1998, the Company had $98.2 million available on the Senior Credit Facility, $24.9 million available on its Conduit Facility and no amounts available on its endpaper loans. At December 31, 1997, the Company had approximately $186.0 million of borrowing capacity from various endpaper loans and had no amounts available on its Senior Credit Facility and its Conduit Facility. The Convertible Notes are convertible into Common Stock at any time prior to maturity, unless previously redeemed, at a conversion price of $30.417 per share, subject to adjustment under certain events. The Company's loan agreements contain certain covenants, the most restrictive of which require certain of the consolidated entities to maintain a minimum net worth and require certain expenses to not exceed certain percentages of sales. At December 31, 1998, the Company was in compliance with all covenants. Dividends are restricted by certain of the Company's debt agreements. F-14 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 The expected maturities of the remaining long-term debt are as follows (amounts in thousands):
DUE IN FISCAL YEAR ------------------ 1999.............................. $ 37,504 2000.............................. 32,087 2001.............................. 30,525 2002.............................. 24,453 2003.............................. 24,520 2004 and thereafter............... 478,000 -------- $627,089 ========
9. RELATED PARTY TRANSACTIONS At December 31, 1998 and 1997, respectively, the Company had accrued $7.3 million and $6.0 million as net receivables from various homeowners' associations at its resorts. The Company generally accrues receivables from homeowners' associations for management fees and certain other expenses. Payables to the homeowners' associations consist primarily of maintenance fees for units owned by the Company. All of these amounts are classified as due from and due to related parties in the accompanying consolidated balance sheets. As of December 31, 1998, the Company had accounts receivable and notes receivable of $2.8 million, and $11.9 million, respectively, from the Company's joint ventures in Poipu Point, Hawaii, Kaanapali, Hawaii and St. John, U.S. Virgin Islands. As of December 31, 1997, these accounts receivable and notes receivable balances due from Poipu Point, Hawaii and St. John, U.S. Virgin Islands were $2.7 million and $11.8 million, respectively. The accounts receivable relate to certain reimbursable operating and development expenses. The notes receivable represent loans made to the projects for start-up and development activities. In 1997, Messrs. Gessow, Kaneko and Kenninger transferred 100% of their interest in the Embassy Vacation Resort at Kaanapali Beach (the "Kaanapali Resort") in exchange for the Company's agreement to reimburse to them expenses they had incurred to acquire the Kaanapali Resort. On June 9, 1998, the Board of Directors of the Company approved the reimbursement by the Company of an aggregate of $626,858 to Messrs. Gessow ($250,743), Kaneko ($250,743) and Kenninger ($125,372) for expenses incurred by them individually in connection with the acquisition of the Kaanapali Resort. The Company has been previously reimbursed $275,639 by The Whitehall Fund of Goldman Sachs and Apollo, the Company's partners in the Kaanapali Resort for their pro rata portion of such expenses. F-15 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 10. SUPPLEMENTAL CASH FLOW DISCLOSURE The following schedule provides certain supplemental disclosure of cash flows as well as supplemental disclosure of non-cash transactions that should be read in conjunction with the accompanying consolidated statements of cash flows.
YEAR ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest...................................... $52,607 $18,508 $24,127 Cash paid for taxes, net of tax refunds..................... $ 1,968 $ 7,918 $ 1,629 SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION: Stock issued in connection with acquisition of Marc Resorts................................................... $ -- $ 6,010 -- Costs incurred in conjunction with debt issuances........... $ 9,295 $12,824 -- Tax benefit resulting from exercise of common stock options................................................... $ -- $ 1,469 -- Stock issued and goodwill recorded in connection with the acquisition of investment in joint venture................ -- -- $ 4,989 Deferred taxes recorded in connection with the Consolidation Transactions.............................................. -- -- $ 9,464 Interest accrued on deferred installment gains in connection with the Consolidation Transactions....................... -- -- $ 820 Net assets of predecessor partnership acquired in exchange for 17,032,058 shares of common stock in connection with the Consolidation Transactions............................ -- -- $37,380 Assignment to venturers of receivable due from related party recorded as a reduction of venturers' equity.............. -- -- $ 3,449 Write-off of receivable from related party recorded as a reduction of stockholders' equity......................... -- -- $ 3,890 Conversion of convertible notes payable to AVCOM common stock..................................................... -- -- $ 400
11. COMMITMENTS AND CONTINGENCIES The Company is currently subject to litigation and claims regarding employment, tort, contract, construction, and commission disputes, among others. In the judgment of management, none of such litigation or claims against the Company is likely to have a material adverse effect on the Company's financial statements or its business. The Company owns a partnership interest in the Embassy Vacation Resort at Poipu Point, Koloa, Kauai, Hawaii. Under the terms of the partnership agreement, the Company could be required to purchase the other partner's interest. At December 31, 1998, the Company does not believe that the events requiring such purchase are likely to occur. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires that the Company disclose estimated fair values for its financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents and cash in escrow: The carrying amount reported in the balance sheet for cash and cash equivalents and cash in escrow approximates their fair value because of the short maturity of these instruments. F-16 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 Retained Interests: The carrying amount reported is reported at its fair value based on the assumptions disclosed in Note 5. Mortgages receivable: The carrying amount reported in the balance sheet for mortgages receivable approximates its fair value because the weighted average interest rate on the portfolio of mortgages receivable approximates current interest rates to be received on similar current mortgages receivable. Notes payable: The carrying amount reported in the balance sheet for notes payable approximates its fair value because the interest rates on these instruments approximate current interest rates charged on similar current borrowings. 13. STOCK OPTIONS The Company issued 2,749,600 and 1,054,500 stock options during 1998 and 1997, respectively. The Company accounts for these options under APB Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost has been recognized. Under SFAS 123, Accounting for Stock-Based Compensation, the Company's net income would have been $38.7 million and basic and diluted earnings per share would have been, $1.08 and $1.06, respectively, on an unaudited pro forma basis for the year ended December 31, 1998. The Company's unaudited net income would have been $16.9 million, and basic and diluted unaudited earnings per share would have been $0.48 and $0.47, respectively, for the year ended December 31, 1997. As of December 31, 1998, 163,000 options were available for grant under the Company's equity participation plans. A summary of the Company's stock options for the years ended December 31, 1998 and 1997 is presented in the following table:
1998 1997 ------------------------------ ------------------------------ WEIGHTED AVERAGE WEIGHTED AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ---------- ---------------- ---------- ---------------- Outstanding options, beginning of year........ 3,289,407 $14.45 2,653,500 $10.29 Granted.................... 2,749,600 13.49 1,054,500 23.99 Exercised.................. (600) 9.33 (250,180) 9.33 Forfeited.................. (846,207) 28.60 (168,413) 16.42 Expired.................... -- -- -- -- ---------- ------ ---------- ------ Outstanding options, end of year..................... 5,192,200 $10.21 3,289,407 $14.45 Exercisable at end of year..................... 1,078,490 $10.41 817,528 $10.50 ========== ====== ========== ====== Weighted average fair value of options granted....... $ 5.64 $ 5.32
All stock options issued by the Company were issued to employees at fair market value on the grant date. The options range from 3 to 5 years for full maturity and the exercise prices range from $8.00 to $28.25. The weighted average fair value of options granted is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 6.0%, expected dividend yield of zero, expected volatility of 35%, and expected lives of 3 to 5 years in 1998 and 1997. 14. EMPLOYEE BENEFIT PLANS The Company has established the Sunterra Resorts, Inc. Employee Stock Purchase Plan to assist eligible employees to acquire stock ownership in the Company and to encourage them to remain in the employment of the Company. The Employee Stock Purchase Plan is intended to meet the requirements of an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended, and generally allows eligible employees to purchase common stock at 85% of fair market value, subject to dollar limitations. F-17 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 The Company has reserved a maximum of 750,000 shares of Common Stock for issuance pursuant to the Employee Stock Purchase Plan. As of December 31, 1998 and 1997, an aggregate of 29,269 and 2,482 shares, respectively, had been issued pursuant to the Employee Stock Purchase Plan. The Company also has established a qualified retirement plan, with a salary deferral feature designed to qualify under Section 401 of the Internal Revenue Code of 1986, as amended. Subject to certain limitations, the 401(k) Plan allows participating employees to defer up to 15% of their eligible compensation on a pre-tax basis. Although the 401(k) Plan allows the Company to make discretionary matching contributions of up to 50% of employee contributions, the Company did not make any such matching contributions during 1998, 1997, or 1996. 15. INCOME TAXES The Entities and PRG were taxed prior to August 20, 1996 and May 15, 1997, respectively either as a corporation at the corporate level, as an S corporation taxable at the shareholder level, or as a partnership taxable at the partner level. Accordingly, the table below summarizes the unaudited pro forma provision for income taxes that would have been reported had the Company been treated as a C corporation for federal income tax purposes for the year ended December 31, 1996. AVCOM's and LSI's actual deferred income taxes and provision for income taxes are included in the pro forma schedule and 1996 actuals. The Company's actual income tax provision is presented for the periods subsequent to August 20, 1996.
YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 1996 ------- ------- ------- ----------- (PRO FORMA) (UNAUDITED) (AMOUNTS IN THOUSANDS) Current: Federal....................................... $ 8,570 $ 2,194 $ 2,785 $4,990 State......................................... 1,666 461 481 846 Foreign....................................... 5,691 2,533 1,240 1,233 ------- ------- ------- ------ Total current provision for income taxes...... 15,927 5,188 4,506 7,069 ------- ------- ------- ------ Deferred: Federal....................................... 11,385 16,125 (7,182) (3,675) State......................................... 1,301 1,843 (1,393) (809) Foreign....................................... (242) -- (36) (36) ------- ------- ------- ------ Total deferred provision (benefit) for income taxes...................................... 12,444 17,968 (8,611) (4,520) ------- ------- ------- ------ Provision (benefit) for income taxes.......... $28,371 $23,156 $(4,105) $2,549 ======= ======= ======= ======
F-18 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 The reconciliation between the statutory provision for income taxes and the actual provision (benefit) for income taxes is shown as follows (amounts in thousands):
YEAR ENDED DECEMBER 31, -------------------------------------------- 1998 1997 1996 1996 ------- ------- ------- ----------- (PRO FORMA) (UNAUDITED) Income tax at U.S. federal statutory rate.................................... $25,461 $15,205 $ 2,357 $2,357 State tax, net of federal benefit......... 1,929 1,738 163 163 Difference in foreign tax rates........... (202) (994) (34) (34) Non-deductible expenses................... 610 3,192 598 63 Deferred income taxes recorded upon acquisition of previously non-taxable entities................................ -- 5,960 -- -- Write-off of receivable from related party................................... -- -- (1,478) -- Non-taxable income from entities.......... -- (1,050) (5,711) -- Other..................................... 573 (895) -- -- ------- ------- ------- ------ Provision (benefit) for income taxes.... $28,371 $23,156 $(4,105) $2,549 ======= ======= ======= ======
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the net deferred tax liabilities were as follows (amounts in thousands):
DECEMBER 31, ------------------------ 1998 1997 -------- -------- Deferred tax assets: Allowance for doubtful accounts............................ $ 12,084 $ 8,867 Fixed assets and inventory................................. 1,666 1,305 Accrued expenses........................................... 1,961 4,152 Adjustment to basis of partnership property................ 1,429 3,474 Net operating loss carryover............................... 33,250 29,439 Foreign tax credit carryover............................... 991 62 Minimum tax credit carryover............................... 8,840 5,776 Other...................................................... 1,963 367 -------- -------- Total gross deferred tax assets.................. 62,184 53,442 Valuation allowance........................................ -- (2,367) -------- -------- Total net deferred tax asset..................... $ 62,184 $ 51,075 -------- -------- Deferred tax liabilities: Installment sales.......................................... (87,536) (73,818) Percentage of completion................................... (4,784) (160) Other...................................................... (848) (849) -------- -------- Total deferred tax liabilities................... $(93,168) $(74,827) -------- -------- Net deferred taxes......................................... $(30,984) $(23,752) ======== ========
At December 31, 1998, the Company has available approximately $85 million of unused net operating loss carryforwards (the "NOLs") that may be applied against future taxable income. These NOLs expire on various dates from 2004 through 2018. The valuation allowance of $2.4 million in 1997 was related to loss carryforwards acquired in a 1997 company purchase. Deferred tax liabilities generated during the current year favorably impacted the future realization of these loss carryforwards resulting in the reversal of this reserve. Income taxes currently payable F-19 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 have not been affected by the change in reserve. The reversal of the reserve reduced the goodwill recorded on the 1997 company acquisition. Provision has not been made for taxes on approximately $5.3 million of undistributed earnings of foreign subsidiaries. Those earnings have been and are expected to be reinvested in the foreign subsidiaries. These earnings could become subject to additional tax if they were remitted to the Company, or if the Company were to sell its stock in the subsidiaries. It is not practicable to estimate the amount of additional tax that might be payable on the foreign earnings; however, the Company believes that U.S. foreign tax credits would largely eliminate any U.S. tax and offset any foreign tax. 16. SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in one industry segment, which includes the marketing, sales, financing and management of vacation ownership resorts and two geographic segments. The Company's areas of operation outside of the United States include Mexico, Canada, Netherlands Antilles, United Kingdom, Japan, Spain, Portugal, Austria and France. The Company's management evaluates performance of each segment based on profit or loss from operations before income taxes not including extraordinary items and cumulative effect of change in accounting principles. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The Company's customers are not concentrated in any specific geographic region and no single customer accounts for a significant amount of the Company's sales. Information about the Company's operations in different geographic locations is shown below (amounts in thousands):
UNITED STATES FOREIGN TOTAL ------------- -------- ---------- 1998 Total revenues.................................... $336,060 $113,894 $ 449,954 Income before provision for income taxes, extraordinary items and cumulative effect...... 55,181 17,564 72,745 Identifiable assets............................... 939,332 81,800 1,021,132 1997 Total revenues.................................... $270,296 $ 67,397 $ 337,693 Income before provision for income taxes, extraordinary items............................ 31,177 12,267 43,444 Identifiable assets............................... 701,509 59,636 761,145 1996 Total revenues.................................... $179,003 $ 40,844 $ 219,847 Income before provision for income taxes.......... 356 6,573 6,929 Identifiable Assets............................... 412,339 33,545 445,884
17. ACQUISITIONS On February 7, 1997, the Company consummated its acquisition by merger of AVCOM (the "AVCOM Acquisition"). AVCOM is the parent company of All Seasons Resorts, Inc., a developer, marketer and operator of vacation ownership resorts in Arizona, California and Texas. Under the terms of the AVCOM merger agreement, the Company issued 1,324,554 shares of its common stock in exchange for all the outstanding capital stock of AVCOM. The AVCOM Acquisition has been treated as a pooling-of-interests and is reflected in the accompanying consolidated financial statements as if it took place at the beginning of the earliest period presented. F-20 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 On May 15, 1997, the Company consummated its acquisition by merger ("the PRG Acquisition") of (PRG), a Williamsburg, Virginia, based developer, owner and operator of vacation ownership resorts in Williamsburg, Virginia. PRG was incorporated in April 1997 through a private placement of its common stock in which certain predecessor joint ventures and corporations (the "PRG Entities") exchanged their interests for shares of PRG's common stock (the "PRG Exchange"). The PRG Acquisition was consummated through the issuance of 3,601,844 shares of the Company's common stock. The PRG Acquisition has been treated as a pooling-of-interests and is reflected in the accompanying consolidated financial statements as if it took place at the beginning of the earliest period presented. On August 28, 1997, the Company consummated its acquisition by merger of 100% of the capital stock of LSI in exchange for 1,996,401 newly-issued shares of the Company's common stock and approximately $1.0 million in cash (the "LSI Acquisition"). United Kingdom-based LSI is a developer, owner and operator of vacation ownership resorts located in Europe. Through its Grand Vacation Club, LSI operates a points-based club system. The LSI Acquisition has been treated as a pooling-of-interests and is reflected in the accompanying consolidated financial statements as if it took place at the beginning of the earliest period presented. During 1998, the Company acquired MMG Holding Corporation, Harich Tahoe Development, and ten resorts located in the United States, Europe, and Japan, all in separate transactions. During 1997, the Company acquired Marc Hotels & Resorts, Inc., Vacation International, Ltd., and Global Development Ltd. all in separate transactions. Each of the aforementioned acquisitions in 1998 and 1997 were accounted for under the purchase method for business combinations. Assets acquired and liabilities assumed in connection with the Company's 1998 and 1997 purchases are as follows (amounts in thousands):
1998 1997 -------- ------- Assets acquired in acquisitions: Cash in escrow............................................ $ 6 $ 857 Mortgages receivable, net................................. 74,655 14,509 Due from related parties.................................. 317 1,175 Other receivables, net.................................... 2,091 2,719 Prepaid expenses and other................................ 1,170 377 Real estate and development costs......................... 19,833 10,834 Property and equipment, net............................... 8,362 3,202 Goodwill in conjunction with acquisitions................. 37,421 35,186 -------- ------- Total assets acquired in acquisitions............. $143,855 $68,859 ======== ======= Liabilities assumed in acquisitions: Accounts payable.......................................... 5,995 8,666 Accrued liabilities....................................... 3,005 21,359 Due to related parties.................................... -- 12 Deferred income taxes..................................... 258 1,012 Notes payable............................................. 35,257 227 Cumulative translation adjustments........................ -- 277 -------- ------- Total liabilities assumed in acquisitions......... $ 44,515 $31,553 ======== =======
F-21 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 The following table sets forth certain unaudited pro forma information for the Company's purchases as if they had occurred as of the beginning of the year acquired and the immediately preceding year for 1998, 1997 and 1996 (amounts in thousands, except per share data).
PRO FORMA ACTUAL ADJUSTMENTS TOTAL -------- ----------- ----------- (UNAUDITED) (UNAUDITED) Year ended December 31, 1998 Total Revenues......................................... $449,954 $(17,362) $432,592 Net Income............................................. 42,779 (2,510) 40,269 Basic EPS.............................................. $ 1.19 $ 1.12 Diluted EPS............................................ $ 1.16 $ 1.10 Year ended December 31, 1997 Total revenues......................................... $337,693 $ 67,932 $405,625 Net income............................................. 19,522 (1,758) 17,764 Basic EPS.............................................. $ 0.55 $ 0.50 Diluted EPS............................................ $ 0.54 $ 0.49 Year ended December 31, 1996 Total revenues......................................... $219,847 $ 74,014 $293,861 Net income............................................. 11,034 261 11,295 Basic EPS.............................................. $ 0.41 $ 0.41 Diluted EPS............................................ $ 0.40 $ 0.41
Total revenues and net income for the Company, AVCOM and its subsidiaries, PRG and LSI, all acquired by pooling of interests in 1997, are shown in the following table (amounts in millions) for the year ended 1996, which represents the period prior to the poolings:
1996 ------ Revenues Consolidated...................... $219.8 AVCOM............................. 48.4 PRG............................... 48.4 LSI............................... 27.9 Net income (loss) Consolidated...................... $ 11.0 AVCOM............................. (12.4) PRG............................... 7.0 LSI............................... 2.3
F-22 64 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- *3.1 Restated Articles of Incorporation of Sunterra Corporation 3.2 Bylaws of Sunterra Corporation, as amended (incorporated by reference to Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996) 4.1 Indenture dated as of January 15, 1997 by and between Sunterra Corporation and Norwest Bank Minnesota, National Association, as trustee, for the 5 3/4% Convertible Subordinated Notes of Sunterra Corporation due 2007 (incorporated by reference to Exhibit 4 to Registrant's Registration Statement on Form S-1 (No. 333-30285)) 4.2 Indenture dated as of August 1, 1997 by and between Sunterra Corporation and Norwest Bank Minnesota, National Association, as trustee, for the 9 3/4% Senior Subordinated Notes of Sunterra Corporation due 2007 (incorporated by reference to Exhibit 4.2 to Amendment No. 1 on Form S-3 to Registrant's Registration Statement on Form S-1 (No. 333-30285)) 4.3 Indenture dated as of April 15, 1998 by and between Sunterra Corporation and Norwest Bank Minnesota, National Association, as trustee for the 9 1/4% Senior Notes of Sunterra Corporation due 2006 (incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-4 (No. 333-51803)) 4.4 Indenture dated a of May 1, 1998, by and between Sunterra Finance L.L.C. as issuer of the bonds, Sunterra Corporation as Servicer, and LaSalle National Bank as Trustee and Back-up Servicer for Signature Resorts Vacation Ownership Receivables -- Backed Notes 1998-A (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998) *10.1 Credit Agreement dated as of February 18, 1998 by and among Sunterra Corporation, certain lender parties thereto, NationsBank of Texas, N.A., as administrative lender and Societe Generale, as document agent, including Amendments 1, 2 and 3 thereto 10.2 Servicing Agreement dated as of May 1, 1998, by and between Sunterra Finance L.L.C. as issuer of the bonds, Sunterra Corporation as Servicer, and LaSalle National Bank as Trustee and Back-up Servicer for Signature Resorts Vacation Ownership Receivables -- Backed Notes 1998-A (incorporated by reference to Exhibit 10.8 to the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1998) *10.3 Receivables Purchase Agreement dated as of December 17, 1998 among Blue Bison Funding Corp., Sunterra Corporation and Barton Capital Corporation 10.4 Construction Loan Agreement between Lake Tahoe Resort Partners, LLC, and FINOVA Capital Corporation dated as of April 29, 1996 (incorporated by reference to Exhibit 10.8.8 to Registrant's Registration Statement on Form S-1 (No. 333-18447)) 10.5 Agreement of Limited Partnership of Pointe Resort Partners, L.P. (subsequently renamed Poipu Resort Partners L.P.) dated October 11, 1994 (incorporated by reference to Exhibit 10.4 to Registrant's Registration Statement on Form S-1 (No. 333-06027)) 10.6 Joint Development Agreement dated as of January 16, 1998 between Westin Hotel Company and Sunterra Corporation (incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 20, 1998))
65
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.7 Registration Rights Agreement dated as of August 20, 1996 by and among Sunterra Corporation and the persons named therein (incorporated by reference to Exhibit 10.1 to Registrant's Registration Statement on Form S-1 (No. 333-30285)) 10.8 Registration Rights Agreement dated as of May 15, 1997 by and among Signature Resorts Inc. and the persons named therein (incorporated by reference to Exhibit 4 to Registrant's current report on Form 8-K filed with the Commission on May 29, 1997) 10.9 Registration Rights Agreement dated as of August 28, 1997 by and among Sunterra Corporation and Ian K. Ganney and Richard Harrington (incorporated by reference to Exhibit 10.10 to Amendment No. 1 on Form S-3 to Registrant's Registration Statement on Form S-1 (No. 333-30285)) 10.10 Registration Rights Agreement dated as of October 10, 1997 by and among Sunterra Corporation and Michael V. Paulin, Rosemarie Paulin, Maya K. Paulin and Annemarie H. Paulin (incorporated by reference to Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997) 10.11 Employment Agreement between Sunterra Corporation and Andrew J. Gessow (incorporated by reference to Exhibit 10.2.2 to Registrant's Registration Statement on Form S-1 (No. 333-30285)) 10.12 Employment Agreement between Sunterra Corporation and Steven C. Kenninger (incorporated by reference to Exhibit 10.2.3 to Registrant's Registration Statement on Form S-1 (No. 333-30285)) 10.13 Employment Agreement between Sunterra Corporation and L. Steven Miller (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) *10.14 Employment Agreement between Sunterra Corporation and Richard Goodman 10.15 Employment Agreement between Sunterra Corporation and James E. Noyes (incorporated by reference to Exhibit 10.2.4 to Registrant's Registration Statement on Form S-1 (No. 333-06027)) *10.16 Amended and Restated 1996 Equity Participation Plan of Sunterra Corporation, including form of stock option agreement thereunder 10.17 Sunterra Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.5 to Registrant's Registration Statement on Form S-1 (No. 333-06027)) 10.18 First Amendment to Employee Stock Plan of Sunterra Corporation effective as of November 1, 1997 (incorporated by reference to Exhibit 10.2 to Registrant's Registration Statement on Form S-8 (No. 333-15361)) *10.19 1998 New-Hire Stock Option Plan of Sunterra Corporation 10.20 Amended Consulting Agreement dated as of August 1, 1997 by and between Sunterra Corporation, Resort Services, Inc. and Dr. Kay F. Gow and Robert T. Gow (incorporated by reference to Exhibit 10.12 to Amendment No. 1 on Form S-3 to Registrant's Registration Statement on Form S-1 (No. 333-30285)) *21 Subsidiaries of Sunterra Corporation *23.1 Consent of Arthur Andersen LLP *23.2 Consent of KPMG *23.3 Consent of Schreeder, Wheeler & Flint, LLP *27 Financial Data Schedule (for the fiscal year ended December 31, 1998)
- --------------- * Filed herewith EX-3.1 2 ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 SUNTERRA CORPORATION ARTICLES OF RESTATEMENT SUNTERRA CORPORATION, a Maryland corporation (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland (the "Department") that: FIRST: The Corporation desires to, and does hereby, restate its Charter as currently in effect. SECOND: The following provisions are all of the provisions of the Charter currently in effect: FIRST: The undersigned, Charles R. Moran, whose address is 300 East Lombard Street, Baltimore, Maryland 21202, being at least eighteen years of age, acting as incorporator, does hereby form a corporation under the General Laws of the State of Maryland. SECOND: The name of the corporation (which is hereinafter called the "Corporation") is: Sunterra Corporation THIRD: The purposes for which and any of which the Corporation is formed and the business and objects to be carried on and promoted by it are: (1) To engage in the business of developing and operating timeshare resorts and to perform any and all activities necessary or desirable in connection therewith. (2) To engage in and perform any other activities or functions which may lawfully be performed by a business corporation organized under the General Laws of the State of Maryland. The foregoing enumerated purposes and objects shall be in no way limited or restricted by reference to, or inference from, the terms of any other clause of this or any other Article of the Charter of the Corporation, and each shall be regarded as independent; and they are intended to be and shall be construed as powers as well as purposes and objects of the Corporation and shall be in addition to and not in limitation of the general powers of corporations under the General Laws of the State of Maryland. 2 FOURTH: The present address of the principal office of the Corporation in the State of Maryland is c/o National Registered Agents, Inc. of MD, 11 East Chase Street, Baltimore, Maryland 21202. FIFTH: The name and address of the resident agent of the Corporation is c/o National Registered Agents, Inc. of MD, 11 East Chase Street, Baltimore, Maryland 21202. Said resident agent is a Maryland corporation. SIXTH: The total number of shares of stock of all classes which the Corporation has authority to issue is One Hundred Twenty Five Million (125,000,000) shares consisting of One Hundred Million (100,000,000) shares of common stock, par value of One Cent ($.01) per share ("Common Stock") and Twenty Five Million (25,000,000) shares of preferred stock, par value of One Cent ($.01) per share ("Preferred Stock"). The aggregate par value of all of the Corporation's authorized shares of capital stock is One Million Two Hundred Fifty Thousand Dollars ($1,250,000). The designations and the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of the shares of each class of capital stock of the Corporation are as follows: (1) Preferred Stock. The Preferred Stock may be authorized for issuance from time to time by the Board of Directors in one or more separately designated classes or series. The designation of each such class or series, the number of shares to be included in each such class or series, and the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and terms and conditions of redemption shall be as set forth in resolutions adopted by the Board of Directors and included in Articles Supplementary filed as required by law from time to time prior to the issuance of any shares of such class or series. Subject to the express limitations, if any, of any class or series of Preferred Stock of which shares are outstanding at the time, the Board of Directors is authorized, by the adoption of resolutions, to increase or decrease (but not below the number of shares of Preferred Stock of such class or series then outstanding) the number of shares of Preferred Stock of such class or series and to alter the designation of or, classify or reclassify, any unissued shares of Preferred Stock of any class or 3 series from time to time, by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms and conditions of redemption of such class or series. (2) Common Stock. Subject to all rights of Preferred Stock, as expressly provided herein, by law or by the Board of Directors pursuant to this Article Sixth, the Common Stock of the Corporation shall have all rights and privileges afforded to capital stock by applicable law in the absence of any express grant of rights or privileges in the Corporation's charter, including, but not limited to, the following rights and privileges: (a) The holders of shares of Common Stock shall have the right to vote for the election of directors and on all other matters requiring stockholder action, each share of Common Stock being entitled to one vote; (b) Dividends may be declared and paid or set apart for payment upon shares of Common Stock out of any assets or funds of the Corporation legally available for the payment of dividends; (c) Upon the voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, the net assets of the Corporation shall be distributed pro rata to the holders of shares of Common Stock in accordance with their respective rights and interests. SEVENTH: The business and affairs of the Corporation shall be managed by a Board of Directors which may exercise all of the powers of the Corporation except those conferred on, or reserved to, the stockholders by law. The number of directors of the Corporation initially shall be three (3), which number may be increased or decreased pursuant to the Bylaws of the Corporation but in no event shall be less than the minimum number required by the General Laws of the State of Maryland. Each director shall hold office until the next annual meeting of the stockholders of the Corporation and until his or her successor shall have been elected and qualified. 4 The following provisions shall apply to the directors of the Corporation: (a) The directors of the Corporation (other than any directors who may be elected solely by holders of any class or series of Preferred Stock) shall be and hereby are divided into three classes, designated "Class I," "Class I" and "Class III," respectively. The number of directors in each class shall be as nearly equal as possible. Each director shall serve for a term ending on the date of the third Annual Meeting of Stockholders following the Annual Meeting at which such director was elected, provided, however, that each initial director in Class I, as determined by the directors, shall serve for a term ending on the date of the Annual Meeting held in 1997, each initial director in Class II, as determined by the directors, shall serve for a term ending on the date of the Annual Meeting held in 1998, and each initial director in Class III, as determined by the directors, shall serve for a term ending on the date of the Annual Meeting held in 1999. (b) In the event of any increase or decrease in the authorized number of directors: (i) each director then serving shall nevertheless continue as director of the class of which such director is a member until the expiration of such director's term or such director's prior death, retirement, resignation or removal; and (ii) except to the extent that an increase or decrease in the authorized number of directors occurs in connection with the rights of holders of Preferred Stock to elect additional directors, the newly created or eliminated directorships resulting from any increase or decrease shall be apportioned by the Board of Directors among the three classes so as to keep the number of directors in each class as nearly equal as possible. (c) Anything in this Article SEVENTH to the contrary notwithstanding, each director shall serve until such director's successor is elected and qualified, or until such director's earlier death, retirement, resignation or removal. (d) A director may be removed from office with or without cause only by the affirmative vote of the holders of at least two-thirds of the votes entitled to be cast in the election of directors. 5 EIGHTH: The following provisions are hereby adopted for the purposes of defining, limiting and regulating the powers of the Corporation and of the directors and stockholders: (1) The Board of Directors shall have power from time to time and in its sole discretion (a) to determine in accordance with sound accounting practice what constitutes annual or other net profits, earnings, surplus or net assets in excess of capital; (b) to fix and vary from time to time the amount to be reserved as working capital, or determine that retained earnings or surplus shall remain in the hands of the Corporation; (c) to set apart out of any funds of the Corporation such reserve or reserves in such amount or amounts and for such proper purposes as it shall determine and to abolish or redesignate any such reserve or any part thereof; (d) to borrow or raise money upon any terms for any corporate purposes; (e) to distribute and pay distributions or dividends in stock, cash or other securities or property, out of surplus or any other funds or amounts legally available there for, at such times and to the stockholders of record on such dates as it may, from time to time, determine; and (f) to determine whether and to what extent and at what times and places and under what conditions and regulations the books, accounts and documents of the Corporation, or any of them shall be open to the inspection of stockholders, except as otherwise provided by statute or by the Bylaws of the Corporation, and, except as so provided, no stockholder shall have the right to inspect any book, account or document of the Corporation unless authorized so to do by resolution of the Board of Directors. (2) The liability of the directors and officers of the Corporation to the Corporation or its stockholders for money damages shall be limited to the fullest extent permitted under the General Laws of the State of Maryland now or hereafter in force, including, but not limited to, Section 5-349 of the Courts and Judicial Proceedings Article of the Annotated Code of Maryland, or any successor provision of law of similar import, and the directors and officers of the Corporation shall have no liability whatsoever to the Corporation or its stockholders for money damages 6 except to the extent which such liability can not be limited or restricted under the General Laws of the State of Maryland now or hereafter in force. Neither the amendment nor repeal of the foregoing sentence of this Section (2) of Article EIGHTH nor the adoption nor amendment of any other provision of the Charter or Bylaws of the Corporation inconsistent with the foregoing sentence shall apply to or affect in any manner the applicability of the foregoing sentence with respect to any act or omission of any director or officer occurring prior to any such amendment, repeal or adoption. (3) The Corporation shall indemnify, in the manner and to the fullest extent permitted by law, any person who is or was a party to, or is threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, whether or not by or in the right of the Corporation and whether civil, criminal, administrative, investigative or otherwise, by reason of the fact that such person is or was a director or officer of the Corporation, or that such person, while an officer or director of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner or trustee of another corporation, partnership, trust, employee benefit plan or other enterprise. To the fullest extent permitted by law, the indemnification provided herein shall include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement and any such expenses may be paid by the Corporation in advance of the final disposition of any such action, suit or proceeding. Upon authorization by the Board of Directors, the Corporation may indemnify employees and/or agents of the Corporation to the same extent provided herein for directors and officers. Any repeal or modification of any of the foregoing sentences of this Section (3) of Article EIGHTH shall be prospective in operation and effect only, and shall not adversely affect any right to indemnification or advancement of expenses hereunder existing at the time of any such repeal or modification. (4) No holders of shares of stock of the Corporation of any class shall have any preemptive rights or preferential right to purchase, subscribe for or otherwise acquire any shares of 7 stock of the Corporation of any class now or hereafter authorized or any securities convertible into or exchangeable for shares of stock of the Corporation of any class now or hereafter authorized or any warrants, options or other instruments evidencing rights to purchase, subscribe for or otherwise acquire shares of stock of the Corporation of any class now or hereafter authorized, other than such preferential rights, if any, as the Board of Directors in its sole discretion may determine, and at such price as the Board of Directors in its sole discretion may fix. (5) The Board of Directors shall have the power, in its sole discretion and without limitation, to authorize the issuance at any time and from time to time of shares of stock of the Corporation, with or without par value, of any class now or hereafter authorized and of securities convertible into or exchangeable for shares of the stock of the Corporation, with or without par value, of any class now or hereafter authorized, for such consideration (irrespective of the value or amount of such consideration) and in such manner and by such means as said Board of Directors may deem advisable. (6) The Board of Directors shall have the power, in its sole discretion and without limitation, to classify or reclassify any unissued shares of stock, whether now or hereafter authorized, by setting, altering or eliminating in any one or more respects, from time to time before the issuance of such shares, any feature of such shares, including but not limited to the designation, preferences, conversion or other rights, voting powers, qualifications, and terms and conditions of redemption of, and limitations as to dividends and any restrictions on, such shares. (7) The Corporation reserves the right at any time and from time to time to make any amendments to its Charter including any amendments changing the terms of contract rights, as expressly set forth in its Charter, of any of its outstanding stock by classification, reclassification or otherwise; and all contract or other rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors and 8 officers by and pursuant to the Charter of the Corporation are granted subject to this reservation. (8) Notwithstanding any provision of law requiring a greater proportion of the votes of all classes of stock of the Corporation for approval of dissolution of the Corporation, the affirmative vote of a majority of all votes entitled to be cast by the stockholders of the Corporation shall be sufficient, valid and effective, after due authorization, approval or advice by the Board of Directors, to approve and authorize dissolution of the Corporation. The enumeration and definition of particular powers of the Board of Directors included in the foregoing shall in no way be limited or restricted by reference to or inference from the terms of any other clause of this or any other Article of the Charter of the Corporation, or construed as or deemed by inference or otherwise in any manner to exclude or limit any powers conferred upon the Board of Directors under the General Laws of the State of Maryland now or hereafter in force. THIRD: The foregoing restatement of the Charter has been approved by a majority of the entire board of directors of the Corporation. FOURTH: The Charter is not amended by these Articles of Restatement. FIFTH: The current address of the principal office of the Corporation is set forth in Article FOURTH of the foregoing restatement of the Charter. SIXTH: The name and address of the Corporation's current resident agent is set forth in Article FIFTH of the foregoing restatement of the Charter. SEVENTH: The number of directors of the Corporation is currently ten (10) and the names of those currently in office are as follows:\ Adam A. Aron Stanford R. Climan J. Taylor Crandall Michael A. Depatie Joshua S. Friedman Andrew J. Gessow Osamu Kaneko W. Leo Kelly, III Steven C. Kenninger James E. Noyes 9 IN WITNESS WHEREOF, the Corporation has caused these Articles of Restatement to be signed in its name and on its behalf by its President and its corporate seal to be hereunder affixed and attested by its Secretary on this 1st day of July, 1998, and its President acknowledges that these Articles of Restatement are the act and deed of the Corporation and, under the penalties of perjury, that the matters and facts set forth herein with respect to authorization and approval are true in all material respects to the best of his knowledge, information and belief. ATTEST: SUNTERRA CORPORATION /s/ ANDREW D. HUTTON /s/ STEVEN C. KENNINGER - ------------------------------ ----------------------------------- Andrew D. Hutton (SEAL) Secretary Steven C. Kenninger President EX-10.1 3 CREDIT AGREEMENT 1 EXHIBIT 10.1 ================================================================================ $100,000,000 CREDIT AGREEMENT AMONG SIGNATURE RESORTS, INC., CERTAIN LENDERS PARTY HERETO, NATIONSBANK OF TEXAS, N.A., AS ADMINISTRATIVE LENDER, AND SOCIETE GENERALE, AS DOCUMENTATION AGENT FEBRUARY 18, 1998 ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 Definitions Section 1.1 Defined Terms........................................................................ 1 Section 1.2 Amendments and Renewals.............................................................. 25 Section 1.3 Construction......................................................................... 25 ARTICLE 2 Advances Section 2.1 The Advances......................................................................... 25 Section 2.2 Manner of Borrowing and Disbursement................................................. 26 Section 2.3 Interest............................................................................. 28 Section 2.4 Fees................................................................................. 30 Section 2.5 Prepayments.......................................................................... 31 Section 2.6 Reduction of Commitment.............................................................. 31 Section 2.7 Non-Receipt of Funds by the Administrative Lender.................................... 32 Section 2.8 Payment of Principal of Advances..................................................... 32 Section 2.9 Reimbursement........................................................................ 32 Section 2.10 Manner of Payment.................................................................... 33 Section 2.11 LIBOR Lending Offices................................................................ 34 Section 2.12 Sharing of Payments.................................................................. 34 Section 2.13 Calculation of LIBOR Rate............................................................ 35 Section 2.14 Taxes................................................................................ 35 Section 2.15 Letters of Credit.................................................................... 38 ARTICLE 3 Conditions Precedent Section 3.1 Conditions Precedent to the Initial Advance and the Initial Issuance of Letters of Credit................................................................. 44 Section 3.2 Conditions Precedent to All Advances and Letters of Credit........................... 46 Section 3.3 Conditions Precedent to Conversions and Continuations................................ 48
3 ARTICLE 4 Representations and Warranties Section 4.1 Representations and Warranties....................................................... 48 Section 4.2 Survival of Representations and Warranties, etc...................................... 57 ARTICLE 5 General Covenants Section 5.1 Preservation of Existence and Similar Matters........................................ 57 Section 5.2 Business; Compliance with Applicable Law............................................. 57 Section 5.3 Maintenance of Properties............................................................ 57 Section 5.4 Accounting Methods and Financial Records............................................. 58 Section 5.5 Insurance............................................................................ 58 Section 5.6 Payment of Taxes and Claims.......................................................... 58 Section 5.7 Visits and Inspections............................................................... 58 Section 5.8 Use of Proceeds...................................................................... 59 SECTION 5.9 INDEMNITY............................................................................ 59 Section 5.10 Environmental Law Compliance......................................................... 60 Section 5.11 Further Assurances................................................................... 61 Section 5.12 Management of Projects............................................................... 62 Section 5.13 Obligations to Purchasers............................................................ 62 Section 5.14 Owners Associations.................................................................. 62 Section 5.15 Note Receivable Information.......................................................... 63 Section 5.16 Maintenance of Borrowing Base........................................................ 63 ARTICLE 6 Information Covenants Section 6.1 Borrowing Base Report................................................................ 64 Section 6.2 Eligible Notes Receivable Report..................................................... 64 Section 6.3 Quarterly Financial Statements and Information....................................... 65 Section 6.4 Annual Financial Statements and Information; Certificate of No Default.............................................................................. 65 Section 6.5 Compliance Certificate............................................................... 66 Section 6.6 Copies of Other Reports and Notices.................................................. 66 Section 6.7 Notice of Litigation, Default and Other Matters...................................... 67 Section 6.8 ERISA Reporting Requirements......................................................... 67
- ii - 4 ARTICLE 7 Negative Covenants Section 7.1 Indebtedness......................................................................... 68 Section 7.2 Liens................................................................................ 69 Section 7.3 Investments.......................................................................... 69 Section 7.4 Liquidation, Merger.................................................................. 70 Section 7.5 Sales of Assets...................................................................... 70 Section 7.6 Acquisitions......................................................................... 70 Section 7.7 Capital Expenditures................................................................. 71 Section 7.8 Restricted Payments.................................................................. 71 Section 7.9 Affiliate Transactions............................................................... 71 Section 7.10 Compliance with ERISA................................................................ 71 Section 7.11 Minimum Interest Coverage Ratio...................................................... 72 Section 7.12 Minimum Tangible Net Worth........................................................... 72 Section 7.13 Maximum Senior Debt to Total Capital................................................. 72 Section 7.14 Maximum Total Debt to Total Capital.................................................. 72 Section 7.15 Sale and Leaseback................................................................... 72 Section 7.16 Business............................................................................. 73 Section 7.17 Fiscal Year.......................................................................... 73 Section 7.18 Amendment of Organizational Documents................................................ 73 Section 7.19 Amendments and Waivers of Subordinated Debt.......................................... 73 Section 7.20 Use of Lenders' Name................................................................. 73 Section 7.21 Servicing and Collection Agreement................................................... 73 Section 7.22 Custodial Agreement.................................................................. 74 Section 7.23 Notes Receivable..................................................................... 74 ARTICLE 8 Default Section 8.1 Events of Default.................................................................... 74 Section 8.2 Remedies............................................................................. 77 ARTICLE 9 Changes in Circumstances Section 9.1 LIBOR Basis Determination Inadequate................................................. 78 Section 9.2 Illegality........................................................................... 78 Section 9.3 Increased Costs...................................................................... 79 Section 9.4 Effect On Base Rate Advances......................................................... 80
- iii - 5 Section 9.5 Capital Adequacy..................................................................... 80 Section 9.6 Replacement Lender................................................................... 80 ARTICLE 10 Agreement Among Lenders Section 10.1 Agreement Among Lenders.............................................................. 81 Section 10.2 Lender Credit Decision............................................................... 84 Section 10.3 Benefits of Article.................................................................. 84 ARTICLE 11 Miscellaneous Section 11.1 Notices.............................................................................. 84 Section 11.2 Expenses............................................................................. 85 Section 11.3 Waivers.............................................................................. 86 Section 11.4 Calculation by the Lenders Conclusive and Binding.................................... 86 Section 11.5 Set-Off.............................................................................. 87 Section 11.6 Assignment........................................................................... 87 Section 11.7 Counterparts......................................................................... 89 Section 11.8 Severability......................................................................... 89 Section 11.9 Interest and Charges................................................................. 89 Section 11.10 Headings............................................................................. 90 Section 11.11 Amendment and Waiver................................................................. 90 Section 11.12 Exception to Covenants............................................................... 90 Section 11.13 No Liability of Issuing Bank......................................................... 90 Section 11.14 Confidentiality...................................................................... 91 Section 11.15 No Liability of Lenders to Purchasers................................................ 92 SECTION 11.16 GOVERNING LAW........................................................................ 92 SECTION 11.17 WAIVER OF JURY TRIAL................................................................. 92 SECTION 11.18 ENTIRE AGREEMENT..................................................................... 92
- iv - 6 Schedules and Exhibits Schedule 1: LIBOR Lending Offices Schedule 2: Existing Liens Schedule 3: Existing Litigation and Material Liabilities Schedule 4: Subsidiaries Schedule 5: Existing Investments Schedule 6: Existing Indebtedness Schedule 7: Qualification and Good Standing Schedule 8: Intellectual Property and Disputes Relating Thereto Schedule 9: Labor Relations Schedule 10: List of Specified Resorts Exhibit A: Revolving Credit Note Exhibit B: Swing Line Note Exhibit C: Security Agreement Exhibit D: Borrowing Base Report Exhibit E: Compliance Certificate Exhibit F: Assignment Agreement Exhibit G: Subsidiary Guaranty Exhibit H: Notice of Borrowing Exhibit I: Assignment of Pledged Documents - v - 7 CREDIT AGREEMENT THIS CREDIT AGREEMENT is dated as of February 18, 1998, among SIGNATURE RESORTS, INC., a Maryland corporation (the "Borrower"), the Lenders from time to time party hereto, NATIONSBANK OF TEXAS, N.A., a national banking association, as administrative agent for the Lenders, and SOCIETE GENERALE, as documentation agent for the Lenders. BACKGROUND The Lenders have been requested to provide the Borrower the funds required to (a) refinance certain existing debt of the Borrower and its Subsidiaries (as hereinafter defined), (b) finance acquisitions permitted hereunder, (c) finance eligible mortgage loans, and (d) finance the ongoing working capital and general corporate requirements of the Borrower and its Subsidiaries. The Lenders have agreed to provide such financing, subject to the terms and conditions set forth below. In consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 Definitions Section 1.1 Defined Terms. For purposes of this Agreement: "Acquisition" means any transaction pursuant to which the Borrower or any of its Subsidiaries, (a) whether by means of a capital contribution or purchase or other acquisition of Capital Stock, (i) acquires more than 50% of the Capital Stock in any Person pursuant to a solicitation by the Borrower or such Subsidiary of tenders of Capital Stock of such Person, or through one or more negotiated block, market, private or other transactions, or a combination of any of the foregoing, or (ii) makes any corporation a Subsidiary of the Borrower or such Subsidiary, or causes any corporation, other than a Subsidiary of the Borrower or such Subsidiary, to be merged into the Borrower or such Subsidiary (or agrees to be merged into any other corporation other than a wholly-owned Subsidiary (excluding directors' qualifying shares) of the Borrower or such Subsidiary), or (b) purchases all or substantially all of the business or assets of any Person or of any operating division of any Person. "Administrative Lender" means NationsBank of Texas, N.A., a national banking association, as administrative agent for Lenders, or such successor administrative agent appointed pursuant to Section 10.1(b) hereof. 8 "Advance" means a Revolving Credit Advance or a Swing Line Advance and "Advances" means Revolving Credit Advances and Swing Line Advances. "Affiliate" means, as applied to any Person, any other Person that, directly or indirectly, through one or more Persons, Controls or is Controlled By or Under Common Control with, that Person. "Agreement" means this Credit Agreement, as amended, modified, supplemented or restated from time to time. "Agreement Date" means the date of this Agreement. "Applicable Environmental Laws" means applicable laws pertaining to health or the environment, including without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (as amended from time to time, "CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act amendments of 1980, and the Hazardous and Solid Waste Amendments of 1984 (as amended from time to time, "RCRA"). "Applicable Law" means (a) in respect of any Person, all provisions of constitutions, statutes, rules, regulations and orders of governmental bodies or regulatory agencies applicable to such Person and its properties, including, without limiting the foregoing, all orders and decrees of all courts and arbitrators in proceedings or actions to which the Person in question is a party, and (b) in respect of contracts relating to interest or finance charges that are made or performed in the State of Texas, "Applicable Law" shall mean the laws of the United States of America, including without limitation 12 USC Sections 85 and 86(a), as amended from time to time, and any other statute of the United States of America now or at any time hereafter prescribing the maximum rates of interest on loans and extensions of credit, and the laws of the State of Texas, including, without limitation, Art. 1H, if applicable, and if Art. 1H is not applicable, Art. 1D and any other statute of the State of Texas prescribing maximum rates of interest with respect to extensions of credit; provided that the parties hereto agree that the provisions of Chapter 346 of the Texas Finance Code, as amended, shall not apply to Advances, this Agreement, the Notes or any other Loan Documents. "Applicable LIBOR Rate Margin" means the following per annum percentages, applicable in the following situations:
Applicability Percentage ------------- ---------- (a) Sum of (i) aggregate outstanding Advances and 1.375% (ii) aggregate Reimbursement Obligations is greater than or equal to 75% of Eligible Notes Receivable
- 2 - 9 (b) Sum of (i) aggregate outstanding Advances and 1.125% (ii) aggregate Reimbursement Obligations is greater than or equal to 65% but less than 75% of Eligible Notes Receivable (c) Sum of (i) aggregate outstanding Advances and 0.875% (ii) aggregate Reimbursement Obligations is less than 65% of Eligible Notes Receivable
The Applicable LIBOR Rate Margin payable by the Borrower on the LIBOR Advances outstanding hereunder shall be subject to reduction or increase, as applicable and as set forth in the table above, on a monthly basis, retroactively as of the first day of each month and for such month, based upon the aggregate outstanding Advances and Reimbursement Obligations as of the last day of the immediately preceding month and the Eligible Notes Receivable as of the last day of the immediately preceding month (as reflected in the Borrowing Base Report, as of the last day of such month, to be delivered to the Lenders pursuant to Section 6.1 hereof). "Art. 1D" means Article 5069-1D, Title 79, Revised Civil Statutes of Texas, 1925, as amended. "Art. 1H" means Article 5069-1H, Title 79, Revised Civil Statutes of Texas, 1925, as amended. "Art. 1.04" means Article 5069-1.04, Title 79, Revised Civil Statutes of Texas, as amended. "Assignees" means any assignee of a Lender pursuant to an Assignment Agreement and shall have the meaning ascribed thereto in Section 11.6 hereof. "Assignment Agreement" has the meaning specified in Section 11.6 hereof. "Assignment of Pledged Documents" means an Assignment of Pledged Documents, in substantially the form of Exhibit I hereto, pursuant to which the Borrower and each Restricted Subsidiary transfers and assigns to the Administrative Lender (for the benefit of the Lenders), all of the right, title and interest of the Borrower and each Restricted Subsidiary in and to each Note Receivable and the other Pledged Documents with respect to each such Note Receivable, free and clear of all Liens, as security for the Obligations. "Authorized Signatory" means such senior personnel of the Borrower as may be duly authorized and designated in writing by the Borrower to execute documents, agreements and instruments on behalf of the Borrower, and to request Advances and Letters of Credit hereunder. - 3 - 10 "Average Quarterly Delinquency Rate" means the ratio (expressed as a percentage), calculated on a monthly basis as of the last day of each month, of (i) the aggregate outstanding principal balance, as of the date of calculation, of all notes receivable of the Borrower and its Subsidiaries generated from, or attributable to, the Specified Resorts, with respect to which notes receivable any scheduled payment is more than sixty (60) days past due, to (ii) the aggregate outstanding principal balance, as of the date of calculation, of all notes receivable of the Borrower and its Subsidiaries generated from, or attributable to, the Specified Resorts; provided, however, that notes receivable of the Borrower or of any Subsidiary that are, at the time of such calculation, included in any Securitization shall be excluded entirely from the foregoing calculation. "Base Rate Advance" means any Advance bearing interest at the Base Rate Basis. "Base Rate Basis" means, for any day, a per annum interest rate equal to the higher of (a) the sum of (i) 0.50% plus (ii) the Federal Funds Rate on such day or (b) the Prime Rate on such day. The Base Rate Basis shall be adjusted automatically without notice as of the opening of business on the effective date of each change in the Prime Rate or the Federal Funds Rate, as the case may be, to account for such change. "Borrower" has the meaning specified in the introductory provision hereof. "Borrowing Base" means, the following amounts, during the following periods of time and under the following circumstances: (i) during the period of time from the Agreement Date through, and including, the date of consummation of the first Securitization to be consummated by the Borrower after the Agreement Date, the Borrowing Base shall be an amount equal to 85% of the aggregate unpaid principal balance, at the time in question, of Eligible Notes Receivable; (ii) during the period of time from the date of consummation of the first Securitization to be consummated by the Borrower after the Agreement Date through, and including, the date of consummation of the second Securitization to be consummated by the Borrower after the Agreement Date, the Borrowing Base shall be an amount equal to the lesser of (i) 85% of the aggregate unpaid principal balance, at the time in question, of Eligible Notes Receivable and (ii) an amount equal to the product of (x) 100%, minus two (2) times the Credit Enhancement Percentage with respect to such Securitization and (y) the aggregate unpaid principal amount, at the time in question, of Eligible Notes Receivable; and (iii) thereafter, the Borrowing Base shall be an amount equal to the lesser of (i) 85% of the aggregate unpaid principal balance, at the time in question, of Eligible Notes Receivable and (ii) an amount equal to the product of (x) 100%, minus two (2) times the maximum Credit Enhancement Percentage with respect to the Borrower's two most recent Securitizations and (y) the aggregate unpaid principal amount, at the time in question, of Eligible Notes Receivable. - 4 - 11 "Borrowing Base Report" means a report, signed by an Authorized Signatory, in substantially the form of Exhibit D, appropriately completed. "Business Day" means a day on which commercial banks are open (a) for the transaction of business in Dallas, Texas and New York, New York, and, (b) with respect to any LIBOR Advance, for the transaction of international business (including dealings in U.S. dollar deposits) in London, England. "Capital Expenditures" means, for any period, expenditures made by the Borrower and the Restricted Subsidiaries to acquire or construct fixed assets, plant and equipment (including renewals, improvements and replacements during such period and the aggregate amount of items leased or acquired under Capitalized Lease Obligations at the cost of the item, but excluding capital expenditures made with insurance proceeds to the extent used to replace or repair damaged fixed assets, plant and equipment) computed in accordance with GAAP, consistently applied, provided however, that the term "Capital Expenditures" shall not include (i) Investments permitted hereunder, (ii) Acquisitions permitted hereunder or (iii) expenditures made by the Borrower or the Restricted Subsidiaries to acquire or construct time-share residential real estate projects that are acquired or constructed for the purpose of creating, maintaining or enhancing the Borrower's inventory of Time-Share Interests. "Capital Stock" means, as to any Person, the equity interests in such Person, including, without limitation, the shares of each class of capital stock in any Person that is a corporation, and each class of partnership interest (including, without limitation, general, limited and preference units) in any Person that is a partnership. "Capitalized Lease Obligations" means that portion of any obligation of the Borrower or any Restricted Subsidiary as lessee under a lease which at the time are recorded as capitalized lease obligations on the balance sheet of the Borrower or such Restricted Subsidiary prepared in accordance with GAAP. "Cash and Cash Equivalents" means with respect to the Borrower and each Restricted Subsidiary (a) cash (which, after the occurrence of an Event of Default, shall exclude any cash proceeds of Accounts), (b) securities issued or directly and fully guaranteed or insured by the United States Government or any agency or instrumentality thereof having maturities of not more than six months from the date of acquisition, (c) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any Lender or with any domestic commercial bank having capital and surplus in excess of $500,000,000, (d) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (b) and (c) entered into with any financial institution meeting the qualifications specified in clause (c) above, (e) commercial paper issued by any Lender or the parent corporation of any Lender, and commercial paper rated A-1 or the equivalent thereof by Standard & Poor's Ratings Group, a Division of McGraw-Hill, Inc., a New York corporation, or - 5 - 12 P-1 or the equivalent thereof by Moody's Investors Service, Inc., and in each case maturing within six months after the date of acquisition, and (f) a readily redeemable "money market mutual fund" advised by a bank described in clause (c) hereof, or an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, that has and maintains an investment policy limiting its investments primarily to instruments of the types described in clauses (a) through (e) hereof and having on the date of such Investment total assets of at least One Hundred Million Dollars ($100,000,000.00). "Change of Control" means the occurrence of any of the following events after the Agreement Date: (a) any Person or any Persons acting together which would constitute a "group" (a "Group") for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provision thereto, other than the Group whose nominees constituted a majority of the board of directors of the Borrower as of the close of business on the Agreement Date, together with any Affiliates or Related Persons thereof, shall beneficially own (as defined in Rule 13d-3 of the Securities and Exchange Commission under the Exchange Act or any successor provision thereto) at least 30% of the aggregate voting power of all classes of Capital Stock of the Borrower entitled to vote generally in the election of directors of the Borrower; (b) any Person or Group, other than any Person or Group whose nominees constituted a majority of the board of directors of the Borrower as of the close of business on the Agreement Date, together with any Affiliates or Related Persons thereof, shall succeed in having sufficient of its or their nominees elected to the Board of Directors of the Borrower, such that such nominees, when added to any existing director remaining on the Board of Directors of the Borrower after such election who is an Affiliate or Related Person of such Group, shall constitute a majority of the Board of Directors of the Borrower; or (c) any "change of control" or "change in control" or similar term howsoever defined in any agreement governing any other Indebtedness of the Borrower or any of its Subsidiaries. "Code" means the Internal Revenue Code of 1986, as amended. "Collateral" means any collateral granted at any time by any Person to the Administrative Lender for the benefit of the Lenders to secure the Obligations. "Collateral Document" means any document under which Collateral is granted and any document related thereto. "Commitment Fee" has the meaning specified in Section 2.4(a) hereof. "Commitment" means $100,000,000, as reduced from time to time pursuant to Section 2.6 hereof. "Compliance Certificate" means a certificate, signed by an Authorized Signatory, in substantially the form of Exhibit E, appropriately completed. - 6 - 13 "Control" or "Controlled By" or "Under Common Control" means possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of voting securities, by contract or otherwise); provided, however, that in any event any Person which beneficially owns, directly or indirectly, 10% or more (in number of votes) of the securities having ordinary voting power for the election of directors of a corporation shall be conclusively presumed to control such corporation. "Controlled Group" means as of the applicable date, as to any Person not an individual, all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) which are under common control with such Person and which, together with such Person, are treated as a single employer under Section 414(b), (c), (m) or (o) of the Code; provided, however, that the Subsidiaries of the Borrower shall be deemed to be members of the Borrower's Controlled Group. "Credit Enhancement Percentage" means, with respect to the Securitization in question, the highest overall credit enhancement (expressed as a percentage) that was, or would have been, required in order to attain a "BBB" rating (or its equivalent) by the applicable rating agency(ies) involved on all securities issued in connection with such Securitization (assuming that all securities that were issued in connection therewith were so rated), as such Credit Enhancement Percentage shall be communicated to the Administrative Lender by such rating agency(ies); provided, however, that if such Credit Enhancement Percentage shall, for any reason whatsoever, not be communicated to the Administrative Lender by such rating agency(ies) with respect to any such Securitization, the Administrative Lender shall determine such Credit Enhancement Percentage with respect to such Securitization based upon the information available to the Administrative Lender at such time. "Custodial Agreement" means collectively, one or more agency and custodial agreement(s) among the Borrower, each Restricted Subsidiary that owns any of the Notes Receivable included, from time to time, in the Borrowing Base, the Administrative Lender and the Custodian, providing for the maintenance of the Pledged Documents, as such agreement(s) may, from time to time, be amended, modified, supplemented and/or restated with the written consent of the Administrative Lender. "Custodian" means LaSalle National Bank or such other Person(s) as may be designated from time to time by the Administrative Lender, following notice thereof to the Borrower, to maintain physical possession of the Pledged Documents. "Debtor Relief Laws" means any applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, insolvency, reorganization or similar debtor relief Laws affecting the rights of creditors generally from time to time in effect. "Deed of Trust" means any deed of trust or mortgage executed and delivered by a Purchaser, encumbering all the right, title and interest of each such Purchaser in and to its - 7 - 14 purchased Time-Share Interest as security for the Purchaser's obligations under any Note Receivable. "Default" means an Event of Default and/or any of the events specified in Section 8.1, regardless of whether there shall have occurred any passage of time or giving of notice that would be necessary in order to constitute such event an Event of Default. "Default Rate" means a simple per annum interest rate equal to (a) with respect to Base Rate Advances the lesser of (i) the Highest Lawful Rate or (ii) the Prime Rate plus 2.00% or (b) with respect to LIBOR Advances, the lesser of (i) the Highest Lawful Rate or (ii) the LIBOR Basis plus 2% in excess of the Applicable Rate Margin then in effect. "Determining Lenders" means, on any date of determination, any combination of the Lenders having more than 50% of the aggregate amount of the Advances (which for purposes of the calculation shall include for each Lender an amount equal to the product of such Lender's Specified Percentage multiplied by the aggregate amount of Swing Line Advances outstanding) then outstanding; provided, however, that if there are no Advances outstanding hereunder, "Determining Lenders" shall mean any combination of Lenders whose Specified Percentages aggregate more than 50%. "Dividend" means, as to any Person, (a) any declaration or payment of any dividend (other than a stock dividend) on, or the making of any distribution on account of, any shares of Capital Stock of, or other similar interest in, such Person and (b) any purchase, redemption, or other acquisition or retirement for value of any shares of Capital Stock of, or similar interest in, such Person. "Dollar" or "$" means the lawful currency of the United States of America. "Domestic Subsidiary" means any Subsidiary of the Borrower other than a Foreign Subsidiary. "EBIT" means, for any period, determined in accordance with GAAP on a consolidated basis for the Borrower and the Restricted Subsidiaries, the sum of (a) Pretax Net Income (excluding therefrom, to the extent included in determining Pretax Net Income, any items of extraordinary gain, including net gains on the sale of assets other than asset sales in the ordinary course of business, and adding thereto, to the extent included in determining Pretax Net Income, any items of extraordinary loss, including net losses on the sale of assets), plus (b) interest expense, plus (c) non-recurring charges incurred as a result of business combinations utilizing the pooling accounting method to the extent that such charges would be permitted to be capitalized utilizing the purchase accounting method. - 8 - 15 "EBITDA" means, for any period, determined in accordance with GAAP on a consolidated basis for the Borrower and its Subsidiaries, the sum of (a) EBIT plus (b) depreciation, amortization and other non-cash charges (to the extent included in determining EBIT). "Eligible Notes Receivable" means at the time of any determination thereof, the Notes Receivable of the Borrower and the Restricted Subsidiaries (at least 85% of which the Purchasers in respect thereof are residents of the United States, Puerto Rico, the United States Virgin Islands or Canada) which are reasonably acceptable to the Determining Lenders in their discretion for the purposes of determining the Borrowing Base and as to which the following requirements have been fulfilled with respect to each Note Receivable: (a) The Borrower or a Restricted Subsidiary has lawful and absolute title to such Note Receivable; (b) The interests of the Borrower or the applicable Restricted Subsidiary(ies) in such Note Receivable and the Pledged Documents relating thereto are subject to a first priority security interest in favor of the Administrative Lender pursuant to the Collateral Documents, prior to the rights of, and enforceable against, all other Persons; (c) The Note Receivable shall not have a term of greater than one-hundred twenty (120) months and the Note Receivable shall be payable in equal monthly payments in amounts sufficient to repay in full the principal balance thereof and accrued interest thereon during such term; provided, however, that Notes Receivable having terms greater than one-hundred twenty (120) months but not greater than one-hundred eighty (180) months may be included as Eligible Notes Receivable to the extent that such longer term Notes Receivable otherwise satisfy the criteria for inclusion as Eligible Notes Receivable and the aggregate outstanding principal balance of such longer term Notes Receivable does not, at any time, exceed fifteen percent (15%) of the aggregate outstanding principal balance of all Eligible Note Receivable included in the Borrowing Base; (d) The Purchaser in respect of such Note Receivable shall have timely made at least the first regularly scheduled installment payment due thereon; (e) The Purchaser in respect of such Note Receivable has made a cash down payment of at least ten percent (10%) of the aggregate actual purchase price of all Time-Share Interests purchased by such Purchaser, all of the Notes Receivable with respect to such Purchaser qualify as, and are included as, Eligible Notes Receivable and as Collateral hereunder and no part of such cash down payment by such Purchaser has been made or loaned to the Purchaser by the Borrower or any of its Subsidiaries or an Affiliate of the Borrower or any of its Subsidiaries; (f) The terms of such Note Receivable have not been restructured, rewritten or otherwise modified in any manner that would reduce the interest rate with respect thereto, reduce the principal amount thereof, reduce the amount of any scheduled payment(s) with respect thereto, extend the maturity date thereof (unless such extension was granted solely for the purpose of - 9 - 16 upgrading the applicable Purchaser to a larger Unit and/or an additional Time-Share Interest in the Project), release or impair any collateral securing same, release or impair any obligations or duties of any Purchaser with respect thereto or in any manner that would otherwise result in such Note Receivable not qualifying as an Eligible Note Receivable hereunder; (g) No installment of such Note Receivable is more than fifty-nine (59) days past due; (h) The Unit in respect of such Note Receivable has been completed, developed, and furnished pursuant to the specifications provided in the Purchase Documents or a certificate of occupancy or a bond insuring the completion thereof has been posted; (i) The Purchaser is not an Affiliate of, related to or employed by, the Borrower or any of its Subsidiaries nor is the Purchaser in default under any Note Receivable or other obligation of such Purchaser to the Borrower or to any of the Borrower's Subsidiaries; (j) The Note Receivable is free and clear of all Liens, and subject to no claims of rescission, invalidity, unenforceability, illegality, defense, discount, offset or counterclaim; (k) The Purchaser in respect of such Note Receivable has no right to rescind the purchase of the Time-Share Interest; (l) All sales and financing documents relating to the Note Receivable have been executed and delivered to the Administrative Lender and have not been modified from the standard forms theretofore approved by the Administrative Lender; (m) The terms of such Note Receivable and all related instruments comply with all Laws; (n) The Note Receivable is recognized on the books of the Borrower or the applicable Restricted Subsidiary, as applicable, as a bona fide sale of a fee simple interest time-share estate in one or more Time-Share Interests, and such sale is evidenced by Purchase Documents and secured by a first priority mortgage or deed of trust on the purchased Time-Share Interest, which mortgage or deed of trust has been assigned of record by the Borrower or the applicable Restricted Subsidiary to the Administrative Lender; (o) The Time-Share Interest purchased and to which the Note Receivable relates is not subject to any Lien (other than Liens for ad valorem taxes that are not yet due and payable, Liens for association assessments that are not yet due and payable and Liens in favor of the Administrative Lender), and either (i) the Unit with respect to the Time-Share Interest purchased and to which such Note Receivable relates is not subject to any Lien (other than Liens for ad valorem taxes that are not yet due and payable, Liens for association assessments that are not yet due and payable and Liens in favor of the Administrative Lender) or (ii) the Time-Share Interest purchased and to which the Note Receivable relates has been permanently and irrevocably released - 10 - 17 from any such Lien (including, without limitation, any after-acquired property provisions thereof) with respect to such Unit; (p) The Deed of Trust securing the Note Receivable is insured under a mortgagee title insurance policy in favor of the Administrative Lender acceptable to the Administrative Lender, subject only to those exceptions to title as the Administrative Lender approves; (q) Payments under the Note Receivable are to be in legal tender of the United States; (r) The Note Receivable and the other Purchase Documents are valid, genuine and enforceable against the Purchaser; (s) The Purchaser in respect of the Note Receivable has not assigned his or her obligations under such Note Receivable or rights in the applicable Time-Share Interest, except to the extent that any such Purchaser has assigned its interest in a Time-Share Interest to such Purchaser's former spouse in connection with divorce proceedings between such Purchaser and such former spouse or to a member of such Purchaser's immediate family and, in either case, such Purchaser remains primarily liable with respect to such Note Receivable; (t) The payments due under such Note Receivable have been made by the Purchaser in respect thereof and not by the Borrower or any of its Subsidiaries or any Affiliate of the Borrower or any of its Subsidiaries on such Purchaser's behalf; (u) The Purchaser in respect of such Note Receivable is not subject to any Debtor Relief Laws and is not an adverse party in any Litigation (and has not threatened any Litigation) with the Borrower or any of its Subsidiaries or any Lender; (v) The Borrower or the applicable Restricted Subsidiary, as applicable, has performed all of its obligations to the Purchasers in respect of such Note Receivable, and there shall be no executory obligations to such Purchaser to be performed by the Borrower or the applicable Restricted Subsidiary; and (w) The Project containing the Unit subject to such Note Receivable is located in the United States of America or in such other jurisdiction(s) as may, from time to time, be designated in writing by the Determining Lenders. "Equity" means shares of capital stock or partnership, profits, capital or member interest, or options, warrants or any other right to subscribe for or otherwise acquire capital stock or a partnership, profits, capital or member interest, of the Borrower or any Subsidiary of the Borrower. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any regulation promulgated thereunder. - 11 - 18 "ERISA Event" means, with respect to the Borrower and its Subsidiaries, (a) a Reportable Event (other than a Reportable Event not subject to the provision for 30-day notice to the PBGC pursuant to regulations issued under Section 4043 of ERISA), (b) the withdrawal of any such Person or any member of its Controlled Group from a Plan subject to Title IV of ERISA during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (c) the filing of a notice of intent to terminate under Section 4041(c) of ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC, (e) the failure to make required contributions which could result in the imposition of a lien under Section 412 of the Code or Section 302 of ERISA, or (f) any other event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan or the imposition of any liability under Title IV of ERISA other than PBGC premiums due but not delinquent under Section 4007 of ERISA. "Event of Default" means any of the events specified in Section 8.1, provided that any requirement for notice or lapse of time has been satisfied. "Federal Funds Rate" means, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of Dallas on the Business Day next succeeding such day, provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average of the quotations for the day for such transactions received by the Administrative Lender from three Federal funds brokers of recognized standing selected by it. "Fee Letter" has the meaning specified in Section 2.4(b) hereof. "Foreign Subsidiary" means any Subsidiary of the Borrower which is not organized under the laws of any state of the United States of America, the District of Columbia or the United States Virgin Islands. "GAAP" means generally accepted accounting principles applied on a consistent basis, set forth in the Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants, or their successors which are applicable in the circumstances as of the date in question. The requirement that such principles be applied on a consistent basis shall mean that the accounting principles applied in a current period are comparable in all material respects to those applied in a preceding period. "Guarantor" means each direct and indirect Restricted Domestic Subsidiary of the Borrower and each direct and indirect Restricted Foreign Subsidiary of the Borrower which has executed a Subsidiary Guaranty. - 12 - 19 "Guaranty" or "Guaranteed", means (a) as applied to an obligation of another Person, (i) a guaranty, direct or indirect, in any manner, of any part or all of such obligation, and (ii) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of nonperformance) of any part or all of such obligation, including, without limiting the foregoing, any reimbursement obligations with respect to amounts which may be drawn by beneficiaries of outstanding letters of credit and (b) an agreement, direct or indirect, contingent or otherwise, to maintain the net worth, working capital, earnings or other financial performance of another Person; provided, however, Guaranty does not mean (y) the endorsement of instruments for collection or deposit in the ordinary course of business and (z) customary indemnities given in connection with asset sales in the ordinary course of business. "Hedge Agreements" means any and all agreements, devices or arrangements designed to protect at least one of the parties thereto from the fluctuations of interest rates, exchange rates or forward rates applicable to such party's assets, liabilities or exchange transactions, including, but not limited to, dollar-denominated or cross-currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap, swap or collar protection agreements, and forward rate currency or interest rate options, as the same may be amended or modified and in effect from time to time, and any and all cancellations, buy backs, reversals, terminations or assignments of any of the foregoing. "Highest Lawful Amount" means at the particular time in question the maximum amount of interest which, under Applicable Law, the Lenders are then permitted to charge on the Obligations at the Highest Lawful Rate. "Highest Lawful Rate" means at the particular time in question the maximum rate of interest which, under Applicable Law, the Lenders are then permitted to charge on the Obligations. If the maximum rate of interest which, under Applicable Law, the Lenders are permitted to charge on the Obligations shall change after the date hereof, the Highest Lawful Rate shall be automatically increased or decreased, as the case may be, from time to time as of the effective time of each change in the Highest Lawful Rate without notice to the Borrower. For purposes of determining the Highest Lawful Rate under the Applicable Law of the State of Texas, the applicable rate ceiling shall be (a) the weekly rate ceiling described in and computed in accordance with the provisions of Art. 1H, or (b) either the quarterly ceiling or the annualized ceiling computed pursuant to Art. 5069-ID.008, Title 79, Revised Civil Statutes of Texas, as amended; provided, however, that at any time the weekly rate ceiling, the quarterly ceiling or the annualized ceiling shall be less than 18% per annum or more than 24% per annum, the provisions of Art. 5069-1D.009(a) and (b), Title 79, Revised Civil Statutes of Texas, as amended, shall control for purposes of such determination, as applicable. "Indebtedness" means, with respect to any Person, without duplication, (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes or similar instruments, (c) all obligations under conditional sale or other title retention agreements relating - 13 - 20 to property or assets purchased by such Person, (d) all obligations issued or assumed as the deferred purchase price of property or services, (e) all obligations secured by any Lien on any property or asset owned by such Person (other than accounts payable arising in the ordinary course of business), whether or not the obligation secured thereby shall have been assumed (provided that, unless such obligations shall have been assumed, for purposes of this definition the amount of such Indebtedness at any time shall be deemed to equal the fair market value of such property or asset at such time), (f) the principal portion of all obligations of such Person under any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product where such transaction is considered borrowed money indebtedness for tax purposes but is classified as an Operating Lease in accordance with GAAP, (g) to the extent not otherwise included, all Capitalized Lease Obligations of such Person, all obligations of any general partnership, joint venture or other Person to the extent that the Person in question is liable, whether contractually, as a matter of applicable law or otherwise, for such obligations, all obligations in respect of letters of credit, bankers' acceptances and similar instruments, all obligations under Hedge Agreements, and all obligations in respect of payment, performance and similar bonds, (h) the Net Exposure Under Securitizations, (i) an amount equal to eight times the annual rental payment(s) under, or in connection with, any Operating Lease entered into as part of, or in connection with, any sale and leaseback transaction and (j) any Guaranty of such Person of any obligation of another Person constituting obligations of a type set forth above. "Indemnified Matters" has the meaning specified in Section 5.9(a) hereof. "Indemnitees" has the meaning specified in Section 5.9(a) hereof. "Intangible Assets" means those assets which are treated as intangible pursuant to GAAP, and in any event including, without limitation: (a) obligations, if any, owing by Affiliates to the Borrower or to any Restricted Subsidiary, (b) accounts, notes or mortgages receivable which are deemed by the Borrower, any of the Restricted Subsidiaries or the Administrative Lender to be uncollectible or which should be subject to a reserve for bad debts in accordance with GAAP or which are subject to claims or set-offs (to the extent of such claim or set-off); (c) leases and leasehold improvements; (d) any asset which is intangible or lacks intrinsic and marketable value or collectibility, including without limitation goodwill, noncompetition agreements, patents, copyrights, trademarks, franchises or organization or research and development costs; (e) organizational and experimental expense; and (f) unamortized debt discount and expense. "Interest Coverage Ratio" means the ratio of EBITDA to Interest Expense, calculated for the four consecutive fiscal quarters ending on the date of calculation. "Interest Expense" means, for any period, determined in accordance with GAAP on a consolidated basis for the Borrower and the Restricted Subsidiaries, interest expense (including interest expense pursuant to Capitalized Lease Obligations). - 14 - 21 "Interest Period" means the period beginning on the day any LIBOR Advance is made and ending one, two, three or six months thereafter (as the Borrower shall select); provided, however, that all of the foregoing provisions are subject to the following: (a) if any Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day, unless, with respect to a LIBOR Advance, the result of such extension would be to extend such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; (b) any Interest Period with respect to a LIBOR Advance that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and (c) the Borrower may not select any Interest Period which ends after the Maturity Date. "Investment" means any acquisition of all or substantially all assets of any Person, or any direct or indirect purchase or other acquisition of, or beneficial interest in, capital stock or other securities of any other Person, or any direct or indirect loan, advance (other than loans or advances to employees for moving and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or capital contribution to, or investment in any other Person, including without limitation the purchase of accounts receivable of any other Person. "Issuing Bank" means NationsBank of Texas, N.A., a national banking association, in its capacity as issuer of the Letters of Credit. "Law" means any statute, law, ordinance, regulation, rule, order, writ, injunction, or decree of any Tribunal. "Lender" means each financial institution shown on the signature pages hereof so long as such financial institution maintains a portion of the Commitment or is owed any part of the Obligations (including the Administrative Lender in its individual capacity), and each Assignee that hereafter becomes a party hereto pursuant to Section 11.6 hereof, subject to the limitations set forth therein. "L/C Cash Collateral Account" has the meaning specified in Section 2.15(g) hereof. "L/C Related Documents" has the meaning specified in Section 2.15(e) hereof. "Letter of Credit" has the meaning specified in Section 2.15(a) hereof. "Letter of Credit Agreement" has the meaning specified in Section 2.15(b) hereof. - 15 - 22 "Letter of Credit Facility" has the meaning specified in Section 2.15(a) hereof. "LIBOR Advance" means an Advance which the Borrower requests to be made as a LIBOR Advance or which is reborrowed as a LIBOR Advance, in accordance with the provisions of Section 2.2 hereof. "LIBOR Basis" means a simple per annum interest rate equal to the lesser of (a) the Highest Lawful Rate, or (b) the sum of the LIBOR Rate plus the Applicable LIBOR Rate Margin. The LIBOR Basis shall, with respect to LIBOR Advances subject to reserve or deposit requirements, be subject to premiums for such reserve or deposit requirements assessed by each Lender to the extent incurred by such Lender, which are payable directly to each Lender. Once determined, the LIBOR Basis shall remain unchanged during the applicable Interest Period. "LIBOR Lending Office" means, with respect to a Lender, the office designated as its LIBOR Lending Office on Schedule 1 attached hereto, and such other office of the Lender or any of its Affiliates hereafter designated by notice to the Borrower and the Administrative Lender. "LIBOR Rate" means, for any LIBOR Advance for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "LIBOR Rate" shall mean, for any LIBOR Advance for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. "Lien" means, with respect to any property, any mortgage, lien, pledge, collateral assignment, hypothecation, charge, security interest, title retention agreement, levy, execution, seizure, attachment, garnishment or other similar encumbrance of any kind in respect of such property, whether or not choate, vested or perfected. "Litigation" means any proceeding, claim, lawsuit, arbitration, and/or investigation by or before any Tribunal, including, without limitation, proceedings, claims, lawsuits, and/or investigations under or pursuant to any environmental, occupational, safety and health, antitrust, unfair competition, securities, Tax or other Law, or under or pursuant to any contract, agreement or other instrument. "Loan Documents" means this Agreement, the Notes, the Security Agreements, any other Collateral Document, the Subsidiary Guaranty, the Administrative Lender Fee Letter, any Hedge Agreements entered into with any Lender, the Assignments of Pledged Documents, and any other - 16 - 23 document or agreement executed or delivered from time to time by the Borrower, any Subsidiary of the Borrower or any other Person in connection herewith or as security for the Obligations. "Material Adverse Effect" means any act or circumstance or event that (a) could reasonably be expected to be material and adverse to the business, financial condition, results of operations, or business prospects of the Borrower and its Restricted Subsidiaries taken as a whole, or (b) in any manner whatsoever does or could reasonably be expected to materially and adversely affect the validity or enforceability of any Loan Document. "Maturity Date" means February 17, 2001, or the earlier date of termination in whole of the Commitment pursuant to Section 2.6 or 8.2 hereof. "Multiemployer Plan" means, as to any Person, at any time, a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA and to which such Person or any member of its Controlled Group is making, or is obligated to make contributions or has made, or been obligated to make, contributions within the past five (5) years. "NationsBank" means NationsBank of Texas, N.A., a national banking association, in its capacity as a Lender hereunder, but not in its capacity as Administrative Lender hereunder. "Necessary Authorization" means any right, franchise, license, permit, consent, approval or authorization from, or any filing or registration with, any Tribunal or any Person necessary or appropriate to enable the Borrower or any Subsidiary of the Borrower to maintain and operate its business and properties. "Net Cash Proceeds" means, with respect to any sale, lease, transfer or other disposition of any asset by any Person, the amount of cash received by such Person in connection with such transaction (including cash proceeds of any property received in consideration of any such sale, lease, transfer or other disposition) after deducting therefrom the aggregate, without duplication, of the following amounts to the extent properly attributable to such transaction or to the asset that is the subject thereof: (i) reasonable brokerage commissions, legal fees, finder's fees, financial advisory fees, accounting fees, underwriting fees, investment banking fees and other similar commissions and fees, in each case, to the extent paid or payable by such Person; (ii) filing, recording or registration fees or charges or similar fees or charges paid by such Person; (iii) taxes paid or payable by such Person or any shareholder, partner or member of such Person to governmental taxing authorities as a result of such sale or other disposition; and (iv) payment of the outstanding principal amount of, premium or penalty, if any, and interest on any Indebtedness that is secured by a Lien on the asset in question and that is required to be repaid under the terms thereof as a result of such asset sale. "Net Exposure Under Securitization" means, for any date of calculation, the sum of (i) any and all obligations and liabilities of the Borrower or any Restricted Subsidiary under, or in connection with, any Securitization, as of such date of calculation, to the extent that same - 17 - 24 constitute liabilities of the Borrower or of such Restricted Subsidiary under GAAP or would, under GAAP, constitute liabilities of the Borrower or of such Restricted Subsidiary if such Securitization were treated as an on balance sheet transaction and (ii) the fair market value of any and all property of the Borrower or of any Restricted Subsidiary that is pledged or encumbered, or as to which the interest(s) of the Borrower or any Restricted Subsidiary are subordinated or otherwise impaired, as security for or as a credit enhancement or otherwise in connection with, any Securitization. "Net Income" means, with respect to any Person for any period, the net income (loss) of such Person, after provisions for taxes and extraordinary items, determined in accordance with GAAP. "Net Worth" means, as of any date of calculation, for the Borrower and the Restricted Subsidiaries, on a consolidated basis, determined in accordance with GAAP, the consolidated total stockholders' equity of the Borrower and the Restricted Subsidiaries. "Note Receivable" means a promissory note executed by a Purchaser in favor of the Borrower or a Restricted Subsidiary which has arisen out of the sale of a Time-Share Interest to a Purchaser, which note is secured by a Deed of Trust. "Notes" means, collectively, the Revolving Credit Notes and the Swing Line Note. "Notice of Borrowing" has the meaning specified in Section 2.2(a) hereof. "Notice of Issuance" has the meaning specified in Section 2.15(b) hereof. "Obligations" means (a) all obligations of any nature (whether matured or unmatured, fixed or contingent, including the Reimbursement Obligations) of the Borrower or any other Obligor to any Lender or the Administrative Lender under any of the Loan Documents as they may be amended from time to time, and (b) all obligations of the Borrower or any other Obligor for losses, damages, expenses or any other liabilities of any kind that any Lender may suffer by reason of a breach by the Borrower or any other Obligor of any obligation, covenant or undertaking with respect to any Loan Document payable by the Borrower or any other Obligor under any Loan Document. "Obligor" means the Borrower and each Guarantor. "Operating Lease" means any operating lease, as defined in the Financial Accounting Standard Board Statement of Financial Accounting Standards No. 13, dated November, 1976 or otherwise in accordance with GAAP, of the Borrower and/or any of the Restricted Subsidiaries. "Participant" has the meaning specified in Section 11.6(c) hereof. - 18 - 25 "Participation" has the meaning specified in Section 11.6(c) hereof. "Payment Date" means the last day of the Interest Period for any LIBOR Advance. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Liens" means, as applied to any Person: (a) Any Lien in favor of the Lenders to secure the Obligations hereunder; (b) (i) Liens on real estate for ad valorem taxes not yet delinquent, and (ii) Liens for taxes, assessments, governmental charges, levies, homeowners' association dues or other claims that are not yet delinquent or that are being diligently contested in good faith by appropriate proceedings in accordance with Section 5.6 hereof and for which adequate reserves shall have been set aside on such Person's books, but only so long as no foreclosure, restraint, sale or similar proceedings have been commenced with respect thereto; (c) Liens of carriers, landlords, warehousemen, mechanics, laborers and materialmen incurred in the ordinary course of business for sums not yet due or being contested in good faith, if such reserve or appropriate provision, if any, as shall be required by GAAP shall have been made therefor; (d) Liens incurred in the ordinary course of business in connection with worker's compensation, unemployment insurance or similar legislation; (e) Easements, right-of-way, restrictions and other similar encumbrances on the use of real property which do not interfere in any material respect with the ordinary conduct of the business of such Person; (f) Liens in respect of judgments or awards for which appeals or proceedings for review are being prosecuted and in respect of which a stay of execution upon any such appeal or proceeding for review shall have been secured, provided that (i) such Person shall have established adequate reserves for such judgments or awards, (ii) such judgments or awards shall be fully insured (subject to customary deductibles) and the insurer shall not have denied coverage, or (iii) such judgments or awards shall have been bonded to the satisfaction of the Determining Lenders; (g) Any Liens which secure Indebtedness that is permitted by Section 7.1(b) hereof; provided, however, that (i) none of such Liens shall cover or apply to any of the Collateral, (ii) the fair market value of the property covered by any such Lien shall not, at the time of the grant or creation of such Lien, exceed, in the case of property other than notes receivable or accounts - 19 - 26 receivable, 200% of the principal amount of the Indebtedness secured by such Lien and (iii) none of such Liens shall secure any Subordinated Debt; (h) Liens arising from filing Uniform Commercial Code financing statements for precautionary purposes relating solely to true leases of personal property permitted by this Agreement under which the Borrower or any of its Subsidiaries is a lessee; (i) Any zoning or similar law or right reserved to or vested in any Tribunal to control or regulate the use of any real property; (j) Any Lien in favor of any Lender to secure any obligations owed to such Lender in respect of any Hedge Agreement; (k) Liens incurred or deposits made to secure the performance of bids, trade contracts (other than for Indebtedness), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; and (l) any replacements or renewals of Liens (but no increases in the Indebtedness secured thereby) permitted by clauses (h) and (i) hereof. "Person" means an individual, corporation, partnership, trust or unincorporated organization, or a government or any agency or political subdivision thereof. "Plan" means an employee benefit plan as defined in Section 3(3) of ERISA (including a Multiemployer Plan) pursuant to which any employees of the Borrower, its Subsidiaries or any member of their Controlled Group participate. "Pledged Documents" means, collectively, the Notes Receivable, the Deeds of Trust and the Purchase Documents. "Pretax Net Income" means net profit (or loss) before taxes of the Borrower and the Restricted Subsidiaries, on a consolidated basis, determined in accordance with GAAP. "Prime Rate" means, at any time, the prime interest rate announced or published by the Reference Lender from time to time as its reference rate for the determination of interest rates for loans of varying maturities in United States dollars to United States residents of varying degrees of creditworthiness and being quoted at such time by the Reference Lender as its "prime rate;" it being understood that such rate may not be the lowest rate of interest charged by the Reference Lender. "Projects" means those time-share residential real estate projects constructed by the Borrower or any of its Subsidiaries in which the Borrower or any of its Subsidiaries sells Time- - 20 - 27 Share Interests and as to which any of the Notes Receivable generated therefrom constitute Collateral hereunder. "Purchase Documents" means any purchase agreement and related sale and escrow documents executed and delivered by a Purchaser to the Borrower or any of its Subsidiaries with respect to the purchase of a Time-Share Interest. "Purchaser" means a Person who purchases a Time-Share Interest in a Project from the Borrower or any of its Subsidiaries or any other obligor in respect of the Note Receivable executed in connection therewith. "Quarterly Date" means the last day of each March, June, September and December, beginning March 31, 1998. "Reference Lender" means NationsBank; provided that if the commitments of NationsBank hereunder shall terminate and if NationsBank shall have no Advances and Letters of Credit outstanding hereunder, NationsBank shall cease to be the Reference Lender, and Administrative Lender (after consultation with Borrower) shall, with notice to Borrower and Lenders, designate another Lender as the Reference Lender. "Reimbursement Obligations" means, in respect of any Letter of Credit as at any date of determination, the sum of (a) the maximum aggregate amount which is then available to be drawn under such Letter of Credit plus (b) the aggregate amount of all drawings under such Letter of Credit not theretofore reimbursed by the Borrower. "Related Person" means (a) any Affiliate of the Borrower, (b) any individual or entity who directly or indirectly holds 10% or more of any class of Capital Stock of the Borrower, (c) any relative of such individual by blood, marriage or adoption not more remote than first cousin and (d) any officer or director of the Borrower. "Release Date" means the date on which the Notes have been paid, all other Obligations due and owing have been paid and performed in full, and the Commitments have been terminated. "Reportable Event" has the meaning set forth in Section 4043(b) of ERISA. "Restricted Domestic Subsidiary" means each Domestic Subsidiary which has executed a Subsidiary Guaranty and has delivered to the Lenders such board resolutions, officer's certificates and opinions of counsel as the Administrative Lender shall have reasonably requested. "Restricted Foreign Subsidiary" means each Foreign Subsidiary (i) which either has executed and delivered a Subsidiary Guaranty or with respect to which at least 65% of whose Capital Stock has been pledged to the Administrative Lender, for the benefit of the Lenders, pursuant to documentation acceptable to the Administrative Lender and (ii) as to which the - 21 - 28 Lenders have received such board resolutions, officer's certificates and opinions of counsel as the Administrative Lender shall have reasonably requested. "Restricted Payments" means, collectively, (i) Dividends and (ii) any (A) payment or prepayment of principal, premium or penalty on any Subordinated Debt of the Borrower or any Subsidiary of the Borrower or any defeasance, redemption, purchase, repurchase or other acquisition or retirement for value, in whole or in part, of any Subordinated Debt (including, without limitation, the setting aside of assets or the deposit of funds therefor) and (B) prepayment of interest on any Subordinated Debt. "Restricted Subsidiary" means any Restricted Domestic Subsidiary or any Restricted Foreign Subsidiary. "Revolving Credit Advance" means an Advance made pursuant to Section 2.1(a) hereof. "Revolving Credit Notes" means the promissory notes of the Borrower evidencing Revolving Credit Advances, substantially in the form of Exhibit A hereto, together with any extensions, renewals or amendments thereof or thereto, and any substitutions therefor. "Rights" means rights, remedies, powers and privileges. "Security Agreement" means any Collateral Transfer of Notes and Liens (Security Agreement), substantially in the form of Exhibit C hereto, as amended, modified, renewed, supplemented or restated from time to time. "Securitization" means a sale or hypothecation of Notes Receivable by the Borrower in which the proceeds thereof are utilized to repay in full all outstanding Advances attributable to such Notes Receivable pursuant to documentation reasonably acceptable to the Administrative Lender. "Securitization Subsidiary" means any subsidiary of the Borrower which is organized for the sole purpose of facilitating a Securitization and which performs no business and has no other assets outside of those necessary to consummate a Securitization. "Senior Debt" means, as of the date of any determination, the remainder of (a) Total Debt minus (b) Subordinated Debt. "Servicing Agent" means, collectively, the Person(s) that are initially named as the servicer(s) under the Servicing and Collection Agreement, or, should such Person(s) cease to act as Servicing Agent under the Servicing and Collection Agreement, such other entity as the Borrower and each Restricted Subsidiary that is a party to the Servicing and Collection Agreement may appoint with the prior written consent of the Administrative Lender. - 22 - 29 "Servicing and Collection Agreement" means, collectively, the Servicing and Collection Agreement(s), in such form as the Administrative Lender shall prescribe, to be made among the Borrower, each Restricted Subsidiary that owns any of the Notes Receivable included in the Borrowing Base, the Administrative Lender and the Servicing Agent, as from time to time modified, replaced or restated. "Solvent" means, with respect to any Person, that the fair value of the assets of such Person (both at fair valuation and at present fair saleable value) is, on the date of determination, greater than the total amount of liabilities (including contingent and unliquidated liabilities) of such Person as of such date and that, as of such date, such Person is able to pay all liabilities of such Person as such liabilities mature and such Person does not have unreasonably small capital with which to carry on its business. In computing the amount of contingent or unliquidated liabilities at any time, such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability discounted to present value at rates believed to be reasonable by such Person. "Special Counsel" means the law firm of Donohoe, Jameson & Carroll, P.C., or such other legal counsel as the Administrative Lender may select. "Specified Percentage" means, as to any Lender, the percentage indicated beside its name on the signature pages hereof, or if applicable, specified in its most recent Assignment Agreement. "Specified Resorts" means, collectively, the time-share residential real estate projects described or referred to in Schedule 10 attached hereto. "Subordinated Debt" means, collectively, (i) the 5.75% Convertible Subordinated Notes, issued by the Borrower as of January 15, 1997, in the aggregate original principal amount of $138,000,000, due in 2007, (ii) the 9.75% Senior Subordinated Notes, issued by the Borrower as of August 1, 1997, in the aggregate original principal amount of $200,000,000, due October 1, 2007 and (iii) any other Indebtedness of the Borrower or any Subsidiary of the Borrower having maturities and terms, and which is subordinated to payment of the Obligations in a manner, approved in writing by the Administrative Lender and the Determining Lenders, with only such changes or amendments as are not prohibited by Section 7.19 hereof. "Subsidiary" of any Person means any corporation, partnership, joint venture, trust or estate or other Person of which (or in which) more than 50% of: (a) the outstanding capital stock having voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), - 23 - 30 (b) the interest in the capital or profits of such partnership or joint venture, (c) the beneficial interest of such trust or estate, or (d) the equity interest of such other Person, is at the time directly or indirectly owned by such Person, by such Person and one or more of its Subsidiaries or by one or more of such Person's Subsidiaries; provided, however, that (i) no Person shall be deemed to be a Subsidiary of the Borrower solely by virtue of the fact that certain shares of the stock of such Person have been pledged to the Borrower and (ii) the Securitization Subsidiary shall not be deemed to be a Subsidiary for purposes of this Agreement. "Subsidiary Guaranty" means a guaranty, substantially in the form of Exhibit G hereto, executed and delivered by each Guarantor, as such guaranty(ies) may be amended, supplemented, modified, renewed or otherwise restated from time to time. "Swing Line Advance" means an Advance made pursuant to Section 2.1(b) hereof. "Swing Line Bank" means NationsBank of Texas, N.A. and any successors thereto appointed in accordance with Section 10.1(b) hereof. "Swing Line Facility" has the meaning specified in Section 2.1(b) hereof. "Swing Line Note" means the Swing Line Note of the Borrower payable to the order of the Swing Line Bank, substantially in the form of Exhibit B hereto, together with any extensions, renewals or amendments thereof or thereto, and any substitutions therefor. "Tangible Net Worth" means the sum of the following for the Borrower and the Restricted Subsidiaries, on a consolidated basis, determined in accordance with GAAP, (a) Net Worth minus (b) the sum of the following (without duplication in respect of items already deducted in arriving at Net Worth): Intangible Assets, and any write-up in the book value of assets resulting from revaluation thereof subsequent to December 31, 1996. "Taxes" has the meaning specified in Section 2.14 hereof. "Time-Share Interest" means an undivided fee simple ownership interest as tenants in common with all other Purchasers with respect to any Unit with respect to the exclusive right to use such Unit and the common areas for the Project with respect to such Unit for a specified length of time, on an annual or a biennial basis. "Total Capital" means, as of any date of determination, the sum of (a) Total Debt plus (b) Tangible Net Worth. - 24 - 31 "Total Debt" means, as of any date of determination, determined for the Borrower and the Restricted Subsidiaries on a consolidated basis, without duplication, (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations to pay the deferred purchase price of property or services other than trade payables incurred in the ordinary course of business, (iv) obligations in respect of letters of credit, banker's acceptances and similar instruments, (v) obligations under Hedge Agreements, (vi) Capitalized Lease Obligations, (vii) obligations in respect of payment, performance and similar bonds, and (viii) Net Exposure Under Securitization. "Tribunal" means any state, commonwealth, federal, foreign, territorial, or other court or government body, subdivision, agency, department, commission, board, bureau, or instrumentality of a governmental or other regulatory or public body or authority. "UCC" means the Uniform Commercial Code of Texas, as amended from time to time, and the Uniform Commercial Code applicable in such other states as any Collateral may be located. "Unit" means a residential unit in a Project as shown on the recorded condominium plat therefor or other evidence thereof, as required or permitted under applicable Law. "Unused Portion" means an amount equal to the result of (a) the Commitment minus (b) the sum of (i) the outstanding Revolving Credit Advances plus (ii) the outstanding Reimbursement Obligations in respect of the Letters of Credit. Section 1.2 Amendments and Renewals. Each definition of an agreement in this Article 1 shall include such agreement as amended to date, and as amended or renewed from time to time in accordance with its terms, but only with the prior written consent of the Determining Lenders or all the Lenders as required pursuant to Section 11.11 hereof. Section 1.3 Construction. The terms defined in this Article 1 (except as otherwise expressly provided in this Agreement) for all purposes shall have the meanings set forth in Section 1.1 hereof, and the singular shall include the plural, and vice versa, unless otherwise specifically required by the context. All accounting terms used in this Agreement which are not otherwise defined herein shall be construed in accordance with GAAP on a consolidated basis for the Borrower and its Subsidiaries, unless otherwise expressly stated herein. - 25 - 32 ARTICLE 2 Advances Section 2.1 The Advances. (a) Revolving Credit Advances. Each Lender severally agrees, upon the terms and subject to the conditions of this Agreement, to make Revolving Credit Advances to the Borrower from time to time until the Maturity Date in an aggregate amount not to exceed its Specified Percentage of the Commitment less its Specified Percentage of the aggregate amount of all Reimbursement Obligations then outstanding (assuming compliance with all conditions to drawing), for the purposes set forth in Section 5.8 hereof. Subject to Section 2.9 hereof, Revolving Credit Advances may be repaid and then reborrowed. Notwithstanding any provision in any Loan Document to the contrary, in no event shall the principal amount of all outstanding Revolving Credit Advances exceed the lesser of (i) the result of (A) the Borrowing Base minus (B) the aggregate outstanding Reimbursement Obligations and Swing Line Advances and (ii) the Commitment. Any Revolving Credit Advance shall, at the option of the Borrower as provided in Section 2.2 hereof (and, in the case of LIBOR Advances, subject to the provisions of Article 9 hereof), be made as a Base Rate Advance or a LIBOR Advance; provided that there shall not be outstanding, at any one time, more than five LIBOR Advances. (b) The Swing Line Loans. The Borrower may request Swing Line Bank to make, and Swing Line Bank agrees to make, on the terms and conditions hereinafter set forth, advances ("Swing Line Advances") to the Borrower from time to time on any Business Day during the period from the date hereof until the Maturity Date in an aggregate amount not to exceed at any time outstanding the lesser of (i) the Commitment, less the sum of (A) the aggregate principal amount of Revolving Credit Advances then outstanding plus (B) the aggregate principal amount of all Reimbursement Obligations then outstanding, and (ii) $10,000,000 (assuming compliance with all conditions to drawing) (the "Swing Line Facility"). Each Swing Line Advance shall be in an amount not less than $100,000 and in multiples thereof. Each Swing Line Advance shall be a Base Rate Advance. Within the limits of the Swing Line Facility, Swing Line Advances may be repaid and then reborrowed. Section 2.2 Manner of Borrowing and Disbursement. (a) In the case of Base Rate Advances, the Borrower, through an Authorized Signatory, shall give the Administrative Lender prior to 11:00 a.m., Dallas, Texas time, on the date of any proposed Base Rate Advance irrevocable written notice, or irrevocable telephonic notice followed immediately by written notice, in substantially the form of Exhibit H hereto (a "Notice of Borrowing") (provided, however, that the Borrower's failure to confirm any telephonic notice in writing shall not invalidate any notice so given), of its intention to borrow a Base Rate Advance hereunder. Such notice of borrowing shall specify the requested funding date, which shall be a - 26 - 33 Business Day, and the amount of the proposed aggregate Base Rate Advances to be made by Lenders. (b) In the case of LIBOR Advances, the Borrower, through an Authorized Signatory, shall give the Administrative Lender at least three Business Days' irrevocable written notice, or irrevocable telephonic notice followed immediately by written notice (provided, however, that the Borrower's failure to confirm any telephonic notice in writing shall not invalidate any notice so given) pursuant to a Notice of Borrowing, of its intention to borrow a LIBOR Advance hereunder. Notice shall be given to the Administrative Lender prior to 11:00 a.m., Dallas, Texas time, in order for such Business Day to count toward the minimum number of Business Days required. LIBOR Advances shall in all cases be subject to Article 9 hereof. For LIBOR Advances, the notice of borrowing shall specify the requested funding date, which shall be a Business Day, the amount of the proposed aggregate LIBOR Advances to be made by Lenders and the Interest Period selected by the Borrower, provided that no such Interest Period shall extend past the Maturity Date, or prohibit or impair the Borrower's ability to comply with Section 2.5 or 2.8 hereof. (c) In the case of Swing Line Advances, the Borrower, through an Authorized Signatory, shall give the Swing Line Bank and the Administrative Lender prior to 12:00 noon, Dallas, Texas time, on the date of any proposed Swing Line Advance irrevocable written notice or irrevocable telephonic notice followed immediately by written notice (provided, however, that the Borrower's failure to confirm any telephonic notice in writing shall not invalidate any notice so given), of its intention to borrow or reborrow a Swing Line Advance. Such notice of borrowing shall specify the requested funding date, which shall be a Business Day, and the amount of the proposed Swing Line Advance. (d) Subject to Sections 2.1 and 2.9 hereof, the Borrower shall have the option (i) to convert at any time all or any part (subject to the requirements contained herein as to the minimum amounts of LIBOR Advances) of the outstanding Base Rate Advances to LIBOR Advances and all or any part of the outstanding LIBOR Advances to Base Rate Advances or (ii) upon expiration of any Interest Period applicable to a LIBOR Advance, to continue all or any portion of such LIBOR Advance equal to $5,000,000 and integral multiples of $1,000,000 in excess of that amount as a LIBOR Advance and the succeeding Interest Period(s) of such continued LIBOR Advance shall commence on the last day of the Interest Period of the LIBOR Advance to be continued; provided, however, (A) LIBOR Advances may only be converted into Base Rate Advances on the expiration date of the Interest Period applicable thereto and (B) notwithstanding anything in this Agreement to the contrary, no outstanding Advance may be continued as, or converted into, a LIBOR Advance when any Default or Event of Default has occurred and is continuing. At least two Business Days prior to a proposed conversion/continuation date, the Borrower, through an Authorized Signatory, shall give the Administrative Lender irrevocable written notice, or irrevocable telephonic notice followed immediately by written notice (provided, however, that the Borrower's failure to confirm any telephonic notice in writing shall not invalidate any notice so given), stating (i) the proposed conversion/continuation date (which shall be a Business Day), (ii) the amount of the Advance to be converted/continued, (iii) in the case of a conversion to, or - 27 - 34 a continuation of, a LIBOR Advance, the requested Interest Period, and (iv) in the case of a conversion of a Base Rate Advance to a LIBOR Advance or continuation of a LIBOR Advance, stating that no Default or Event of Default has occurred and is continuing. If the Borrower shall fail to give any notice in accordance with this Section 2.2(d), the Borrower shall be deemed irrevocably to have requested that such LIBOR Advance be converted to a Base Rate Advance in the same principal amount. Notice shall be given to the Administrative Lender prior to 11:00 a.m., Dallas, Texas time, in order for such Business Day to count toward the minimum number of Business Days required. (e) The aggregate amount of Base Rate Advances to be made by the Lenders on any day shall be in a principal amount which is at least $2,000,000 and which is an integral multiple of $500,000; provided, however, that such amount may equal the unused amount of the applicable Commitment. The aggregate amount of LIBOR Advances having the same Interest Period and to be made by the Lenders on any day shall be in a principal amount which is at least $5,000,000 and which is an integral multiple of $1,000,000. (f) The Administrative Lender shall promptly notify the Lenders of each notice (other than with respect to a Swing Line Advance) received from the Borrower pursuant to this Section. Each Lender shall, not later than 2:00 p.m., Dallas, Texas time, on the date of any Advance, deliver to the Administrative Lender, at its address set forth herein, such Lender's Specified Percentage of such Advance in immediately available funds in accordance with the Administrative Lender's instructions. Prior to 3:00 p.m., Dallas, Texas time, on the date of any Advance hereunder, the Administrative Lender shall, subject to satisfaction of the conditions set forth in Article 3, disburse the amounts made available to the Administrative Lender by the Lenders by (i) transferring such amounts by wire transfer pursuant to the Borrower's instructions, or (ii) in the absence of such instructions, crediting such amounts to the account of the Borrower maintained with the Administrative Lender. All Advances shall be made by each Lender according to its Specified Percentage. (g) The Swing Line Bank shall, not later than 1:30 p.m., Dallas, Texas time, on the date of any Swing Line Advance, deliver to the Administrative Lender at its address set forth herein, the amount of such Swing Line Advance in immediately available funds in accordance with the Administrative Lender's instructions. Prior to 2:00 p.m., Dallas, Texas time, on the date of any Swing Line Advance, the Administrative Lender shall, subject to the conditions set forth in Article 3, disburse the amount made available to the Administrative Lender by the Swing Line Bank by (i) transferring such amounts by wire transfer pursuant to the Borrower's instruction or (ii) in the absence of such instructions, crediting such amounts to the account of the Borrower maintained with the Administrative Lender. Forthwith upon demand by the Swing Line Bank and in any event upon the making of the request or the granting of the consent specified by Section 8.2 to authorize the Administrative Lender to declare the Advances due and payable pursuant to the provisions of Section 8.2, each Lender, including the Swing Line Bank, notwithstanding the failure of the Borrower at such time to satisfy each condition specified in Article 3, shall make by 12:00 noon (Dallas, Texas time) on the first Business Day following receipt by such Lender of - 28 - 35 notice from the Swing Line Bank, a Revolving Credit Advance which is a Base Rate Advance in an amount equal to the product of (i) the Specified Percentage of such lender times (ii) the aggregate outstanding principal amount of the Swing Line Advances. The proceeds of such Revolving Credit Advances shall be applied by the Administrative Lender to repay the outstanding Swing Line Advances. Section 2.3 Interest. (a) On Base Rate Advances. (i) The Borrower shall pay interest on the outstanding unpaid principal amount of the Base Rate Advances outstanding from time to time, until such Base Rate Advances are due (whether at maturity, by reason of acceleration, by scheduled reduction, or otherwise) and repaid at a simple interest rate per annum equal to the Base Rate Basis for the Base Rate Advances as in effect from time to time. If at any time the Base Rate Basis would exceed the Highest Lawful Rate, interest payable on the Base Rate Advances shall be limited to the Highest Lawful Rate, but the Base Rate Basis shall not thereafter be reduced below the Highest Lawful Rate until the total amount of interest accrued on the Base Rate Advances equals the amount of interest that would have accrued if the Base Rate Basis had been in effect at all times. (ii) Interest on the Base Rate Advances shall be computed on the basis of a year of 365 or 366 days, as appropriate, for the actual number of days elapsed, and shall be payable in arrears on each Quarterly Date and on the Maturity Date. (b) On LIBOR Advances. (i) The Borrower shall pay interest on the unpaid principal amount of each LIBOR Advance, from the date such Advance is made until it is due (whether at maturity, by reason of acceleration, by scheduled reduction, or otherwise) and repaid, at a rate per annum equal to the LIBOR Basis for such LIBOR Advance. The Administrative Lender, whose determination shall be controlling in the absence of manifest error, shall determine the LIBOR Basis on the second Business Day prior to the applicable funding date and shall notify the Borrower and the Lenders of such LIBOR Basis. (ii) Subject to Section 11.9 hereof, interest on each LIBOR Advance shall be computed on the basis of a 360-day year for the actual number of days elapsed, and shall be payable in arrears on the applicable Payment Date and on the Maturity Date; provided, however, that if the Interest Period for such LIBOR Advance exceeds three months, interest shall also be due and payable in arrears on each three-month anniversary of the commencement of such Interest Period during such Interest Period. (c) On Swing Line Advances. - 29 - 36 (i) The Borrower shall pay interest on the outstanding principal amount of each Swing Line Advance, from the date each Swing Line Advance is made until it is due (whether at maturity, by acceleration or otherwise) or repaid, at a rate per annum equal to the Base Rate Basis in effect from time to time. If at any time the Base Rate Basis would exceed the Highest Lawful Rate, interest payable on the Swing Line Advances shall be limited to the Highest Lawful Rate, but the Base Rate Basis shall not thereafter be reduced below the Highest Lawful Rate until the total amount of interest accrued on the Swing Line Advances equals the amount of interest that would have accrued if the Base Rate Basis had been in effect at all times. (ii) Interest on each Swing Line Advance shall be computed on the basis of a year of 365 or 366 days, as applicable, for the number of days elapsed, and shall be payable quarterly in arrears on each Quarterly Date and on the Maturity Date. (d) Interest After an Event of Default. (i) After an Event of Default (other than an Event of Default specified in Section 8.1(f) or (g) hereof) and during any continuance thereof, at the option of Determining Lenders and provided that the Administrative Lender has given notice to the Borrower of the decision to charge interest at the Default Rate, and (ii) after an Event of Default specified in Section 8.1(f) or (g) hereof and during any continuance thereof, automatically and without any action or notice by the Administrative Lender or any Lender, the Obligations shall bear interest at a rate per annum equal to the Default Rate. Such interest shall be payable on the earlier of demand or the Maturity Date, and shall accrue until the earlier of (i) waiver or cure (to the satisfaction of the Determining Lenders) of the applicable Event of Default, (ii) agreement by the Lenders to rescind the charging of interest at the Default Rate, or (iii) payment in full of the Obligations. The Lenders shall not be required to accelerate the maturity of the Advances, to exercise any other rights or remedies under the Loan Documents, or to give notice to the Borrower of the decision to charge interest at the Default Rate. Section 2.4 Fees. (a) Commitment Fee. Subject to Section 11.9 hereof, the Borrower agrees to pay to the Administrative Lender, for the ratable account of the Lenders, a commitment fee (the "Commitment Fee") on the daily average Unused Portion during the period commencing on the Agreement Date and ending on the Maturity Date, at the following per annum percentages, applicable in the following situations:
Applicability Percentage ------------- ---------- (a) Sum of (i) aggregate outstanding Advances and 0.375% (ii) aggregate Reimbursement Obligations is greater than or equal to 75% of Eligible Notes Receivable
- 30 - 37 (b) Sum of (i) aggregate outstanding Advances and 0.250% (ii) aggregate Reimbursement Obligations is less than 75% of Eligible Notes Receivable
The Commitment Fee shall be subject to reduction or increase, as applicable and as set forth in the table above, on a monthly basis, retroactively as of the first day of each month and for such month, based upon the aggregate outstanding Advances and Reimbursement Obligations as of the last day of the immediately preceding month and the Eligible Notes Receivable as of the last day of the immediately preceding month (as reflected in the Borrowing Base Report, as of the last day of such month, to be delivered to the Lenders pursuant to Section 6.1 hereof). The fee shall be (i) payable in arrears on each Quarterly Date and on the Maturity Date, (ii) fully earned when due and, subject to Section 11.9 hereof, nonrefundable when paid and (iii) subject to Section 11.9 hereof, computed on the basis of a year of 365 or 366 days, as appropriate, for the actual number of days elapsed. (b) Other Fees. Subject to Section 11.9 hereof, the Borrower agrees to pay to the Administrative Lender, for the account of the Administrative Lender, the fees on the dates and in the amounts specified in the letter agreement (the "Fee Letter"), dated as of the Agreement Date, between the Borrower and the Administrative Lender. Section 2.5 Prepayments. (a) Voluntary LIBOR Advance Prepayments. Upon three Business Days' prior telephonic notice (to be promptly followed by written notice) by an Authorized Signatory to the Administrative Lender, LIBOR Advances may be voluntarily prepaid but only so long as the Borrower concurrently reimburses the Lenders in accordance with Section 2.9 hereof. Any notice of prepayment shall be irrevocable. (b) Mandatory Prepayment. On or before the date of any reduction of the Commitment, the Borrower shall prepay applicable outstanding Advances in an amount necessary to reduce the sum of outstanding Advances and Reimbursement Obligations to an amount less than or equal to the Commitment as so reduced. On any date that the aggregate principal amount of outstanding Advances and Reimbursement Obligations exceed the Borrowing Base, the Borrower shall immediately prepay Advances in an amount equal to such excess amount and all interest attributable to such excess amount. To the extent required by the immediately preceding two sentences, the Borrower shall first prepay all Base Rate Advances and shall thereafter prepay LIBOR Advances. To the extent that any prepayment requires that a LIBOR Advance be repaid on a date other than the last day of its Interest Period, the Borrower shall reimburse each Lender in accordance with Section 2.9 hereof. To the extent that outstanding Advances exceed the Commitment after any reduction thereof, the Borrower shall repay any such excess amount and all accrued interest attributable to such excess Advances on the date of such reduction. - 31 - 38 (c) Payments, Generally. Any prepayment of any LIBOR Advance shall be accompanied by interest accrued on the principal amount being prepaid. Any voluntary partial payment of a Base Rate Advance shall be in a principal amount which is at least $2,000,000 and which is an integral multiple of $500,000 (unless constituting a payment of all outstanding Base Rate Advances). Any voluntary partial payment of a LIBOR Advance shall be in a principal amount which is at least $5,000,000 and which is an integral multiple of $1,000,000 (unless constituting a payment of all outstanding LIBOR Advances), and to the extent that any prepayment of a LIBOR Advance is made on a date other than the last day of its Interest Period, the Borrower shall reimburse each Lender in accordance with Section 2.9 hereof. Any voluntary partial payment of a Swing Line Advance shall be in a principal amount which is at least $100,000 or an integral multiple thereof. Section 2.6 Reduction of Commitment. (a) Voluntary Reduction. The Borrower shall have the right, upon not less than ten Business Days' notice by an Authorized Signatory to the Administrative Lender (if telephonic, to be confirmed by telex or in writing on or before the date of reduction or termination), which shall promptly notify the Lenders, to terminate or reduce the Commitment, in whole or in part, without premium or penalty except as provided in the next sentence. Each partial termination shall be in an aggregate amount which is at least $5,000,000 and which is an integral multiple of $1,000,000, and no voluntary reduction of the Commitment shall cause any LIBOR Advance to be repaid prior to the last day of its Interest Period unless the Borrower shall reimburse each Lender in accordance with Section 2.9 hereof. (b) Mandatory Reduction. The Commitment shall be automatically reduced to zero on the Maturity Date. (c) General Requirements. Upon any reduction of the Commitment pursuant to this Section, the Borrower shall immediately make a repayment of applicable Advances in accordance with Section 2.5(b) hereof. The Borrower shall reimburse each Lender in connection with any such payment in accordance with Section 2.9 hereof to the extent applicable. The Borrower shall not have any right to rescind any termination or reduction. Once reduced, the Commitment may not be increased or reinstated. Section 2.7 Non-Receipt of Funds by the Administrative Lender. Unless the Administrative Lender shall have been notified by a Lender no later than the date that such Lender receives notice of a proposed Revolving Credit Advance from the Administrative Lender pursuant to Section 2.2(e) hereof that such Lender does not intend to make the proceeds of such Revolving Credit Advance available to the Administrative Lender, the Administrative Lender may assume that such Lender has made such proceeds available to the Administrative Lender on such date, and the Administrative Lender may in reliance upon such assumption (but shall not be required to) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Lender by such Lender, the Administrative Lender shall - 32 - 39 be entitled to recover such amount on demand from such Lender (or, if such Lender fails to pay such amount forthwith upon such demand, from the Borrower) together with interest thereon in respect of each day during the period commencing on the date such amount was available to the Borrower and ending on (but excluding) the date the Administrative Lender receives such amount from (a) the Lender, at a per annum rate equal to the lesser of (i) the Highest Lawful Rate or (ii) the Federal Funds Rate or (b) the Borrower, at the per annum rate applicable at the time to such Revolving Credit Advance. Notwithstanding Section 10.1(f), no Lender shall be liable for any other Lender's failure to fund a Revolving Credit Advance hereunder. Section 2.8 Payment of Principal of Advances. To the extent not otherwise required to be paid earlier as provided herein, the principal amount of the Advances, all accrued interest and fees thereon, and all other Obligations related thereto, shall be due and payable in full on the Maturity Date. Section 2.9 Reimbursement. Whenever any Lender shall sustain or incur (other than through a default by that Lender) any losses (inclusive of any such losses attributable to change(s) in the LIBOR Rate during the applicable period(s), but exclusive of any losses of any other anticipated profits on the part of such Lender) or reasonable out-of-pocket expenses actually incurred in connection with (a) failure by the Borrower to borrow (including any failure to continue or convert into) any LIBOR Advance after having given notice of its intention to borrow (or to continue or convert) in accordance with Section 2.2 hereof (whether by reason of the Borrower's election not to proceed or the non-fulfillment of any of the conditions set forth in Article 3 hereof) or (b) any prepayment for any reason of any LIBOR Advance in whole or in part (including a prepayment pursuant to Section 9.3(b) hereof) on other than the last day of an Interest Period applicable to such LIBOR Advance, the Borrower agrees to pay to any such Lender, within 30 days after demand by such Lender, an amount sufficient to compensate such Lender for all such losses (inclusive of any such losses attributable to change(s) in the LIBOR Rate during the applicable period(s), but exclusive of any losses of any other anticipated profits on the part of such Lender) and out-of-pocket expenses, subject to Section 11.9 hereof. Such losses shall include, without limiting the generality of the foregoing, reasonable expenses incurred by such Lender in connection with the re-employment of funds prepaid, repaid, converted or not borrowed, converted or paid, as the case may be. A certificate as to any amounts payable to any Lender under this Section 2.9 submitted to the Borrower by such Lender shall certify that such amounts were actually incurred by such Lender and shall show in reasonable detail an accounting of the amount payable and the calculations used to determine in good faith such amount and shall be conclusive absent manifest or demonstrable error. Nothing in this Section 2.9 shall provide the Borrower or any Subsidiary of the Borrower the right to inspect the records, files or books of any Lender. Section 2.10 Manner of Payment. (a) Each payment (including prepayments) by the Borrower of the principal of or interest on the Advances, fees, and any other amount owed under this Agreement or any other - 33 - 40 Loan Document shall be made not later than 12:00 noon (Dallas, Texas time) on the date specified for payment under this Agreement to the Administrative Lender at the Administrative Lender's office, in lawful money of the United States of America constituting immediately available funds. (b) If any payment under this Agreement or any other Loan Document shall be specified to be made upon a day which is not a Business Day, it shall be made on the next succeeding day which is a Business Day, unless, with respect to a payment due in respect of a LIBOR Advance, such Business Day falls in another calendar month, in which case payment shall be made on the preceding Business Day. Any extension of time shall in such case be included in computing interest and fees, if any, in connection with such payment. (c) Without waiving any other rights or recourse that the Borrower may otherwise have against any Lender for such Lender's breach of its obligations hereunder, the Borrower agrees to pay principal, interest, fees and all other amounts due under the Loan Documents without deduction for set-off or counterclaim or any deduction whatsoever. (d) If some but less than all amounts due from the Borrower are received by the Administrative Lender, the Administrative Lender shall apply such amounts in the following order of priority: (i) to the payment of the Administrative Lender's reasonable expenses incurred on behalf of the Lenders then due and payable, if any; (ii) to the payment of all other fees then due and payable; (iii) to the payment of interest then due and payable on the Advances; (iv) to the payment of all other amounts not otherwise referred to in this clause (d) then due and payable under the Loan Documents; and (v) to the payment of principal then due and payable on the Advances. (e) Each payment by the Borrower in respect of obligations relating to the Revolving Credit Advances and the Letters of Credit (whether for principal, interest, fees or otherwise) shall be made to the Administrative Lender for the account of the Lenders pro rata in accordance with their respective Specified Percentages. Each payment by the Borrower in respect of obligations relating to Swing Line Advances (whether for principal, interest, fees or otherwise) shall be made to the Administrative Lender for the account of the Swing Line Bank. Section 2.11 LIBOR Lending Offices. Each Lender's initial LIBOR Lending Office is set forth opposite its name in Schedule 1 attached hereto. Each Lender shall have the right at any time and from time to time to designate a different office of itself or of any Affiliate of such Lender as such Lender's LIBOR Lending Office, and to transfer any outstanding LIBOR Advance to such LIBOR Lending Office. No such designation or transfer shall result in any liability on the part of the Borrower for increased costs or expenses resulting solely from such designation or transfer (except any such transfer which is made by a Lender pursuant to Section 9.2 or 9.3 hereof, or otherwise for the purpose of complying with Applicable Law, to the extent that Applicable Law, or any relevant construction or interpretation thereof, changes after the Agreement Date). Increased costs for expenses resulting from a change in law occurring - 34 - 41 subsequent to any such designation or transfer shall be deemed not to result solely from such designation or transfer. Section 2.12 Sharing of Payments. Any Lender obtaining a payment (whether voluntary or involuntary, due to the exercise of any right of set-off, or otherwise) on account of its Advances or its participation in the Letters of Credit (other than pursuant to Sections 2.4(b), 2.14, 2.15(d), 9.3 or 9.5 or in respect of Swing Line Advances) in excess of its Specified Percentage of all payments made by the Borrower with respect to Advances and the Letters of Credit shall purchase from each other Lender such participation in the Advances made by such other Lender or its participation in the Letters of Credit as shall be necessary to cause such purchasing Lender to share the excess payment pro rata according to Specified Percentages with each other Lender; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section, to the fullest extent permitted by law, may exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. Section 2.13 Calculation of LIBOR Rate. The provisions of this Agreement relating to calculation of the LIBOR Rate are included only for the purpose of determining the rate of interest or other amounts to be paid hereunder that are based upon such rate, it being understood that each Lender shall be entitled to fund and maintain its funding of all or any part of a LIBOR Advance as it sees fit. Section 2.14 Taxes. (a) Any and all payments by the Borrower hereunder shall be made, in accordance with Section 2.10, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges and withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Administrative Lender, (i) taxes imposed on, based upon or measured by its overall net income, net worth or capital, and franchise taxes, doing business taxes or minimum taxes imposed on it, (A) by the jurisdiction under the laws of which such Lender or the Administrative Lender (as the case may be) is organized or in which it has its applicable lending office or any political subdivision thereof; or (B) by any other jurisdiction, or any political subdivision thereof, other than those imposed solely by reason of (1) an asserted relation of such jurisdiction to the transactions contemplated by this Agreement, (2) the activities of the Borrower in such jurisdiction or (3) the activities in connection with the transactions contemplated by this Agreement of a Lender or the Administrative Lender; (ii) taxes imposed by reason of failure by the Lender or the Administrative Lender to comply with the requirements of paragraph (e) of this Section 2.14; and (iii) in the case of any Lender, any Taxes in the nature of transfer, stamp, recording or documentary taxes resulting from a transfer (other than as a result of foreclosure) by such Lender of all or any portion of its interest in this Agreement, the Notes - 35 - 42 or any other Loan Documents; (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by Law to deduct or withhold any Taxes from or in respect of any sum payable hereunder to any Lender or the Administrative Lender, (x) the sum payable shall be increased as may be necessary so that after making all required deductions for Taxes (including deductions applicable to additional sums payable under this Section 2.14) such Lender or the Administrative Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (y) the Borrower shall make such deductions and (z) the Borrower shall pay the full amount of Taxes deducted to the relevant taxation authority or other authority in accordance with Applicable Law. (b) In addition, the Borrower agrees to pay any and all stamp and documentary taxes and any and all other excise and property taxes, charges and similar levies (other than Taxes described in clause (iii) of the first sentence of Section 2.14(a)) that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document (hereinafter referred to as "Other Taxes"). (c) The Borrower will indemnify each Lender and the Administrative Lender for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.14) paid by such Lender or the Administrative Lender (as the case may be) and all liabilities (including penalties, additions to tax, interest and reasonable expenses) arising therefrom or with respect thereto whether or not such Taxes or Other Taxes were correctly or legally asserted, other than penalties, additions to tax, interest and expenses arising as a result of gross negligence or wilful misconduct on the part of such Lender or the Administrative Lender, provided, however, that the Borrower shall have no obligation to indemnify such Lender or the Administrative Lender unless and until such Lender or the Administrative Lender shall have delivered to the Borrower a certificate certifying that such Taxes or Other Taxes (and/or penalties, additions to tax, interest and reasonable expenses) were actually incurred by such Lender or the Administrative Lender and showing in reasonable detail an accounting of the amount payable and the calculations used to determine in good faith such amount, which certificate shall be conclusive absent manifest or demonstrable error. Nothing in this Section 2.14 shall provide the Borrower or any Subsidiary of the Borrower the right to inspect the records, files or books of any Lender or the Administrative Lender. This indemnification shall be made within 30 days from the date such Lender or the Administrative Lender (as the case may be) makes written demand therefor. (d) As soon as practicable after the date of any payment of Taxes, the Borrower will furnish to the Administrative Lender the original or a certified copy of a receipt evidencing payment thereof. For purposes of this Section 2.14 the terms "United States" and "United States Person" shall have the meanings set forth in Section 7701 of the Code. (e) Each Lender which is not a United States Person hereby agrees that: - 36 - 43 (i) it shall, no later than the Agreement Date (or, in the case of a Lender which becomes a party hereto pursuant to Section 11.6 after the Agreement Date, the date upon which such Lender becomes a party hereto) and at such times as necessary in the reasonable determination of the Borrower, deliver to the Borrower through the Administrative Lender, with a copy to the Administrative Lender: (A) if any lending office is located in the United States of America, two (2) accurate and complete signed originals of Internal Revenue Service Form 4224 or any successor thereto ("Form 4224"), (B) if any lending office is located outside the United States of America, two (2) accurate and complete signed originals of Internal Revenue Service Form 1001 or any successor thereto ("Form 1001"), in each case indicating that such Lender is on the date of delivery thereof entitled to receive payments of principal, interest and fees for the account of such lending office or lending offices under this Agreement free from withholding of United States Federal income tax; (ii) if at any time such Lender changes its lending office or lending offices or selects an additional lending office it shall, at the same time or reasonably promptly thereafter but only to the extent the forms previously delivered by it hereunder are no longer effective, deliver to the Borrower through the Administrative Lender, with a copy to the Administrative Lender, in replacement for the forms previously delivered by it hereunder: (A) if such changed or additional lending office is located in the United States of America, two (2) accurate and complete signed originals of Form 4224; or (B) otherwise, two (2) accurate and complete signed originals of Form 1001, in each case indicating that such Lender is on the date of delivery thereof entitled to receive payments of principal, interest and fees for the account of such changed or additional lending office under this Agreement free from withholding of United States Federal income tax; (iii) it shall, before or promptly after the occurrence of any event (including the passing of time but excluding any event mentioned in clause (ii) above) requiring a change in the most recent Form 4224 or Form 1001 previously delivered by such Lender and if the delivery of the same be lawful, deliver to the Borrower through the Administrative Lender with a copy to the Administrative Lender, two (2) accurate and complete original signed copies of Form 4224 or Form 1001 in replacement for the forms previously delivered by such Lender; - 37 - 44 (iv) it shall, promptly upon the request of the Borrower to that effect, deliver to the Borrower such other forms or similar documentation as may be required from time to time by any applicable law, treaty, rule or regulation in order to establish such Lender's tax status for withholding purposes; and (v) it shall notify the Borrower after any event (including an amendment to, or a change in any applicable law or regulation or in the written interpretation thereof by any regulatory authority or any judicial authority, or by ruling applicable to such Lender of any governmental authority charged with the interpretation or administration of any law) shall occur that results in such Lender no longer being capable of receiving payments under this Agreement without any deduction or withholding of United States federal income tax. (f) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.14 shall survive the payment in full of principal and interest hereunder. (g) Each Lender (and the Administrative Lender with respect to payments to the Administrative Lender for its own account) agrees that (i) it will take all reasonable actions by all usual means to maintain all exemptions, if any, available to it from United States withholding taxes (whether available by treaty, existing administrative waiver or by virtue of the location of any Lender's lending office), (ii) it will use reasonable best efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its lending office, if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts which may thereafter accrue and would not, in the reasonable judgment of such Lender, be materially disadvantageous to such Lender, and (iii) otherwise cooperate with the Borrower to minimize amounts payable by the Borrower under this Section 2.14; provided, however, the Lenders and the Administrative Lender shall not be obligated by reason of this Section 2.14(g) to contest the payment of any Taxes or Other Taxes or to disclose any information regarding its tax affairs or tax computations or reorder its tax or other affairs or tax or other planning. Subject to the foregoing, to the extent the Borrower pays sums pursuant to this Section 2.14 and the Lender or the Administrative Lender receives a refund of any or all of such sums, such refund shall be applied to reduce any amounts then due and owing under this Agreement or, to the extent that no amounts are due and owing under this Agreement at the time such refunds are received, the party receiving such refund shall promptly pay over all such refunded sums to the Borrower, provided that (i) no Event of Default is in existence at such time or (ii) all of the Obligations have been fully and finally paid or satisfied. At such time, if any, that such Default or Event of Default is cured or waived, the party receiving such refund shall promptly pay over all such refunded sums to the Borrower. (h) If the Borrower becomes obligated to pay additional amounts described in this Section 2.14 to any Lender, the Borrower may designate a financial institution reasonably acceptable to the Administrative Lender to replace such Lender by purchasing for cash and receiving an assignment of such Lender's pro rata share of the Commitment and the Rights of such - 38 - 45 Lender under the Loan Documents without recourse to or warranty by, or expense to, such Lender, for a purchase price equal to the outstanding amounts owed to such Lender (including such additional amounts owing to such Lender pursuant to this Section 2.14). Upon execution of an Assignment Agreement, such other financial institution shall be deemed to be a "Lender" for all purposes of this Agreement as set forth in Section 11.6 hereof. Section 2.15 Letters of Credit. (a) The Letter of Credit Facility. The Borrower may request the Issuing Bank, on the terms and conditions hereinafter set forth, to issue, and the Issuing Bank shall, if so requested, issue, letters of credit (the "Letters of Credit") for the account of the Borrower or any other Obligor from time to time on any Business Day from the date of the initial Advance until the Maturity Date in an aggregate maximum amount (assuming compliance with all conditions to drawing) not to exceed, at any time outstanding, the least of (i) $20,000,000 (the "Letter of Credit Facility"), (ii) the remainder of the Borrowing Base minus the aggregate principal amount of Advances then outstanding and the aggregate amount of all drawings under Letter(s) of Credit not theretofore reimbursed by the Borrower, and (iii) the Commitment. No Letter of Credit shall have an expiration date (including all rights of renewal) later than the earlier of (i) the Maturity Date or (ii) one year after the date of issuance thereof. Immediately upon the issuance of each Letter of Credit, the Issuing Bank shall be deemed to have sold and transferred to each Lender, and each Lender shall be deemed to have purchased and received from the Issuing Bank, in each case irrevocably and without any further action by any party, an undivided interest and participation in such Letter of Credit, each drawing thereunder and the obligations of the Borrower under this Agreement in respect thereof in an amount equal to the product of (x) such Lender's Specified Percentage times (y) the maximum amount available to be drawn under such Letter of Credit (assuming compliance with all conditions to drawing). Within the limits of the Letter of Credit Facility, and subject to the limits referred to above, the Borrower may request the issuance of Letters of Credit under this Section 2.15(a), repay any Advances resulting from drawings thereunder pursuant to Section 2.15(c) and request the issuance of additional Letters of Credit under this Section 2.15(a). (b) Request for Issuance. Each Letter of Credit shall be issued upon notice, given not later than 11:00 a.m. (Dallas, Texas time) on the fourth Business Day prior to the date of the proposed issuance of such Letter of Credit, by the Borrower to the Issuing Bank. Each Letter of Credit shall be issued upon notice given in accordance with the terms of any separate agreement between the Borrower and the Issuing Bank in form and substance reasonably satisfactory to the Borrower and the Issuing Bank providing for the issuance of Letters of Credit pursuant to this Agreement and containing terms and conditions not inconsistent with this Agreement (a "Letter of Credit Agreement"), provided that if any such terms and conditions are inconsistent with this Agreement, this Agreement shall control. Each such notice of issuance of a Letter of Credit by the Borrower (a "Notice of Issuance") shall be in writing or by telecopier, specifying therein, in the case of a Letter of Credit, the requested (A) date of such issuance (which shall be a Business Day), (B) maximum amount of such Letter of Credit, (C) expiration date of such Letter of Credit, - 39 - 46 (D) name and address of the beneficiary of such Letter of Credit, and (E) form of such Letter of Credit and specifying such other information as shall be required pursuant to the relevant Letter of Credit Agreement. If the requested terms of such Letter of Credit are acceptable to the Issuing Bank in its reasonable discretion, the Issuing Bank will, upon fulfillment of the applicable conditions set forth in Article 3 hereof, make such Letter of Credit available to the Borrower at its office referred to in Section 11.1 or as otherwise agreed with the Borrower in connection with such issuance. (c) Drawing and Reimbursement. The payment by the Issuing Bank of a draft drawn under any Letter of Credit shall constitute for all purposes of this Agreement the making by the Issuing Bank of an Advance, which shall bear interest at the Base Rate Basis, in the amount of such draft (but without any requirement for compliance with the conditions set forth in Article 3 hereof). In the event that a drawing under any Letter of Credit is not reimbursed by the Borrower by 11:00 a.m. (Dallas, Texas time) on the first Business Day after such drawing, the Issuing Bank shall promptly notify Administrative Lender and each other Lender. Each such Lender shall, on the first Business Day following such notification, make a Revolving Credit Advance (or if, as a result of any Debtor Relief Law, the Lenders are prohibited from making a Revolving Credit Advance, each Lender shall fund its participation purchased pursuant to Section 2.15(a) by making such amount available to the Administrative Lender), which shall bear interest at the Base Rate Basis, and shall be used to repay the applicable portion of the Issuing Bank's Advance with respect to such Letter of Credit, in an amount equal to the amount of its participation in such drawing for application to reimburse the Issuing Bank (but without any requirement for compliance with the applicable conditions set forth in Article 3 hereof) and shall make available to the Administrative Lender for the account of the Issuing Bank, by deposit at the Administrative Lender's office, in same day funds, the amount of such Revolving Credit Advance (or such participation). In the event that any Lender fails to make available to the Administrative Lender for the account of the Issuing Bank the amount of such Revolving Credit Advance (or such participation), the Issuing Bank shall be entitled to recover such amount on demand from such Lender together with interest thereon at a rate per annum equal to the lesser of (i) the Highest Lawful Rate or (ii) the Federal Funds Rate. (d) Increased Costs. If after the Agreement Date any change in any Law or in the interpretation thereof by any court or administrative or governmental authority charged with the administration thereof shall either (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against letters of credit or guarantees issued by, or assets held by, or deposits in or for the account of, the Issuing Bank or any Lender or any corporation controlling the Issuing Bank or any Lender or (ii) impose on the Issuing Bank or any Lender or any corporation controlling the Issuing Bank or any Lender any other condition regarding this Agreement or any Letter of Credit, and the result of any event referred to in the preceding clause (i) or (ii) shall be to increase the cost to the Issuing Bank or any corporation controlling the Issuing Bank of issuing or maintaining any Letter of Credit or to any Lender or any corporation controlling such Lender of purchasing any participation therein or making any Advance pursuant to Section 2.15(c), then, within 30 days after demand by the Issuing Bank or such Lender (which - 40 - 47 demand shall be made not later than one year after the Issuing Bank or applicable Lender receives notice of the relevant change), the Borrower shall, subject to Section 11.9 hereof, pay to the Issuing Bank or such Lender, from time to time as specified by the Issuing Bank or such Lender, additional amounts that shall be sufficient to compensate the Issuing Bank or such Lender or any corporation controlling such Lender for such increased cost. A certificate as to the amount of such increased cost, submitted to the Borrower by the Issuing Bank or such Lender, shall certify that such increased costs were actually incurred by the Issuing Bank or such Lender and shall show in reasonable detail an accounting of the amount payable and the calculation used to determine in good faith such amount and shall be conclusive absent manifest or demonstrable error. In determining such amount, the Issuing Bank or such Lender may use any reasonable averaging or attribution method. Nothing in this Section 2.15(d) shall provide the Borrower or any Subsidiary of the Borrower the right to inspect the records, files or books of the Issuing Bank or any Lender. If the Borrower becomes obligated to pay additional amounts described in this Section 2.15(d) to any Lender, the Borrower may designate a financial institution reasonably acceptable to the Administrative Lender to replace such Lender by purchasing for cash and receiving an assignment of such Lender's pro rata share of the Commitments and the Rights of such Lender under the Loan Documents without recourse to or warranty by, or expenses to, such Lender, for a purchase price equal to the outstanding amounts owing to such Lender (including such additional amounts owing to such Lender pursuant to this Section 2.15(d). Upon execution of an Assignment Agreement, such other financial institution shall be deemed to be a "Lender" for all purposes of this Agreement as set forth in Section 11.6 hereof. The obligations of the Borrower under this Section 2.15(d) shall survive termination of this Agreement. The Issuing Bank or any Lender claiming any additional compensation under this Section 2.15(d) shall use reasonable efforts (consistent with legal and regulatory restrictions) to reduce or eliminate any such additional compensation which may thereafter accrue and which efforts would not, in the reasonable judgment of the Issuing Bank or such Lender, be otherwise disadvantageous. (e) Obligations Absolute. The obligations of the Borrower under this Agreement with respect to any Letter of Credit, any Letter of Credit Agreement and any other agreement or instrument relating to any Letter of Credit or any Advance pursuant to Section 2.15(c) shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement, such Letter of Credit Agreement and such other agreement or instrument under all circumstances, including, without limitation, the following circumstances: (i) any lack of validity or enforceability of this Agreement, any other Loan Document, any Letter of Credit Agreement, any Letter of Credit or any other agreement or instrument relating thereto (collectively, the "L/C Related Documents"); (ii) (A) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations of the Borrower in respect of the Letters of Credit or any Advance pursuant to Section 2.15(c) or (B) any other amendment or waiver of or any consent to departure from all or any of the L/C Related Documents; - 41 - 48 (iii) the existence of any claim, set-off, defense or other right that the Borrower may have at any time against any beneficiary or any transferee of a Letter of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), the Issuing Bank, any Lender or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by the L/C Related Documents or any unrelated transaction; (iv) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect, except to the extent finally determined by a court of competent jurisdiction to be the result of the gross negligence or willful misconduct of the Issuing Bank in connection therewith; (v) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or certificate that does not comply with the terms of the Letter of Credit, except to the extent finally determined by a court of competent jurisdiction to be the result of the gross negligence or willful misconduct of the Issuing Bank in connection therewith; (vi) any exchange, release or non-perfection of any Collateral, or any release or amendment or waiver of or consent to departure from any guarantee, for all or any of the Obligations of the Borrower in respect of the Letters of Credit or any Advance pursuant to Section 2.15(c); or (vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including, without limitation, any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Borrower or a guarantor, except to the extent finally determined by a court of competent jurisdiction to be the result of the gross negligence or willful misconduct of the Issuing Bank in connection therewith. (f) Compensation for Letters of Credit. (i) Credit Fee. Subject to Section 11.9 hereof, the Borrower shall pay to the Administrative Lender for the ratable account of each Lender a fee (which shall be payable quarterly in arrears on each Quarterly Date and on the Maturity Date) equal to a rate per annum equal to the product of the Applicable LIBOR Rate Margin in effect from time to time multiplied by the average daily amount available for drawing under all outstanding Letters of Credit. Subject to Section 11.9 hereof, such fee shall be computed on the basis of a 360-day year for the actual number of days elapsed. (ii) Fronting Fee. Subject to Section 11.9 hereof, the Borrower shall pay to the Administrative Lender for the account of the Issuing Bank a fronting fee (which shall be payable in arrears on each Quarterly Date and on the Maturity Date) in an amount equal to 0.10% per annum on the average daily amount available for drawing under all - 42 - 49 outstanding Letters of Credit, computed, subject to Section 11.9 hereof, on the basis of a 360-day year for the actual number of days elapsed. (iii) Other Fees. Subject to Section 11.9 hereof, the Borrower shall pay, with respect to each amendment, renewal or transfer of each Letter of Credit and each drawing made thereunder, reasonable documentary and processing charges in accordance with the Issuing Bank's standard schedule for such charges in effect at the time of such amendment, renewal, transfer or drawing, as the case may be. (g) L/C Cash Collateral Account. (i) Upon the Maturity Date or the occurrence, and during the continuance, of an Event of Default and demand by the Administrative Lender pursuant to Section 8.2(c), the Borrower will promptly pay to the Administrative Lender in immediately available funds an amount equal to the maximum amount then available to be drawn under the Letters of Credit then outstanding. Any amounts so received by the Administrative Lender shall be deposited by the Administrative Lender in a deposit account maintained by the Issuing Bank (the "L/C Cash Collateral Account"). (ii) As security for the payment of all Reimbursement Obligations and for any other Obligations, the Borrower hereby grants, conveys, assigns, pledges, sets over and transfers to the Administrative Lender (for the benefit of the Issuing Bank and Lenders), and creates in the Administrative Lender's favor (for the benefit of the Issuing Bank and Lenders) a Lien in, all money, instruments and securities at any time held in or acquired in connection with the L/C Cash Collateral Account, together with all proceeds thereof. The L/C Cash Collateral Account shall be under the sole dominion and control of the Administrative Lender and the Borrower shall have no right to withdraw or to cause the Administrative Lender to withdraw any funds deposited in the L/C Cash Collateral Account. At any time and from time to time, upon the Administrative Lender's request, the Borrower promptly shall execute and deliver any and all such further instruments and documents, including UCC financing statements, as may be necessary, appropriate or desirable in the Administrative Lender's judgment to obtain the full benefits (including perfection and priority) of the security interest created or intended to be created by this paragraph (ii) and of the rights and powers herein granted. The Borrower shall not create or suffer to exist any Lien on any amounts or investments held in the L/C Cash Collateral Account other than the Lien granted under this paragraph (ii). (iii) The Administrative Lender shall (A) apply any funds in the L/C Cash Collateral Account on account of Reimbursement Obligations when the same become due and payable, (B) after the Maturity Date, apply any proceeds remaining in the L/C Cash Collateral Account first to pay any unpaid Obligations then outstanding hereunder and then to refund any remaining amount to the Borrower. - 43 - 50 (iv) The Borrower, no more than once in any calendar month, may direct the Administrative Lender to invest the funds held in the L/C Cash Collateral Account (so long as the aggregate amount of such funds exceeds any relevant minimum investment requirement) in (A) Cash and Cash Equivalents or direct obligations of the United States or any agency thereof, or obligations guaranteed by the United States or any agency thereof and (B) one or more other types of investments permitted by the Determining Lenders, in each case with such maturities as the Borrower, with the consent of the Determining Lenders, may specify, pending application of such funds on account of Reimbursement Obligations or on account of other Obligations, as the case may be. In the absence of any such direction from the Borrower, the Administrative Lender shall invest the funds held in the L/C Cash Collateral Account (so long as the aggregate amount of such funds exceeds any relevant minimum investment requirement) in one or more types of investments with the consent of the Determining Lenders with such maturities as the Borrower, with the consent of the Determining Lenders, may specify, pending application of such funds on account of Reimbursement Obligations or on account of other Obligations, as the case may be. All such investments shall be made in the Administrative Lender's name for the account of the Lenders, subject to the ownership interest therein of the Borrower. The Borrower recognizes that any losses or taxes with respect to such investments shall be borne solely by the Borrower, and the Borrower agrees to hold the Administrative Lender and the Lenders harmless from any and all such losses and taxes. Administrative Lender may liquidate any investment held in the L/C Cash Collateral Account in order to apply the proceeds of such investment on account of the Reimbursement Obligations as provided in Section 2.15(g)(iii) hereof (or on account of any other Obligation then due and payable, as the case may be) without regard to whether such investment has matured and without liability for any penalty or other fee incurred (with respect to which the Borrower hereby agrees to reimburse the Administrative Lender) as a result of such application. (v) After the establishment of the L/C Cash Collateral Account pursuant to Section 2.15(g)(i) hereof, the Borrower shall pay to the Administrative Lender the fees customarily charged by the Issuing Bank with respect to the maintenance of accounts similar to the L/C Cash Collateral Account. ARTICLE 3 Conditions Precedent Section 3.1 Conditions Precedent to the Initial Advance and the Initial Issuance of Letters of Credit. The obligation of each Lender to make the initial Revolving Credit Advance, the obligation of the Issuing Bank to issue the initial Letter of Credit and the obligation of the Swing Line Bank to make the initial Swing Line Advance are subject to (i) receipt by the Administrative Lender of the following items which are to be delivered, in form and substance - 44 - 51 satisfactory to each Lender, with a copy (except for the Notes and this Agreement) for each Lender, and (ii) satisfaction of the following conditions which are to be satisfied: (a) A loan certificate of each Obligor certifying as to the accuracy of its representations and warranties in the Loan Documents with respect to such Obligor, and including a certificate of incumbency with respect to each Authorized Signatory, and including (i) a copy of the articles or certificate of incorporation or similar organizational documents of such Obligor, certified to be true, complete and correct by the secretary of state of its state of organization, (ii) a copy of the true, complete and correct Bylaws or similar governance documents of such Obligor, and (iv) a copy of a certificate of good standing and a certificate of existence for its state of organization and each state in which the nature of its business requires it to be qualified; (b) a duly executed Revolving Credit Note payable to the order of each Lender and in an amount for each Lender equal to its Specified Percentage of the Commitment; (c) the duly executed Swing Line Note payable to the order of the Swing Line Bank, in the principal amount of $10,000,000; (d) opinions of counsel to each Obligor addressed to the Lenders and in form and substance reasonably acceptable to the Administrative Lender, dated the Agreement Date, and addressing the matters set forth in Sections 4.1(a), (b), (c), (e), (f), (h), (m), (n), (o) and (p), as deemed appropriate by the Administrative Lender, and if the Projects have not been registered under the Federal Interstate Land Sales Full Disclosure Act, stating that the Projects do not fall within the purview of the Federal Interstate Land Sales Full Disclosure Act, and covering such other matters incident to the transactions contemplated hereby as the Administrative Lender or Special Counsel may reasonably request; (e) reimbursement for the Administrative Lender for Special Counsel's reasonable and customary fees (on an hourly basis) and expenses rendered through the date hereof, to the extent invoiced; (f) evidence that all proceedings of each Obligor taken in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be reasonably satisfactory in form and substance to the Lenders and Special Counsel; and the Lenders shall have received copies of all documents or other evidence which the Administrative Lender, Special Counsel or any Lender may reasonably request in connection with such transactions; (g) any fees or expenses required to be paid on or before the Agreement Date pursuant to the Fee Letter; (h) Security Agreements, appropriately completed and duly executed by each of the Obligors, dated as of the Agreement Date, granting a Lien in all Collateral covered thereby, together with related financing statements, and insurance certificates listing Administrative Lender, - 45 - 52 as its interest may appear, as loss payee and additional insured and otherwise in a form required by the Collateral Documents; (i) the duly executed Servicing and Collection Agreement; (j) the duly executed Custodial Agreement, together with evidence of delivery to the Custodian of the original counterpart of each Note Receivable included in the Borrowing Base, together with allonges, in form and substance acceptable to the Administrative Lender, duly executed by the Borrower or the applicable Restricted Subsidiary owning such Note Receivable and Assignments of Pledged Documents appropriately completed and duly executed by the Borrower or the applicable Restricted Subsidiary owning such Pledged Documents; (k) simultaneously with the making of the initial Revolving Credit Advance, executed UCC-3 Termination Statements to be filed in appropriate jurisdictions to terminate all Liens against the Collateral, or any portion thereof (other than Permitted Liens, if any); (l) copies of the form of Purchase Documents which have been or are being used in connection with the Projects; (m) there shall have occurred no material adverse change in the business, assets or financial condition of the Borrower and its Subsidiaries, taken as a whole, since December 31, 1996; (n) each of the Subsidiary Guaranties, duly executed by the Guarantor party thereto; (p) a mortgagee title insurance policy [or if such mortgagee title insurance policy has not been issued, a binding, irrevocable and unconditional (other than for conditions acceptable to the Administrative Lender) commitment to issue such mortgagee title insurance policy] in favor of the Administrative Lender, in form and substance acceptable to the Administrative Lender, covering each Deed of Trust; (q) in form and substance reasonably satisfactory to the Lenders and Special Counsel, such other documents, instruments and certificates as the Administrative Lender or any Lender may reasonably require in connection with the transactions contemplated hereby, including without limitation, evidence of the status, organization or authority of the Borrower or any Subsidiary of the Borrower, and the enforceability of the Obligations; and (r) The Borrower shall have delivered a Borrowing Base Report reflecting Eligible Notes Receivable as of a date after December 29, 1997. Section 3.2 Conditions Precedent to All Advances and Letters of Credit. The obligation of each Lender to make each Revolving Credit Advance hereunder (including the initial Revolving Credit Advance), the obligation of the Issuing Bank to issue each Letter of Credit (including the - 46 - 53 initial Letter of Credit) and the obligation of the Swing Line Bank to make each Swing Line Advance (including the initial Swing Line Advance) are subject to fulfillment of the following conditions immediately prior to or contemporaneously with each such Advance or issuance: (a) With respect to each Advance and each issuance of a Letter of Credit, all of the representations and warranties of each Obligor under the Loan Documents, which, pursuant to Section 4.2 hereof, are made at and as of the time of each such Advance or issuance, shall be true and correct at such time in all material respects, both before and after giving effect to the application of the proceeds of the Advance or Letter of Credit; (b) The incumbency of the Authorized Signatories shall be as stated in the certificate of incumbency delivered in the Borrower's loan certificate pursuant to Section 3.1(a) or as subsequently modified and reflected in a certificate of incumbency delivered to the Administrative Lender. The Lenders may, without waiving this condition, consider it fulfilled and a representation by the Borrower made to such effect if no written notice to the contrary, dated on or before the date of such Advance or Letter of Credit, is received by the Administrative Lender from the Borrower prior to the making of such Advance or issuance of such Letter of Credit; (c) There shall not exist a Default or Event of Default hereunder that has not been waived or cured to the satisfaction of the Determining Lenders or all Lenders, as required pursuant to Section 11.11 hereof; (d) The aggregate Advances and Letters of Credit, after giving effect to such proposed Advance or Letter of Credit, shall not exceed the maximum principal amount then permitted to be outstanding hereunder; (e) No order, judgment, injunction or decree of any Tribunal shall purport to enjoin or restrain any Lender or the Issuing Bank from making any Advance or issuing any Letter of Credit; (f) (i) There shall not be pending, or to the knowledge of the Borrower, threatened any Litigation against or affecting the Borrower or any Subsidiary of the Borrower or any property of the Borrower or any Subsidiary of the Borrower that has not been disclosed in writing by the Borrower pursuant to Section 4.1(h) or 6.7(a) prior to the making of the last preceding Advance or the issuance of the last preceding Letter of Credit (or in the case of the initial Advances and Letters of Credit, prior to the Agreement Date) that could reasonably be expected to have a Material Adverse Effect, (ii) there shall not be pending, or to the knowledge of the Borrower, threatened any Litigation against or affecting the Borrower or any Subsidiary of the Borrower or any property of the Borrower or any Subsidiary of the Borrower that (x) was disclosed by the Borrower only after the Agreement Date, (y) was disclosed by the Borrower as threatened Litigation prior to the Agreement Date but subsequently became pending Litigation or (z) was not disclosed by the Borrower, that could reasonably be expected to have a Material Adverse Effect and (iii) there shall have occurred no development in any Litigation against or affecting the - 47 - 54 Borrower or any Subsidiary of the Borrower or any property of the Borrower or any Subsidiary of the Borrower that could reasonably be expected to have a Material Adverse Effect; (g) There shall have occurred no material adverse change in the business, assets, financial condition, results of operations or business prospects of the Borrower and its Subsidiaries, taken as a whole, since December 31, 1996; (h) The Borrower shall have delivered a current Borrowing Base Report evidencing that there is availability under the Commitment after taking into account the projected Advance or Letter of Credit; and (i) The Average Quarterly Delinquency Rate shall not exceed eight percent (8.0%). Notwithstanding anything herein to the contrary, the obligation of each Lender to make a Revolving Credit Advance pursuant to Section 2.15(c) (or to fund its participation in respect of Letters of Credit pursuant to Section 2.15(c)) shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, (i) the occurrence of any Default or Event of Default, (ii) the failure of the Borrower to satisfy any condition set forth in this Section 3.2 or (iii) any other circumstance, happening or event whatsoever. Section 3.3 Conditions Precedent to Conversions and Continuations. The obligation of the Lenders to convert any existing Base Rate Advance into a LIBOR Advance or to continue any existing LIBOR Advance is subject to the condition precedent that on the date of such conversion or continuation no Default or Event of Default shall have occurred and be continuing or would result from the making of such conversion or continuation. The acceptance of the benefits of each such conversion and continuation shall constitute a representation and warranty by the Borrower to each of the Lenders that no Default or Event of Default shall have occurred and be continuing or would result from the making of such conversion or continuation. ARTICLE 4 Representations and Warranties Section 4.1 Representations and Warranties. The Borrower hereby represents and warrants to each Lender as follows: (a) Organization; Power; Qualification. The respective jurisdiction of organization or incorporation and percentage ownership by the Borrower of the Subsidiaries listed on Schedule 4 are true and correct as of the Agreement Date. Schedule 4 is a complete and accurate listing as of the Agreement Date, showing with respect to the Borrower and each Subsidiary of the Borrower (a) its mailing address, which is its principal place of business, (b) the classes of its Capital Stock and the number and amount of its Capital Stock authorized and outstanding, (c) each record and - 48 - 55 beneficial owner of 5% or more of the outstanding Capital Stock of each Restricted Subsidiary, and (d) all outstanding options, rights, rights of conversion, redemption, purchase or repurchase, rights of first refusal and similar rights relating to the Capital Stock of the Restricted Subsidiaries. All of the outstanding Capital Stock of the Borrower and each Subsidiary of the Borrower is validly issued, fully paid and non-assessable. Each of the Borrower and its Subsidiaries is a corporation or other legal Person duly organized, validly existing and in good standing under the laws of its state of incorporation or organization. Each of the Borrower and its Subsidiaries has the legal power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted. Each of the Borrower and its Subsidiaries is authorized to do business, duly qualified and in good standing as set forth in Schedule 7 and no qualification or authorization is necessary in any other jurisdictions in which the character of its properties or the nature of its business requires such qualification or authorization, except where the failure to be so qualified or authorized could not reasonably be expected to have a Material Adverse Effect. (b) Authorization. The Borrower has legal power and has taken all necessary legal action to authorize it to borrow and request Letters of Credit hereunder. Each of the Borrower and its Subsidiaries has legal power and has taken all necessary legal action to execute, deliver and perform the Loan Documents to which it is party in accordance with the terms thereof, and to consummate the transactions contemplated thereby. Each Loan Document has been duly executed and delivered by the Borrower or the Subsidiary of the Borrower executing it. Each of the Loan Documents to which the Borrower or any of its Subsidiaries is a party is a legal, valid and binding obligation of the Borrower or such Subsidiary, as applicable, enforceable in accordance with its terms, subject, to enforcement of remedies, to the following qualifications: (i) equitable principles generally, and (ii) Debtor Relief Laws (insofar as any such law relates to the bankruptcy, insolvency or similar event of the Borrower or any Subsidiary of the Borrower). (c) Compliance with Other Loan Documents and Contemplated Transactions. The execution, delivery and performance by the Borrower and its Subsidiaries of the Loan Documents to which they are respectively a party, and the consummation of the transactions contemplated thereby, do not and will not (i) require any consent or approval necessary on or prior to the Agreement Date not already obtained, except to the extent that the failure to obtain any such consent or approval could not reasonably be expected to have a Material Adverse Effect, (ii) violate any Applicable Law, (iii) conflict with, result in a breach of, or constitute a default under the certificate of incorporation, by-laws or other similar organizational or governance document of the Borrower or any Subsidiary of the Borrower, (iv) conflict with, result in a breach of, or constitute a default under any Necessary Authorization, indenture, agreement or other instrument, to which the Borrower or any Subsidiary of the Borrower is a party or by which they or their respective properties may be bound, the result of which could reasonably be expected to have a Material Adverse Effect, or (v) result in or require the creation or imposition of any Lien (other than Liens in favor of the Lenders to secure the Obligations hereunder) upon or with respect to any property now owned or hereafter acquired by the Borrower or any Subsidiary of the Borrower. - 49 - 56 (d) Business. The Borrower and its Subsidiaries are engaged primarily in the business of acquiring, developing and operating time share resorts and other time-share activities, providing financing for the purchase of Units or other interests in its time-share resorts and other leisure activities (exclusive of gaming) and activities directly related to the foregoing. (e) Licenses, etc. All Necessary Authorizations have been duly obtained, and are in full force and effect without any known conflict with the rights of others and free from any unduly burdensome restrictions, unless the failure to obtain or have in effect such Necessary Authorizations could not reasonably be expected to result in a Material Adverse Effect. The Borrower and its Subsidiaries are and will continue to be in compliance in all material respects with all provisions thereof. No circumstance exists which could reasonably be expected to impair the utility of the Necessary Authorization or the right to renew such Necessary Authorization the effect of which could reasonably be expected to have a Material Adverse Effect. No Necessary Authorization is the subject of any pending or, to the best of the Borrower's knowledge, threatened challenge, suspension, cancellation or revocation, the effect of which could reasonably be expected to have a Material Adverse Effect. (f) Compliance with Law. The Borrower and its Subsidiaries are in compliance in all respects with all Applicable Laws, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. (g) Title to Properties. The Borrower and its Restricted Subsidiaries have good and indefeasible title to, or a valid leasehold interest in, all of their material assets. None of their assets is subject to any Liens, except Permitted Liens. No financing statement or other Lien filing (except relating to Permitted Liens) is on file in any state or jurisdiction that names the Borrower or any of its Restricted Subsidiaries as debtor or covers (or purports to cover) any assets of the Borrower or any of its Restricted Subsidiaries. The Borrower and its Restricted Subsidiaries have not signed any such financing statement or filing, nor any security agreement authorizing any Person to file any such financing statement or filing (except relating to Permitted Liens). (h) Litigation. Except as reflected on Schedule 3 hereto, as of the Agreement Date there is no Litigation pending against, or, to the Borrower's current actual knowledge, threatened against the Borrower, or in any other manner relating directly and adversely to the Borrower or any of its Subsidiaries, or any of their respective properties, in any court or before any arbitrator of any kind or before or by any governmental body in which the amount claimed (in excess of applicable insurance) exceeds $500,000. (i) Taxes. All material federal, state and other tax returns of the Borrower and its Subsidiaries required by law to be filed have been duly filed or extensions have been timely filed, and all material federal, state and other Taxes upon the Borrower, its Subsidiaries or any of their properties, income, profits and assets, which are due and payable, have been paid, unless the same are being diligently contested in accordance with Section 5.6 hereof. The charges, accruals and - 50 - 57 reserves on the books of the Borrower and its Subsidiaries in respect of their Taxes are, in the reasonable judgment of the Borrower, adequate. (j) Financial Statements; Material Liabilities. (i) The Borrower has heretofore delivered to Lenders (a) the audited consolidated balance sheets of the Borrower and its Subsidiaries as at December 31, 1996, and the related statements of earnings and changes in investment and statement of cash flows for the twelve-month period then ended, and (b) unaudited consolidated balance sheets of the Borrower and its Subsidiaries as at June 30, 1997, and the related statements of earnings and statement of cash flows for the six-month period then ended. Such financial statements were prepared in conformity with GAAP (except for the absence of footnotes) and fairly present, in all material respects, the financial position of the Borrower and its Subsidiaries as at the date thereof and the combined results of operations and cash flows for the period covered thereby. (ii) The projected financial statements of the Borrower and its Subsidiaries delivered to the Lenders prior to or on the Agreement Date were prepared in good faith and management of the Borrower believes them to be based on reasonable assumptions (which assumptions have been included in the most recent projections furnished to the Lenders prior to the Agreement Date) and to fairly present in all material respects the projected financial condition of the Borrower and its Subsidiaries and the projected results of operations as of the dates and for the periods shown for the Borrower and its Subsidiaries, it being recognized by the Lenders that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. (iii) The financial statements of the Borrower and its Subsidiaries delivered to the Lenders pursuant to Section 6.1, 6.2 and 6.3 hereof fairly present in all material respects their respective financial condition and their respective results of operations as of the dates and for the periods shown, all in accordance with GAAP, subject to normal year-end adjustments. The latest of such financial statements reflects all material liabilities, direct and contingent, of the Borrower and each Subsidiary of the Borrower that are required to be disclosed in accordance with GAAP. As of the date of the latest of such financial statements, there were no Guaranties, liabilities for Taxes, forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments that are substantial in amount that are required to be reflected but that are not reflected on such financial statements or the footnotes thereto. (k) No Adverse Change. Since December 31, 1996, no event or circumstance has occurred or arisen which is reasonably likely to have a Material Adverse Effect. - 51 - 58 (l) ERISA. None of the Borrower or its Controlled Group maintains or contributes to any Plan subject to Title IV of ERISA other than those disclosed to the Administrative Lender in writing. Each such Plan (other than any Multiemployer Plan) is in compliance in all material respects with the applicable provisions of ERISA, the Code, and any other applicable Law, except to the extent that failure to so comply would not reasonably be expected to have a Material Adverse Effect. With respect to each Plan (other than any Multiemployer Plan) of the Borrower and each member of its Controlled Group, all reports required under ERISA or any other Applicable Law to be filed with any Tribunal, the failure of which to file could reasonably be expected to result in liability of the Borrower or any member of its Controlled Group in excess of $100,000, have been duly filed. All such reports are true and correct in all material respects as of the date given. No Plan of the Borrower or any member of its Controlled Group has been terminated under Section 4041(c) of ERISA nor has any accumulated funding deficiency (as defined in Section 412(a) of the Code) been incurred (without regard to any waiver granted under Section 412 of the Code), nor has any funding waiver from the Internal Revenue Service been received or requested the result of which could reasonably be expected to have a Material Adverse Effect. None of the Borrower or any member of its Controlled Group has failed to make any contribution or pay any amount due or owing as required under the terms of any such Plan, or by Section 412 of the Code or Section 302 of ERISA by the due date under Section 412 of the Code and Section 302 of ERISA, the result of which could reasonably be expected to have a Material Adverse Effect. There has been no ERISA Event or any event requiring disclosure under Section 4041(c)(3)(C) or 4063(a) of ERISA with respect to any Plan (other than any Multiemployer Plan) or its related trust of the Borrower or any member of its Controlled Group since the effective date of ERISA. The present value of the benefit liabilities, as defined in Title IV of ERISA, of each Plan subject to Title IV of ERISA (other than a Multiemployer Plan) of the Borrower and each member of its Controlled Group does not exceed by more than $500,000 the present value of the assets of each such Plan as of the most recent valuation date using each such Plan's actuarial assumptions at such date. There are no pending, or to the Borrower's knowledge threatened, claims, lawsuits or actions (other than routine claims for benefits in the ordinary course) asserted or instituted against, and neither the Borrower nor any member of its Controlled Group has knowledge of any threatened litigation or claims against, the assets of any Plan or its related trust or against any fiduciary of a Plan with respect to the operation of such Plan, the result of which could reasonably be expected to have a Material Adverse Effect. None of the Borrower or, to the Borrower's knowledge, any member of its Controlled Group has engaged in any prohibited transactions, within the meaning of Section 406 of ERISA or Section 4975 of the Code, in connection with any Plan the result of which could reasonably be expected to have a Material Adverse Effect. None of the Borrower or any member of its Controlled Group has incurred or reasonably expects to incur (A) any liability under Title IV of ERISA (other than premiums due under Section 4007 of ERISA to the PBGC), (B) any withdrawal liability (and no event has occurred which with the giving of notice under Section 4219 of ERISA would result in such liability) under Section 4201 of ERISA as a result of a complete or partial withdrawal (within the meaning of Section 4203 or 4205 of ERISA) from a Multiemployer Plan, as defined in Section 1.1 of this Agreement but without regard to the five-year limitation provided therein or (C) any liability under Section 4062 of ERISA to the PBGC or to a trustee appointed - 52 - 59 under Section 4042 of ERISA. None of the Borrower, any member of its Controlled Group, or any organization to which the Borrower or any member of its Controlled Group is a successor or parent corporation within the meaning of ERISA Section 4069(b), has engaged in a transaction within the meaning of ERISA Section 4069, the result of which could reasonably be expected to have a Material Adverse Effect. None of the Borrower or any member of its Controlled Group maintains or has established any Plan, which is a welfare benefit plan within the meaning of Section 3(1) of ERISA and which provides for continuing benefits or coverage for any participant or any beneficiary of any participant after such participant's termination of employment, except as may be required by any Applicable Law, the result of which could reasonably be expected to have a Material Adverse Effect. Each of Borrower and its Controlled Group which maintains a Plan which is a welfare benefit plan within the meaning of Section 3(1) of ERISA has complied in all material respects with any applicable notice and continuation requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and the regulations thereunder. None of the Borrower or any member of its Controlled Group maintains, has established, or has ever participated in a multiemployer welfare benefit arrangement within the meaning of Section 3(40)(A) of ERISA. (m) Compliance with Regulations G, T, U and X. The Borrower is not engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying any margin stock within the meaning of Regulations G, T, U and X of the Board of Governors of the Federal Reserve System, and no part of the proceeds of the Advances or Letters of Credit will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. No more than 25% of the assets of the Borrower and its Subsidiaries are margin stock. None of the Borrower and its Subsidiaries nor any agent acting on their behalf, has taken or will knowingly take any action which would cause this Agreement or any other Loan Documents to violate any regulation of the Board of Governors of the Federal Reserve System or to violate the Securities Exchange Act of 1934, in each case as in effect now or as the same may hereafter be in effect. (n) Authorization. The Borrower and its Subsidiaries are not required to obtain any Necessary Authorization on or prior to the Agreement Date that has not already been obtained from, or effect any material filing or registration that has not already been effected with, any Tribunal or any other Person in connection with the execution and delivery of this Agreement or any other Loan Document, or the performance thereof, in accordance with their respective terms, including any borrowings hereunder, except for the filing of financing statements (and other similar notices) containing a description of the Collateral with certain Tribunals. (o) Absence of Default. The Borrower and its Subsidiaries are in compliance in all material respects with all of the provisions of their certificate of incorporation and by-laws (or similar organizational and governance documents), and no event has occurred or failed to occur, which has not been remedied or waived, the occurrence or non-occurrence of which constitutes, or which with the passage of time or giving of notice or both would constitute, (i) an Event of Default or (ii) a default by the Borrower or any of its Subsidiaries under any indenture, agreement - 53 - 60 or other instrument, or any judgment, decree or order to which the Borrower or any of its Subsidiaries or by which they or any of their respective properties is bound, except to the extent that such default could not reasonably be expected to have a Material Adverse Effect. (p) Governmental Regulation. Neither the Borrower nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or the Investment Company Act of 1940. Neither the entering into or performance by the Borrower of this Agreement nor the issuance of the Notes violates any provision of such act or requires any consent, approval, or authorization of, or registration with, the Securities and Exchange Commission or any other Tribunal pursuant to any provisions of such act. (q) Environmental Matters. Neither the Borrower nor any Subsidiary has any current actual knowledge that any substance deemed hazardous by any Applicable Environmental Law, has been installed (i) on any real property fee title to which is now owned by the Borrower or any of its Subsidiaries or (ii) by Borrower or any of its Subsidiaries on any real property leased by the Borrower or any of its Subsidiaries, in either case in a manner which does not comply with Applicable Environmental Laws, except to the extent that the failure to so comply could not reasonably be expected to have a Material Adverse Effect. The Borrower and its Subsidiaries are not in violation of or subject to any existing, pending or, to the best of the Borrower's knowledge, threatened investigation or inquiry by any Tribunal or to any remedial obligations under any Applicable Environmental Laws, the effect of which could reasonably be expected to have a Material Adverse Effect. The Borrower and its Subsidiaries have not obtained and are not required to obtain any permits, licenses or similar authorizations other than certificates of occupancy and building permits and other authorizations that have been obtained to construct, occupy, operate or use any buildings, improvements, fixtures, and equipment forming a part of any real property owned or leased by the Borrower or any Subsidiary of the Borrower by reason of any Applicable Environmental Laws, except to the extent that the failure to so obtain could not reasonably be expected to have a Material Adverse Effect. The Borrower and its Subsidiaries undertook, at the time of acquisition of fee title to any real property, reasonable inquiry into the previous ownership and uses of such real property consistent with good commercial or customary practice. The Borrower and its Subsidiaries have taken reasonable steps to determine, and the Borrower and its Subsidiaries have no current actual knowledge, that any hazardous substances or solid wastes have been disposed of or otherwise released (i) on or to the real property fee title to which is owned by the Borrower or any of its Subsidiaries or (ii) by Borrower or any of its Subsidiaries on or to any real property leased by Borrower or any of its Subsidiaries, all within the meaning of the Applicable Environmental Laws, the effect of which could reasonably be expected to have a Material Adverse Effect. To the extent required to do so by any Applicable Environmental Laws, the Borrower and its Subsidiaries have disposed of all hazardous substances and solid wastes (if any), all within the meaning of the Applicable Environmental Laws, generated in their respective businesses in compliance with all Applicable Environmental Laws, except to the extent that the failure to so comply could not reasonably be expected to have a Material Adverse Effect. - 54 - 61 (r) Certain Fees. No broker's, finder's or other fee or commission will be payable by the Borrower (other than to the Lenders hereunder) with respect to the making of the Commitments or the Advances hereunder. The Borrower agrees to indemnify and hold harmless the Administrative Lender and each Lender from and against any claims, demand, liability, proceedings, costs or expenses asserted with respect to or arising in connection with any such fees or commissions payable by the Borrower. (s) Patents, Etc. Except as reflected on Schedule 8 hereto, the Borrower and its Subsidiaries have collectively obtained or applied for all patents, trademarks, service marks, trade names, copyrights, licenses and other rights, free from burdensome restrictions, that are necessary for the operation of their business as presently conducted and as proposed to be conducted, except to the extent that the failure to so obtain or apply could not reasonably be expected to have a Material Adverse Effect. Except as reflected on Schedule 8 hereto, nothing has come to the current actual knowledge of the Borrower or any of its Subsidiaries to the effect that (i) any process, method, part or other material presently contemplated to be employed by the Borrower or any Subsidiary of the Borrower may infringe any patent, trademark, service mark, trade name, copyright, license or other right owned by any other Person, or (ii) there is pending or overtly threatened any claim or litigation against or affecting the Borrower or any Subsidiary of the Borrower contesting its right to sell or use any such process, method, part or other material, which could reasonably be expected to have a Material Adverse Effect. (t) Disclosure. All factual information furnished by the Borrower or any of its Subsidiaries in writing to the Administrative Lender or any Lender in connection with this Agreement, the other Loan Documents or any transaction contemplated herein or therein is, and all other factual information hereafter furnished by or on behalf of the Borrower or any of its Subsidiaries in writing to the Administrative Lender or any Lender will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances under which such information was provided. There is no fact known to the Borrower and not known to the public generally that could reasonably be expected to have a Material Adverse Effect, which has not been set forth in this Agreement or in the documents, certificates and statements furnished to the Lenders by or on behalf of the Borrower prior to the date hereof in connection with the transaction contemplated hereby. (u) Solvency. The Borrower is, and Borrower and its Subsidiaries on a consolidated basis are, Solvent. (v) Labor Relations. Except as provided on Schedule 9, neither the Borrower nor any Subsidiary is a party to a collective bargaining agreement or similar agreement, and the Borrower and each Subsidiary is in compliance in all material respects with all Laws respecting employment and employment practices, terms and conditions of employment, wages and hours and other laws related to the employment of its employees, except where the failure to comply could not - 55 - 62 reasonably be expected to result in a Material Adverse Effect, and there are no arrears in the payment of wages, withholding or social security taxes, unemployment insurance premiums or other similar obligations of the Borrower or any Subsidiary or for which the Borrower or any Subsidiary may be responsible other than in the ordinary course of business, except for such unpaid or unwithheld arrears which could not reasonably be expected to result in a Material Adverse Effect. There is no strike, work stoppage or labor dispute with any union or group of employees pending or overtly threatened involving Borrower or any Subsidiary that could reasonably be expected to have a Material Adverse Effect. (w) Consolidated Business Entity. The Borrower and its Subsidiaries are engaged in the business of developing and operating time-share resorts and other leisure activities (exclusive of gaming). These operations require financing on a basis such that the credit supplied can be made available from time to time to the Borrower and various of its Subsidiaries, as required for the continued successful operation by the Borrower and its Subsidiaries as a whole. The Borrower and its Subsidiaries expect to derive benefit (and the board of directors of the Borrower and its Subsidiaries have determined that the Borrower and its Subsidiaries may reasonably be expected to derive benefit), directly or indirectly, from the credit extended by the Lenders hereunder, both in their separate capacities and as members of the group of companies, since the successful operation and condition of the Borrower and its Subsidiaries is dependent on the continued successful performance of the functions of the group as a whole. (x) Time-Share Interest Exchange Network. Borrower and its Subsidiaries are members and participants, pursuant to validly executed and enforceable written agreements in Resort Condominiums International, L.L.C. and Interval International. Borrower and its Subsidiaries have paid all fees and other amounts due and owing under such agreements and are not otherwise in default in any material respect thereunder. (y) Time-Share Interests. The sale, offering of sale, and financing of Time-Share Interests in the Projects (i) do not constitute the sale, or the offering of sale, of securities subject to registration requirements of the Securities Act of 1933, as amended, or any state or foreign securities Law, (ii) except to the extent that any such violation(s), either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect, do not violate any time-sharing or other Law of any state or foreign country in which sales or solicitation of Time-Share Interests occur, and (iii) except to the extent that any such violation(s), either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect, do not violate any consumer credit or usury Laws of any state or foreign country in which sales or solicitation of Time-Share Interests occur. Except to the extent that any such failure(s), either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect, the Borrower and its Subsidiaries have not failed to make or cause to be made any registrations or declarations with any Tribunal necessary to the ownership of the Projects or to the conduct of its business, including, without limitation, the operation of the Projects and the sale, or offering for sale, of Time-Share Interests therein. Except to the extent that any such noncompliance(s), either individually or in the aggregate, could not reasonably be expected to have - 56 - 63 a Material Adverse Effect, Borrower and its Subsidiaries have, to the extent required by its activities and businesses, fully complied with (i) all of the applicable provisions of (A) the Consumer Credit Protection Act, as amended, (B) the Federal Trade Commission Act, as amended, (C) the Federal Interstate Land Sales Full Disclosure Act, as amended, (D) any other Laws of any Tribunal otherwise applicable, and (E) all rules and regulations promulgated under any of the foregoing. True and complete copies of the Purchase Documents and other documents requested by the Administrative Lender which have been and are being used by the Borrower and its Subsidiaries in connection with the Projects and the sale or offering for sale of Time-Share Interests therein have been delivered to the Administrative Lender. The Time-Share Interests in the Projects constitute undivided interests in real property under the Laws of the jurisdictions in which the applicable Units are located. (z) Common Areas. To the extent that the Borrower or any of its Subsidiaries are legally obligated to construct same, the common areas and amenities appurtenant to sold Time-Share Interests, and the streets and other off-site improvements contained within the Projects have been completed or a bond insuring the completion thereof has been obtained and such interests in such common areas are free and clear of all Liens except Permitted Liens. (aa) Subordinated Debt. The terms, provisions, covenants and requirements contained in the documents, instruments and agreements relating to the Subordinated Debt are not more restrictive than the comparable terms, provisions, covenants and requirements contained in this Agreement and the other Loan Documents. All of the Obligations constitute senior indebtedness under the documents, instruments and agreements evidencing or relating to the Subordinated Debt and, as such, all of the Obligations are expressly superior in right of payment to the Subordinated Debt. Section 4.2 Survival of Representations and Warranties, etc. All representations and warranties made under this Agreement and the other Loan Documents shall be deemed to be made at and as of the Agreement Date and at and as of the date of each Advance and the date of issuance of each Letter of Credit, and each shall be true and correct in all material respects when made, except to the extent (a) previously fulfilled in accordance with the terms hereof or (b) previously waived in writing by the Determining Lenders with respect to any particular factual circumstance or permitted by the terms of this Agreement. All such representations and warranties shall survive, and not be waived by, the execution hereof by any Lender, any investigation or inquiry by any Lender, or by the making of any Advance or the issuance of any Letter of Credit under this Agreement. - 57 - 64 ARTICLE 5 General Covenants So long as any of the Obligations are outstanding and unpaid or any Commitment is outstanding (whether or not the conditions to borrowing have been or can be fulfilled): Section 5.1 Preservation of Existence and Similar Matters. The Borrower shall, and shall cause each Subsidiary of the Borrower to: (a) except as otherwise permitted pursuant to Section 7.4 hereof, preserve and maintain, or timely obtain and thereafter preserve and maintain, its existence, rights, franchises, licenses, authorizations, consents, privileges and all other Necessary Authorizations from any Tribunal, the loss of which could reasonably be expected to have a Material Adverse Effect; and (b) except as otherwise permitted pursuant to Section 7.4 hereof, qualify and remain qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization, unless the failure to do so could not reasonably be expected to have a Material Adverse Effect. Section 5.2 Business; Compliance with Applicable Law. The Borrower and its Subsidiaries shall (a) engage primarily in the businesses set forth in Section 4.1(d) hereof, and (b) comply in all respects with the requirements of all Applicable Law, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. Section 5.3 Maintenance of Properties. To the maximum extent that the Borrower and/or any Subsidiary of the Borrower has the right, power or authority (whether as a matter of contract, at law or otherwise) to do so, the Borrower shall, and shall cause each Subsidiary of the Borrower to, maintain or cause to be maintained all its properties (whether owned or held under lease) in reasonably good repair, working order and condition, taken as a whole, and from time to time make or cause to be made all appropriate (in the reasonable judgment of the Borrower) repairs, renewals, replacements, additions, betterments and improvements thereto, except where the failure to so maintain, repair, renew, replace or improve could not reasonably be expected to have a Material Adverse Effect. Section 5.4 Accounting Methods and Financial Records. The Borrower shall, and shall cause each Subsidiary of the Borrower to, maintain a system of accounting established and administered in accordance with GAAP, keep adequate records and books of account in which complete entries will be made and all transactions reflected in accordance with GAAP, and keep accurate and complete records of its respective assets. The Borrower and each of its Subsidiaries shall maintain its fiscal year in the manner in existence on the Agreement Date. - 58 - 65 Section 5.5 Insurance. The Borrower shall, and shall cause each Restricted Subsidiary of the Borrower to, maintain insurance from responsible companies in such amounts and against such risks as shall be customary and usual in the industry for companies of similar size and capability. Each insurance policy shall (a) provide for at least 30 days' prior notice to the Administrative Lender of any proposed termination or cancellation of such policy, whether on account of default or otherwise and (b) otherwise contain the requirements for insurance set forth in the Security Agreements. Section 5.6 Payment of Taxes and Claims. The Borrower shall, and shall cause each Subsidiary of the Borrower to, pay and discharge all material Taxes to which they are subject prior to the date on which penalties attach thereto, and all lawful material claims for labor, materials and supplies which, if unpaid, might become a Lien upon any of its properties; except that no such Tax or claim need be paid which is being diligently contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on the appropriate books, but only so long as no Lien shall attach with respect thereto and no foreclosure, distraint, sale or similar proceedings shall have been commenced. The Borrower shall, and shall cause each Subsidiary of the Borrower to, timely file all information returns (or extensions of such filing deadlines) required by federal, state or local tax authorities. Section 5.7 Visits and Inspections. The Borrower shall, and shall cause each Subsidiary of the Borrower to, promptly permit representatives of the Administrative Lender or any Lender from time to time after reasonable notice by the Administrative Lender or any Lender to (a) visit and inspect the properties of the Borrower and its Subsidiaries as often as the Administrative Lender or any Lender shall reasonably deem advisable, (b) audit, inspect and make extracts from and copies of the Borrower's and each such Subsidiary's books and records, and (c) discuss with the Borrower's and each such Subsidiary's appropriate directors, officers, employees and auditors its business, assets, liabilities, financial positions, results of operations and business prospects, provided that such representatives of the Administrative Lender or any Lender shall keep confidential all information obtained pursuant to this Section 5.7 to the extent required by Section 11.14. The Borrower shall pay the reasonable expenses related to up to three (3) such inspections and audits performed by the Administrative Lender per twelve-month period. Prior to the occurrence of an Event of Default, all such visits and inspections shall be conducted during normal business hours. Following the occurrence and during the continuance of an Event of Default, such visits and inspections shall be conducted at any time requested by the Administrative Lender or any Lender without any requirement for reasonable notice. Section 5.8 Use of Proceeds. The proceeds of the Advances and the Letters of Credit shall be used by the Borrower (a) to refinance certain existing debt of the Borrower and its Subsidiaries, (b) to finance Acquisitions permitted under Section 7.6 hereof, (c) to finance eligible mortgage loans, (d) to finance the ongoing working capital and general corporate requirements of the Borrower and its Subsidiaries, and (e) for other legitimate corporate purposes not otherwise prohibited hereunder. - 59 - 66 SECTION 5.9 INDEMNITY. (a) THE BORROWER AGREES TO DEFEND, PROTECT, INDEMNIFY AND HOLD HARMLESS THE ADMINISTRATIVE LENDER, EACH LENDER, EACH OF THEIR RESPECTIVE AFFILIATES, AND EACH OF THEIR RESPECTIVE (INCLUDING SUCH AFFILIATES') OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS, SHAREHOLDERS AND CONSULTANTS (INCLUDING, WITHOUT LIMITATION, THOSE RETAINED IN CONNECTION WITH THE SATISFACTION OR ATTEMPTED SATISFACTION OF ANY OF THE CONDITIONS SET FORTH HEREIN) OF EACH OF THE FOREGOING (COLLECTIVELY, "INDEMNITEES") FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, PROCEEDINGS (WHETHER CIVIL OR CRIMINAL), JUDGMENTS, SUITS, CLAIMS, REASONABLE COSTS, REASONABLE EXPENSES AND REASONABLE DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER (INCLUDING, WITHOUT LIMITATION, THE REASONABLE FEES AND DISBURSEMENTS OF COUNSEL FOR SUCH INDEMNITEES IN CONNECTION WITH ANY INVESTIGATIVE, ADMINISTRATIVE OR JUDICIAL PROCEEDING, WHETHER OR NOT SUCH INDEMNITEES SHALL BE DESIGNATED A PARTY THERETO), IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST SUCH INDEMNITEES (WHETHER DIRECT, INDIRECT OR CONSEQUENTIAL AND WHETHER BASED ON ANY FEDERAL, STATE, OR LOCAL LAWS AND REGULATIONS, UNDER COMMON LAW OR AT EQUITABLE CAUSE, OR ON CONTRACT, TORT OR OTHERWISE, ARISING FROM OR CONNECTED WITH THE PAST, PRESENT OR FUTURE OPERATIONS OF THE BORROWER, ITS SUBSIDIARIES OR THEIR RESPECTIVE PREDECESSORS IN INTEREST, OR THE PAST, PRESENT OR FUTURE ENVIRONMENTAL CONDITION OF PROPERTY OF THE BORROWER OR ITS SUBSIDIARIES), RELATING TO OR ARISING OUT OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR ANY ACT, EVENT OR TRANSACTION OR ALLEGED ACT, EVENT OR TRANSACTION RELATING OR ATTENDANT THERETO, THE MANAGEMENT OF THE ADVANCES OR LETTERS OF CREDIT, INCLUDING IN CONNECTION WITH, OR AS A RESULT, IN WHOLE OR IN PART, OF ANY ORDINARY OR MERE NEGLIGENCE OF ADMINISTRATIVE LENDER OR ANY LENDER (OTHER THAN THOSE MATTERS RAISED EXCLUSIVELY BY A PARTICIPANT OR OTHER LENDER AGAINST THE ADMINISTRATIVE LENDER OR ANY LENDER AND NOT THE BORROWER OR ANY OF ITS SUBSIDIARIES), OR THE USE OR INTENDED USE OF THE PROCEEDS OF THE ADVANCES OR LETTERS OF CREDIT HEREUNDER, OR IN CONNECTION WITH ANY INVESTIGATION OF ANY POTENTIAL MATTER COVERED HEREBY, OR THE PROJECTS, OR ANY LENDER'S STATUS BY VIRTUE OF THE ASSIGNMENT OF PLEDGED DOCUMENTS, OR ANY ACT OR OMISSION BY THE BORROWER, ANY OF ITS SUBSIDIARIES, THE CUSTODIAN OR THE SERVICING AGENT, OR THE EMPLOYEES OR AGENTS OF ANY OF THEM, OR ANY ACT OR OMISSION BY ALL BROKERS, AGENTS OR OTHER SALESMEN OF TIME-SHARE INTERESTS, BUT EXCLUDING (i) ANY CLAIM OR LIABILITY THAT ARISES AS THE RESULT OF THE - 60 - 67 GROSS NEGLIGENCE OR WILFUL MISCONDUCT OF ANY INDEMNITEE, AS FINALLY JUDICIALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION, AND (ii) MATTERS RAISED BY ONE LENDER OR PARTICIPANT AGAINST ANOTHER LENDER OR PARTICIPANT OR BY ANY SHAREHOLDERS OF A LENDER OR A PARTICIPANT AGAINST A LENDER OR A PARTICIPANT OR THE RESPECTIVE MANAGEMENT OF SUCH LENDER OR PARTICIPANT (COLLECTIVELY, "INDEMNIFIED MATTERS"). TO THE EXTENT THAT ANY INDEMNIFIED MATTER INVOLVES ONE OR MORE INDEMNITEES, SUCH INDEMNITEES SHALL USE THE SAME LEGAL COUNSEL UNLESS ANY INDEMNITEE IN ITS REASONABLE DISCRETION DETERMINES THAT CONFLICTS EXIST OR MAY ARISE IN CONNECTION WITH SUCH REPRESENTATION. (b) WITHOUT DUPLICATION, THE BORROWER SHALL PERIODICALLY, UPON REQUEST, REIMBURSE EACH INDEMNITEE FOR ITS REASONABLE LEGAL AND OTHER ACTUAL REASONABLE EXPENSES (INCLUDING THE REASONABLE COST OF ANY INVESTIGATION AND PREPARATION) INCURRED IN CONNECTION WITH ANY INDEMNIFIED MATTER. THE REIMBURSEMENT, INDEMNITY AND CONTRIBUTION OBLIGATIONS UNDER THIS SECTION SHALL BE IN ADDITION TO ANY LIABILITY WHICH THE BORROWER MAY OTHERWISE HAVE, SHALL EXTEND UPON THE SAME TERMS AND CONDITIONS TO EACH INDEMNITEE, AND SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF ANY SUCCESSORS, ASSIGNS, HEIRS AND PERSONAL REPRESENTATIVES OF THE BORROWER, THE ADMINISTRATIVE LENDER, THE LENDERS AND ALL OTHER INDEMNITEES. THIS SECTION SHALL SURVIVE ANY TERMINATION OF THIS AGREEMENT AND PAYMENT OF THE OBLIGATIONS. Section 5.10 Environmental Law Compliance. The use which the Borrower or any Subsidiary of the Borrower intends to make of any real property which is owned or leased by it will not result in the disposal or other release of any hazardous substance or solid waste on or to such real property which is in violation of Applicable Environmental Laws, the effect of which could reasonably be expected to have a Material Adverse Effect. As used herein, the terms "hazardous substance" and "release" as used in this Section shall have the meanings specified in CERCLA (as defined in the definition of Applicable Environmental Laws), and the terms "solid waste" and "disposal" shall have the meanings specified in RCRA (as defined in the definition of Applicable Environmental Laws); provided, however, that if CERCLA or RCRA is amended so as to broaden or lessen the meaning of any term defined thereby, such broader or lesser meaning shall apply subsequent to the effective date of such amendment; and provided further, to the extent that any other law applicable to the Borrower, any Subsidiary or any of their respective properties establishes (to the exclusion of the applicability of CERCLA and RCRA) a meaning for "hazardous substance," "release," "solid waste," or "disposal" which is broader or lesser than that specified in either CERCLA or RCRA, such broader or lesser meaning shall apply. The Borrower agrees to indemnify and hold the Administrative Lender and each Lender harmless from and against, and to reimburse them with respect to, any and all claims, demands, causes of action, - 61 - 68 loss, damage, liabilities, reasonable costs and reasonable expenses (including reasonable attorneys' fees and courts costs) of any kind or character, known or unknown, fixed or contingent, asserted against or incurred by any of them at any time and from time to time by reason of or arising out of (a) the failure of the Borrower or any Subsidiary to perform any of their obligations hereunder regarding asbestos or Applicable Environmental Laws, (b) any violation on or before the Release Date of any Applicable Environmental Law in effect on or before the Release Date, and (c) any act, omission, event or circumstance existing or occurring on or prior to the Release Date (including without limitation the presence on such real property or release from such real property of hazardous substances or solid wastes disposed of or otherwise released on or prior to the Release Date), resulting from or in connection with the ownership of the real property, regardless of whether the act, omission, event or circumstance constituted a violation of any Applicable Environmental Law at the time of its existence or occurrence; provided that, the Borrower shall not be under any obligation to indemnify the Administrative Lender or any Lender to the extent that any such liability arises as the result of the gross negligence or wilful misconduct of such Person, as finally judicially determined by a court of competent jurisdiction. The provisions of this paragraph shall survive the Release Date and shall continue thereafter in full force and effect. Section 5.11 Further Assurances. At any time or from time to time upon request by the Administrative Lender, the Borrower or any Subsidiary of the Borrower shall execute and deliver such further documents and do such other acts and things as the Administrative Lender may reasonably request in order to effect fully the purposes of this Agreement and the other Loan Documents and to provide for payment of the Obligations in accordance with the terms of this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, the Borrower agrees to (a) update and deliver to the Administrative Lender supplements to Schedules 3 and 4 hereto at the time of delivery of the financial statements set forth in Sections 6.1 and 6.2 hereof if the information provided therein is not complete and correct, and (b) update and deliver to the Administrative Lender Schedule 1 to the Security Agreements promptly upon discovery that the information provided therein is not complete and correct. Section 5.12 Management of Projects. To the maximum extent that the Borrower and/or any Subsidiary of the Borrower has the right, power or authority (whether as a matter of contract, at law or otherwise) to do so, the Borrower shall, and shall cause each of its Subsidiaries to, maintain managers and management contracts with respect to each Project which are reasonably satisfactory to the Administrative Lender; provided, however, that the Borrower and each Subsidiary of the Borrower shall be deemed to be reasonably satisfactory to the Administrative Lender as managers of the Projects for purposes of this Section 5.12. The Borrower shall not change the manager of any Project (except to the extent that the Borrower replaces the existing manager with a manager that is a Subsidiary of the Borrower) or materially amend, modify or waive any provision of or terminate the management contract for any Project without the prior written consent of the Administrative Lender. - 62 - 69 Section 5.13 Obligations to Purchasers. The Borrower shall, and shall cause each of its Subsidiaries to, fulfill all obligations to the Purchasers under Eligible Notes Receivable which are used in making the Borrowing Base computations or otherwise constitute part of the Collateral. Section 5.14 Owners Associations. The Borrower shall, and shall cause each of its Subsidiaries to, cause each Purchaser to automatically be a member of each Project's owners association or associations, if any, and shall be entitled to vote on the affairs thereof (subject, however, to any preferential voting rights in favor of the Borrower or any of its Subsidiaries as permitted under applicable time-share Laws). Each such owners association shall have the authority to fix and levy pro rata upon each Purchaser annual assessments to cover the costs of maintaining and operating such Project (including, without limitation, taxes and assessments not levied by the appropriate taxing authority directly against owners of Time-Share Interests) and to establish a reasonable reserve for improvements, the replacement of property and furnishings, and contingencies. If the Borrower or any of its Subsidiaries controls an owners association, the Borrower or any of its Subsidiaries will while it controls such association: (i) cause such owners association to discharge timely and completely its obligations under such Project's governing documents and maintain the reserve described above and (ii) to the extent requested to do so by the Administrative Lender, pay or loan to such owners association, not less often than is necessary to provide sufficient funding for such owners association in order to maintain, preserve and maximize the ownership, quality, safety, marketability, value and appearance of the applicable Project, the difference between (A) the cumulative total amount of the maintenance and operating expenses incurred by such association, together with the amount of any installment of real property taxes currently due and payable with respect to such Project not directly levied against owners of Time-Share Interests, through the end of the calendar month preceding the month in which such payment or loan is made and (B) the cumulative total amount of assessments (less amounts thereof allocated to reserve expenses) payable to the association by Time-Share Interest owners other than the Borrower or its Subsidiaries, as appropriate, through the end of the calendar month preceding the month in which such payment or loan is made. Section 5.15 Note Receivable Information. The Borrower shall, and shall cause each of its Subsidiaries to, maintain accurate and complete files relating to the Notes Receivable with respect to the Projects and other Collateral, and such files will contain copies of each Note Receivable, copies of all relevant credit memoranda relating to such Notes Receivable and all collection information and correspondence related thereto. Section 5.16 Maintenance of Borrowing Base. The Borrower shall, and shall cause each of its Restricted Subsidiaries to, at all times maintain the Borrowing Base at an amount equal to or greater than the aggregate principal amount of all outstanding Revolving Credit Advances, Swing Line Advances and Reimbursement Obligations. Without waiving or otherwise modifying the foregoing requirements of this Section 5.16, if any Note Receivable is included in the Borrowing Base as an Eligible Note Receivable and such Note Receivable thereafter fails to meet the criteria for inclusion as an Eligible Note Receivable, the Borrower shall have the right to obtain a release of the nonqualifying Note Receivable from the Liens hereunder in favor of the - 63 - 70 Administrative Lender and the Lenders if immediately prior to, and after giving effect to, such proposed release, (i) the Borrower is in compliance with the requirements of this Section 5.16, and (ii) no Default or Event of Default exists hereunder or under any of the other Loan Documents. Without waiving or otherwise modifying the foregoing requirements of this Section 5.16, if any Note Receivable is included as Collateral hereunder and such Note Receivable is thereafter included in a Securitization, the Borrower shall have the right to obtain a release of such Note Receivable from the Liens hereunder in favor of the Administrative Lender and the Lenders if immediately prior to, and after giving effect to, such proposed release, (i) the Borrower is in compliance with the requirements of this Section 5.16, and (ii) no Default or Event of Default exists hereunder or under any of the other Loan Documents. Without waiving or otherwise modifying the foregoing requirements of this Section 5.16, if a Note Receivable is not past-due or otherwise in default and such Note Receivable ceases to qualify as an Eligible Note Receivable solely by virtue of (i) the reduction of the amount of any scheduled payment(s) with respect thereto or (ii) the extension of the maturity date thereof, a Note Receivable received by the Borrower or a Restricted Subsidiary in substitution or replacement therefor shall not fail to qualify as an Eligible Note Receivable solely by virtue of the fact that the Purchaser in respect of such substitution or replacement Note Receivable has not made at least the first regularly scheduled payment due thereon. ARTICLE 6 Information Covenants So long as any of the Obligations are outstanding and unpaid or any Commitment is outstanding (whether or not the conditions to borrowing have been or can be fulfilled), the Borrower shall furnish or cause to be furnished to each Lender or shall notify each Lender of the following events: Section 6.1 Borrowing Base Report. Within 15 days after the end of each month of each fiscal year, the Borrowing Base Report setting forth (a) a certification of Eligible Notes Receivable, (b) calculation of the Borrowing Base, and (c) an asset portfolio report in form and substance satisfactory to the Administrative Lender. Section 6.2 Eligible Notes Receivable Report. Within 30 days after the second fiscal quarter and the last fiscal quarter of each fiscal year, a report showing through the end of such fiscal quarter, (a) the opening and closing balances on each Eligible Note Receivable, (b) all payments received on each Eligible Note Receivable allocated to interest, principal, late charges, taxes or the like, (c) the average rate of interest for all Eligible Notes Receivable, (d) an itemization of delinquencies, prepayments and any other adjustments for each Eligible Note Receivable, (e) the average down payment received with respect to all Eligible Notes Receivable, and (g) the nature and status of any claims asserted or legal action pending with respect to any Eligible Note Receivable. - 64 - 71 Section 6.3 Quarterly Financial Statements and Information. (a) Within 45 days after the end of each fiscal quarter of each fiscal year, the consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as at the end of such fiscal quarter and the related consolidated and consolidating statements of income for such fiscal quarter and for the elapsed portion of the year ended with the last day of such fiscal quarter, and consolidated and consolidating statements of cash flow for the elapsed portion of the year ended with the last day of such fiscal quarter, all of which shall be certified by the president, chief financial officer or treasurer of the Borrower, to, in his or her opinion acting solely in his or her capacity as an officer of the Borrower, present fairly in all material respects, in accordance with GAAP (except for the absence of footnotes), the financial position and results of operations of the Borrower and its Subsidiaries as at the end of and for such fiscal quarter, and for the elapsed portion of the year ended with the last day of such fiscal quarter, subject only to normal year-end adjustments. (b) Within 45 days after the end of each fiscal quarter of each fiscal year, the consolidated and consolidating balance sheets of the Borrower and the Restricted Subsidiaries as at the end of such fiscal quarter and the related consolidated and consolidating statements of income for such fiscal quarter and for the elapsed portion of the year ended with the last day of such fiscal quarter, and consolidated and consolidating statements of cash flow for the elapsed portion of the year ended with the last day of such fiscal quarter, all of which shall be certified by the president, chief financial officer or treasurer of the Borrower, to, in his or her opinion acting solely in his or her capacity as an officer of the Borrower, present fairly in all material respects, in accordance with GAAP (except for the absence of footnotes), the financial position and results of operations of the Borrower and the Restricted Subsidiaries as at the end of and for such fiscal quarter, and for the elapsed portion of the year ended with the last day of such fiscal quarter, subject only to normal year-end adjustments. Section 6.4 Annual Financial Statements and Information; Certificate of No Default. (a) Within 90 days after the end of each fiscal year, a copy of (i) the consolidated and consolidating balance sheets of the Borrower and its Subsidiaries, as of the end of the current and prior fiscal years and (ii) the consolidated and consolidating statements of earnings and consolidated statements of changes in shareholders' equity, and statements of cash flow as of and through the end of such fiscal year, all of which are prepared in accordance with GAAP, and certified by independent certified public accountants reasonably acceptable to the Lenders (provided, however, any former big six public accounting firm shall be acceptable to the Lenders), whose opinion shall be in scope and substance in accordance with generally accepted auditing standards and shall be unqualified as to scope of audit and going concern. (b) Within 90 days after the end of each fiscal year, a copy of (i) the consolidated and consolidating balance sheets of the Borrower and the Restricted Subsidiaries, as of the end of the current and prior fiscal years and (ii) the consolidated and consolidating statements of earnings and - 65 - 72 consolidated statements of changes in shareholders' equity, and statements of cash flow as of and through the end of such fiscal year, all of which shall be certified by the president, chief financial officer or treasurer of the Borrower, to, in his or her opinion acting solely in his or her capacity as an officer of the Borrower, conform to the presentation of the audited financial statements to be delivered pursuant to Section 6.4(a) hereof and to present fairly in all material respects, in accordance with GAAP (except for the absence of footnotes), the financial position and results of operations of the Borrower and the Restricted Subsidiaries as at the end of and for such fiscal year. (c) As soon as available, but in any event within 30 days after December 31, 1997 and within 30 days after the end of each fiscal year thereafter, a copy of the annual consolidated financial projections (including pro forma income statements, balance sheets and statements of cash flow) of the Borrower and the Restricted Subsidiaries for the succeeding fiscal year. Section 6.5 Compliance Certificate. At the time financial statements are furnished pursuant to Sections 6.3 and 6.4 hereof, the Compliance Certificate, completed as provided therein, executed by the president, the chief financial officer, or treasurer of the Borrower. Section 6.6 Copies of Other Reports and Notices. (a) Promptly upon their becoming available, a copy of (i) all material final reports or letters submitted to the Borrower or any Subsidiary of the Borrower by accountants in connection with any annual, interim or special audit, including without limitation any final report prepared in connection with the annual audit referred to in Section 6.2 hereof, and, if requested by the Administrative Lender, any other comment letter submitted to management in connection with any such audit, (ii) each financial statement, report, notice or proxy statement sent by the Borrower to stockholders generally, (iii) each regular, periodic or other report and any registration statement (other than statements on Form S-8) or prospectus (or material written communication in respect of any thereof) filed by the Borrower or any Subsidiary of the Borrower with any securities exchange, with the Securities and Exchange Commission or any successor agency, (iv) all press releases concerning material financial aspects of the Borrower or any Subsidiary of the Borrower, and (v) forms of Purchase Documents and, to the extent requested by the Administrative Lender, other documents being used in connection with the Projects to the extent different from those delivered pursuant to Section 3.1(l) hereof; (b) Promptly upon becoming aware (i) that the holder(s) of any note(s) or other evidence of indebtedness or other security of the Borrower or any Subsidiary of the Borrower in excess of $500,000 in the aggregate has given notice or taken any action with respect to a breach, failure to perform, claimed default or event of default thereunder, (ii) of the occurrence or non-occurrence of any event which constitutes or which with the passage of time or giving of notice or both could constitute a material breach by the Borrower or any Subsidiary of the Borrower under any material agreement or instrument other than this Agreement to which the Borrower or any Subsidiary of the Borrower is a party or by which any of their respective properties may be bound, or (iii) of any event, circumstance or condition which could reasonably be expected to be - 66 - 73 classified as a Material Adverse Effect, a written notice specifying the details thereof (or the nature of any claimed default or event of default) and what action is being taken or is proposed to be taken with respect thereto; (c) Promptly upon becoming aware that any party to any Capitalized Lease Obligations or Operating Lease, in each case, in excess of $500,000, has given notice or taken any action with respect to a breach, failure to perform, claimed default or event of default thereunder, a written notice specifying the details thereof (or the nature of any claimed default or event of default) and what action is being taken or is proposed to be taken with respect thereto; (d) Promptly upon receipt thereof, information with respect to and copies of any notices received from any Tribunal relating to any order, ruling, law, information or policy that relates to a breach of or noncompliance with any Law, or could reasonably be expected to result in the payment of money by the Borrower or any Subsidiary of the Borrower in an amount of $500,000 or more in the aggregate, or otherwise have a Material Adverse Effect, or result in the loss or suspension of any Necessary Authorization where such loss could reasonably be expected to have a Material Adverse Effect; and (e) From time to time and promptly upon each request, such data, certificates, reports, statements, documents or further information regarding the assets, business, liabilities, financial position, projections, results of operations or business prospects of the Borrower and its Subsidiaries, as the Administrative Lender or any Lender may reasonably request. Section 6.7 Notice of Litigation, Default and Other Matters. Prompt notice of the following events after the Borrower has knowledge or notice thereof: (a) The commencement of all Litigation and investigations by or before any Tribunal, and all actions and proceedings in any court or before any arbitrator involving claims (i) for damages (including punitive damages) in excess of $500,000 (after deducting the amount with respect to the Borrower or any Subsidiary of the Borrower is insured), against or in any other way relating directly to the Borrower, any Subsidiary of the Borrower, or any of their respective properties or businesses or (ii) which otherwise could affect any Collateral and which could reasonably be expected to have a Material Adverse Effect; and (b) Promptly upon the happening of any condition or event of which the Borrower has current actual knowledge which constitutes a Default, a written notice specifying the nature and period of existence thereof and what action is being taken or is proposed to be taken with respect thereto. Section 6.8 ERISA Reporting Requirements. (a) Promptly and in any event (i) within 30 days after the Borrower or any member of its Controlled Group has current actual knowledge that any ERISA Event described in clause (a) - 67 - 74 of the definition of ERISA Event or any event described in Section 4063(a) of ERISA with respect to any Plan of the Borrower or any member of its Controlled Group has occurred, and (ii) within 10 days after the Borrower or any member of its Controlled Group has current actual knowledge that any other ERISA Event with respect to any Plan of the Borrower or any member of its Controlled Group has occurred or a request for a minimum funding waiver under Section 412 of the Code has been made with respect to any Plan of the Borrower or any member of its Controlled Group, a written notice describing such event and describing what action is being taken or is proposed to be taken with respect thereto, together with a copy of any notice of such event that is given to the PBGC; (b) Promptly and in any event within three Business Days after receipt thereof by the Borrower or any member of its Controlled Group from the PBGC, copies of each notice received by the Borrower or any member of its Controlled Group of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan; (c) Promptly and in any event within 30 days after the filing thereof by the Borrower or any member of its Controlled Group with the United States Department of Labor or the Internal Revenue Service, copies of each annual report (including Schedule B thereto, if applicable) with respect to each Plan subject to Title IV of ERISA of which Borrower or any member of its Controlled Group is the "plan sponsor"; (d) Promptly, and in any event within 10 Business Days after receipt thereof, a copy of any correspondence the Borrower or any member of its Controlled Group receives from the Plan Sponsor (as defined by Section 4001(a)(10) of ERISA) of any Plan concerning potential withdrawal liability pursuant to Section 4219 or 4202 of ERISA, and a statement from the chief financial officer of the Borrower or such member of its Controlled Group setting forth details as to the events giving rise to such potential withdrawal liability and the action which the Borrower or such member of its Controlled Group is taking or proposes to take with respect thereto; (e) Notification within 30 days of any material increases in the benefits provided under any existing Plan which is not a Multiemployer Plan, or the establishment of any new Plans, or the commencement of contributions to any Plan to which the Borrower or any member of its Controlled Group was not previously contributing, which could reasonably be expected in any such case to result in an additional material liability to the Borrower; (f) Notification within three Business Days after the Borrower or any member of its Controlled Group knows that the Borrower or any such member of its Controlled Group has filed or intends to file a notice of intent to terminate any Plan under a distress termination within the meaning of Section 4041(c) of ERISA and a copy of such notice; and (g) Within three Business Days after receipt of written notice of commencement thereof, notice of all actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting the - 68 - 75 Borrower or any member of its Controlled Group with respect to any Plan, except those which, in the aggregate, could not reasonably be expected to have a Material Adverse Effect. ARTICLE 7 Negative Covenants So long as any of the Obligations are outstanding and unpaid or any Commitment is outstanding (whether or not the conditions to borrowing have been or can be fulfilled): Section 7.1 Indebtedness. The Borrower shall not, and shall not permit any Restricted Subsidiary to, create, assume, incur or otherwise become or remain obligated in respect of, or permit to be outstanding, or suffer to exist any Indebtedness, except: (a) Indebtedness under the Loan Documents; and (b) Other Indebtedness, if, and only to the extent that, immediately prior to, and after giving effect to, the incurrence of such Indebtedness, no Default or Event of Default exists. Section 7.2 Liens. The Borrower shall not, and shall not permit any Restricted Subsidiary to, create, assume, incur, permit or suffer to exist, directly or indirectly, any Lien on any of its assets, whether now owned or hereafter acquired, except Permitted Liens. Section 7.3 Investments. The Borrower shall not, and shall not permit any Restricted Subsidiary to, make any Investment, except that the Borrower and any Restricted Subsidiary may purchase or otherwise acquire and own: (a) Cash and Cash Equivalents; (b) Accounts receivable that arise in the ordinary course of business and are payable on standard terms; (c) Investments in existence on the Agreement Date which are described on Schedule 5 hereto; (d) Investments which are Acquisitions permitted pursuant to Section 7.6 hereof; (e) Investments in the form of Hedge Agreements entered into with any Lender; (f) Investments in Subsidiaries of the Borrower which are Restricted Subsidiaries; - 69 - 76 (g) Guaranties of Indebtedness (i) of any Person other than the Borrower or a Restricted Subsidiary to the extent that (x) the aggregate amount of such Guaranties by the Borrower and the Restricted Subsidiaries does not exceed ten percent (10%) of the combined total assets of the Borrower and the Restricted Subsidiaries and (y) immediately prior to and after giving effect to any such proposed Guaranty there shall not exist a Default or Event of Default and (ii) of the Borrower or of a Restricted Subsidiary to the extent that such Guaranty, and the Indebtedness guaranteed thereby, are permitted by Section 7.1 hereof; (h) Investments in joint ventures provided that (i) immediately prior to and after giving effect to any such proposed Investment there shall not exist a Default or Event of Default, (ii) the Administrative Lender shall have received at least 10 Business Days prior to the date of such Investment a Compliance Certificate setting forth the covenant calculations, both immediately prior to and after giving effect to the proposed Investment, and (iii) the joint venture shall be in the business described in Schedule 4.1(d) hereof or other activities directly related thereto; (i) Investments in, or with respect to, any Person other than the Borrower or a Restricted Subsidiary to the extent that (i) the aggregate amount of such Investments by the Borrower and the Restricted Subsidiaries does not at any time exceed ten percent (10%) of the combined total assets of the Borrower and the Restricted Subsidiaries and (ii) immediately prior to and after giving effect to any such proposed Investment there shall not exist a Default or Event of Default; and (j) Other Investments not to exceed $7,500,000 in the aggregate amount outstanding at any time. Section 7.4 Liquidation, Merger. The Borrower shall not, and shall not permit any Restricted Subsidiary to, at any time: (a) liquidate or dissolve itself (or suffer any liquidation or dissolution) or otherwise wind up, except that a Restricted Subsidiary may liquidate or dissolve into the Borrower or a Restricted Subsidiary; or (b) enter into any merger or consolidation unless (i) with respect to a merger or consolidation involving the Borrower, the Borrower shall be the surviving corporation, or if the merger or consolidation involves a Restricted Subsidiary and not the Borrower, such Restricted Subsidiary shall be the surviving corporation, (ii) such transaction shall not be utilized to circumvent compliance with any term or provision herein and (iii) no Default or Event of Default shall then be in existence or occur as a result of such transaction. Section 7.5 Sales of Assets. The Borrower shall not, and shall not permit any Restricted Subsidiary to, sell, lease, transfer or otherwise dispose of, any of its assets except (a) inventory and Time-Share Interests in the ordinary course of business, (b) obsolete or worn-out assets, (c) sales of tangible assets in which the Net Cash Proceeds from the disposition thereof are - 70 - 77 reinvested, within 90 days before or after such disposition, in productive tangible assets of a similar nature of the Borrower and the Restricted Subsidiaries, (d) asset sales between Obligors, (e) sales of Notes Receivable (other than Notes Receivable included as Collateral hereunder) to unrelated third parties for full and fair consideration, (f) other asset sales not to exceed $5,000,000 in the aggregate amount during any one fiscal year and (g) other dispositions that constitute grants by the Borrower or a Restricted Subsidiary of Permitted Liens. Section 7.6 Acquisitions. The Borrower shall not, and shall not permit any Restricted Subsidiary to, make any Acquisitions; provided, however, if immediately prior to and after giving effect to the proposed Acquisition there shall not exist a Default or Event of Default, the Borrower or any Restricted Subsidiary may make Acquisitions so long as (i) such Acquisition shall not be opposed by the board of the directors of the Person being acquired, (ii) Lenders shall have received written notice at least 10 Business Days prior to the date of such Acquisition, (iii) the Administrative Lender shall have received at least 10 Business Days prior to the date of such Acquisition a Compliance Certificate setting forth the covenant calculations both immediately prior to and after giving effect to the proposed Acquisition, (iv) the assets, property or business acquired shall be in the business described in Section 4.1(d) hereof and, (v) either (x) contemporaneously with the consummation of such Acquisition, the Person being acquired shall become a Restricted Subsidiary or (y) such Acquisition would be permitted as an Investment under Section 7.3(i). Section 7.7 Capital Expenditures. The Borrower shall not, and shall not permit any Restricted Subsidiary to, make or commit to make any Capital Expenditures during any fiscal year in an aggregate amount in excess of $10,000,000. Section 7.8 Restricted Payments. The Borrower shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly declare, pay or make any Restricted Payments except (a) Dividends payable by a Restricted Subsidiary to the Borrower or to a Guarantor, (b) scheduled payments of principal and interest on the Subordinated Debt; provided, however, the Borrower shall not, and shall not permit any Restricted Subsidiary to, declare, pay or make any Restricted Payments permitted by clauses (a) and/or (b) of this Section 7.8 unless there shall exist no Default or Event of Default prior to or after giving effect to any such proposed Restricted Payment, and (c) Dividends payable by the Borrower in respect of its Capital Stock, if, and to the extent that, (i) no Default or Event of Default shall exist prior to or after giving effect to the declaration and/or payment of any such Dividend(s) and (ii) the aggregate amount of all such Dividends declared and/or paid by the Borrower during any fiscal year of the Borrower does not exceed the sum of (x) $10,000,000, plus (y) 50% of the Net Income of the Borrower (excluding from the calculation thereof any Net Income attributable to any Subsidiary of the Borrower other than the Restricted Subsidiaries) for the immediately preceding fiscal year of the Borrower. Section 7.9 Affiliate Transactions. The Borrower shall not, and shall not permit any Restricted Subsidiary to, at any time engage in any transaction with an Affiliate other than in the ordinary course of business and on terms no less advantageous to the Borrower or such Restricted Subsidiary than would be the case if such transaction had been effected with a non-Affiliate. The - 71 - 78 Borrower shall not, and shall not permit any Restricted Subsidiary to, incur or suffer to exist any Indebtedness, or any Guaranty of any such Indebtedness, to any Affiliate, unless such Affiliate shall (i) be a Restricted Subsidiary, (ii) subordinate the payment and performance thereof to the Obligations on terms and conditions and pursuant to documentation satisfactory to the Determining Lenders or (iii) pledge the applicable Indebtedness to the Administrative Lender pursuant to documentation acceptable to the Administrative Lender. Section 7.10 Compliance with ERISA. The Borrower shall not, and shall not permit any Subsidiary to, directly or indirectly, or permit any member of its Controlled Group to directly or indirectly, (a) terminate any Plan so as likely to result in any material (in the reasonable opinion of the Determining Lenders) liability to the Borrower or any member of its Controlled Group taken as a whole, (b) permit to exist any ERISA Event, or any other event or condition with respect to a Plan which could reasonably be expected to have a Material Adverse Effect, (c) make a complete or partial withdrawal (within the meaning of Section 4201 of ERISA) from any Multiemployer Plan so as likely to result in any material (in the reasonable opinion of the Determining Lenders) liability to the Borrower or any member of its Controlled Group taken as a whole, (d) enter into any new Plan or modify any existing Plan so as to increase its obligations thereunder which could reasonably be expected to have a Material Adverse Effect, or (e) permit the present value of all benefit liabilities, as defined in Title IV of ERISA, under any Plan (other than a Multiemployer Plan) of the Borrower or any member of its Controlled Group that is subject to Title IV of ERISA (using the actuarial assumptions utilized by each such Plan) to exceed the fair market value of Plan assets allocable to such benefits by more than $200,000, all determined as of the most recent valuation date for such Plan. Section 7.11 Minimum Interest Coverage Ratio. The Borrower shall not permit the Interest Coverage Ratio to be less than 2.50 to 1 at the end of any fiscal quarter. Section 7.12 Minimum Tangible Net Worth. The Borrower shall not permit the Tangible Net Worth to be less than an amount equal to the sum of (a) $155,000,000, plus (b) 50% of cumulative Net Income of the Borrower and the Restricted Subsidiaries for the period from, but not including, June 30, 1997 through the date of calculation (but excluding from the calculation of such cumulative Net Income the effect, if any, of any fiscal quarter (or portion of a fiscal quarter not then ended) of the Borrower or any Restricted Subsidiary for which Net Income was a negative number), plus (c) 75% of the Net Cash Proceeds received by the Borrower after June 30, 1997 as a result of any offering of Equity or pursuant to any conversion or exchange of convertible Indebtedness or preferred Capital Stock into common Capital Stock of the Borrower, plus (d) an amount equal to 75% of the tangible net worth of any Person that becomes a Restricted Subsidiary or is merged into or consolidated with the Borrower or any Restricted Subsidiary after June 30, 1997 or substantially all of the assets of which are acquired by the Borrower or any Restricted Subsidiary after June 30, 1997, (in each case determined as of the date that such Person becomes a Restricted Subsidiary or is merged into or consolidated with the Borrower or a Restricted Subsidiary or that such assets are so acquired), provided that the purchase price paid therefor is paid in equity securities of the Borrower or any Subsidiary of the Borrower. - 72 - 79 Section 7.13 Maximum Senior Debt to Total Capital. The Borrower shall not permit the ratio of Senior Debt to Total Capital to exceed 0.35 to 1 at the end of any fiscal quarter. Section 7.14 Maximum Total Debt to Total Capital. The Borrower shall not permit the ratio of Total Debt to Total Capital to exceed (a) 0.70 to 1 at December 31, 1997 and (b) 0.65 to 1 at the end of any fiscal quarter thereafter. Section 7.15 Sale and Leaseback. The Borrower shall not, and shall not permit any Subsidiary of the Borrower to, enter into any arrangement whereby it sells or transfers any of its assets, and thereafter rents or leases such assets, except to the extent that the fair market value of the asset(s) covered by all such arrangements entered into during any fiscal year of the Borrower does not, in the aggregate, exceed $2,000,000. Section 7.16 Business. Neither the Borrower nor any Restricted Subsidiary shall conduct any business other than the business described in Section 4.1(d) hereof. Section 7.17 Fiscal Year. The Borrower shall not, and shall not permit any Restricted Subsidiary to, change its fiscal year except to a fiscal year ending December 31. Section 7.18 Amendment of Organizational Documents. The Borrower shall not, and shall not permit any Restricted Subsidiary to, amend its articles of incorporation or bylaws (or similar organizational or governance documents) in any manner that could reasonably be expected to (a) result in a Material Adverse Effect or (b) impair or affect the Rights of the Administrative Lender or any Lender under any Loan Documents or in respect of any Collateral. Section 7.19 Amendments and Waivers of Subordinated Debt. The Borrower shall not, and shall not permit any Restricted Subsidiary to, change or amend (or take any action or fail to take any action the result of which is an effective amendment or change) or accept any waiver or consent with respect to, any document, instrument or agreement relating to any Subordinated Debt that would result in (a) an increase in the principal, interest, overdue interest, fees or other amounts payable under the Subordinated Debt, (b) an acceleration in any date fixed for payment or prepayment of principal, interest, fees or other amounts payable under the Subordinated Debt (including, without limitation, as a result of any redemption), (c) a reduction in any percentage of holders of the Subordinated Debt required under the terms of the Subordinated Debt to take (or refrain from taking) any action under the Subordinated Debt, (d) a change in any financial covenant under the Subordinated Debt making such financial covenant more restrictive, (e) a change in any default or event of default (however designated) under the Subordinated Debt which makes such default or event of default more restrictive, (f) a change in the definition of "Change of Control" as provided in the Subordinated Debt which would result in such definition being more restrictive than such definition in this Agreement, (g) a change in any of the subordination provisions of the Subordinated Debt, (h) a change in any covenant, term or provision in the Subordinated Debt which would result in such term or provision being more restrictive than the terms of this Agreement and the other Loan Documents or (i) a change in any term or provision - 73 - 80 of the Subordinated Debt that could have, in any material respect, an adverse effect on the interest of the Lenders. Section 7.20 Use of Lenders' Name. The Borrower shall not, and shall not permit any Subsidiary to, use the name of any Lender or any Affiliate of any Lender in connection with any of their respective businesses or activities, except in connection with internal business matters, administration of any of the Advances and as required in dealings with any Tribunal. Section 7.21 Servicing and Collection Agreement. The Borrower shall not, and shall not permit any Restricted Subsidiary to, amend, modify or terminate the Servicing and Collection Agreement; provided, however, that the Person(s) serving as servicer(s) and/or collector(s) thereunder may be replaced with other Person(s) who are reasonably acceptable to the Administrative Lender. The Servicing and Collection Agreement shall be cancelable by the Administrative Lender upon the occurrence of an Event of Default. Section 7.22 Custodial Agreement. The Borrower shall not, and shall not permit any Restricted Subsidiary to, (a) amend, modify or terminate the Custodial Agreement or (b) interfere with the Custodian's performance of its duties under the Custodial Agreement or take any action that would be inconsistent with the Custodial Agreement. Section 7.23 Notes Receivable. The Borrower shall not, and shall not permit any Restricted Subsidiary to, amend, modify or waive any terms of any Note Receivable included in the Borrowing Base or permit any departure from the obligations thereunder unless, and only to the extent that, (a) at the time of any such amendment, modification or waiver, no default, event of default or breach (howsoever designated) exists under, or with respect to, the applicable Note Receivable, and (b) either (x) such amendment, modification or waiver does not, and could not reasonably be expected to, result in such Note Receivable not constituting an Eligible Note Receivable hereunder or (y) such amendment, modification or waiver is evidenced by a replacement Note Receivable that is an Eligible Note Receivable. ARTICLE 8 Default Section 8.1 Events of Default. Each of the following shall constitute an Event of Default, whatever the reason for such event, and whether voluntary, involuntary, or effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any governmental or non-governmental body: (a) Any representation or warranty made under any Loan Document shall prove to have been incorrect or misleading in any material respect when made; - 74 - 81 (b) The Borrower shall fail to pay any (i) principal under any Note when due or (ii) interest under any Note or any fees payable hereunder or any other costs, fees, expenses or other amounts payable hereunder or under any other Loan Document within two Business Days after the date due; (c) The Borrower or any Restricted Subsidiary shall default in the performance or observance of any agreement or covenant contained in Section 5.1 or Article 7; (d) The Borrower or any Restricted Subsidiary shall default in the performance or observance of any other agreement or covenant contained in this Agreement not specifically referred to elsewhere in this Section 8.1, and such default shall not be cured within a period of fifteen days after the earlier of notice from the Administrative Lender thereof or actual notice thereof by the Borrower or such Restricted Subsidiary; (e) There shall occur any default or breach in the performance or observance of any agreement or covenant in any of the Loan Documents (other than this Agreement) and such default shall not be cured within a period of thirty days after the earlier of notice from the Administrative Lender thereof or actual notice thereof by an officer of any Obligor; (f) There shall be commenced an involuntary proceeding or an involuntary petition shall be filed in a court having competent jurisdiction seeking (i) relief in respect of any Obligor or any Subsidiary of the Borrower, or a substantial part of the property or the assets of such Obligor or Subsidiary of the Borrower, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable Federal, state or foreign bankruptcy law or other similar law, (ii) the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or similar official of any Obligor or any Subsidiary of the Borrower, or of any substantial part of their respective properties, or (iii) the winding-up or liquidation of the affairs of any Obligor or any Subsidiary of the Borrower, and any such proceeding or petition shall continue unstayed and in effect for a period of forty-five days; (g) Any Obligor or any Subsidiary of the Borrower shall (i) file a petition, answer or consent seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable Federal, state or foreign bankruptcy law or other similar law, (ii) consent to the institution of proceedings thereunder or to the filing of any such petition or to the appointment or taking of possession of a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of any Obligor or any Subsidiary of the Borrower or of substantially all of its properties, (iii) file an answer admitting the material allegations filed against it in any such proceeding, (iv) make a general assignment for the benefit of creditors, (v) become unable, admit in writing its ability or fail generally to pay its debts as they become due, or (vi) any Obligor or any Subsidiary of the Borrower shall take any corporate action in furtherance of any of the actions described in this Section 8.1(g); - 75 - 82 (h) A final judgment or judgments shall be entered by any court against any Obligor for the payment of money which exceeds $500,000 in the aggregate for all Obligors, or a warrant of attachment or execution or similar process shall be issued or levied against property of any Obligor which, together with all other such property of the Borrower and its Subsidiaries subject to any such process, exceeds in value $500,000 in the aggregate, and if such judgment or award is not insured or, within 30 days after the entry, issue or levy thereof, such judgment, warrant or process shall not have been paid or discharged or stayed pending appeal, or if, after the expiration of any such stay, such judgment, warrant or process shall not have been paid or discharged; (i) With respect to any Plan of the Borrower or any member of its Controlled Group: (i) the Borrower, any such member, or any other party-in-interest or disqualified person (other than any Lender) shall engage in transactions which in the aggregate would reasonably be expected to result in a direct or indirect liability to the Borrower or any member of its Controlled Group under Section 409 or 502 of ERISA or Section 4975 of the Code; (ii) the Borrower or any member of its Controlled Group shall incur any accumulated funding deficiency, as defined in Section 412 of the Code, or request a funding waiver from the Internal Revenue Service for contributions; (iii) the Borrower or any member of its Controlled Group shall incur any withdrawal liability as a result of a complete or partial withdrawal within the meaning of Section 4203 or 4205 of ERISA, or any other liability with respect to a Plan, unless the amount of such liability has been funded within the Plan or pursuant to one or more insurance contracts; (iv) a termination of a Multiemployer Plan, as defined in Section 1.1 hereof but without regard to the five-year limitation set forth therein, shall occur pursuant to Section 4041A of ERISA; (v) the Borrower or any member of its Controlled Group shall fail to make a required contribution by the due date under Section 412 of the Code or Section 302 of ERISA which would result in the imposition of a lien under Section 412 of the Code or Section 302 of ERISA; (vi) the Borrower, any member of its Controlled Group or any Plan sponsor shall notify the PBGC of an intent to terminate, or the PBGC shall institute proceedings to terminate, any Plan (other than a Multiemployer Plan) subject to Title IV of ERISA; (vii) a Reportable Event shall occur with respect to a Plan (other than a Multiemployer Plan) subject to Title IV of ERISA, and within 15 days after the reporting of such Reportable Event to the Administrative Lender, the Administrative Lender shall have notified the Borrower in writing that the Determining Lenders have made a determination that, on the basis of such Reportable Event, there are reasonable grounds for the termination of such Plan by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer such Plan and as a result thereof an Event of Default shall have occurred hereunder; (viii) a trustee shall be appointed by a court of competent jurisdiction to administer any Plan (other than a Multiemployer Plan) or the assets thereof; or (ix) any ERISA Event with respect to a Plan (other than a Multiemployer Plan) subject to Title IV of ERISA shall have occurred, and 30 days thereafter (A) such ERISA Event, other than such event described in clause (f) of the definition of ERISA Event herein, (if correctable) shall not have been corrected and (B) the then present value of such Plan's benefit liabilities, as defined in Title IV of ERISA, shall exceed the then current value of assets accumulated in such Plan; provided, however, that the events listed in subsections (i) - (ix) above shall constitute Events of Default only if the maximum aggregate liability which the Borrower or any member of its Controlled Group has a reasonable likelihood - 76 - 83 of incurring under the applicable provisions of ERISA resulting from an event or events exceeds $500,000. (j) The Borrower or any Restricted Subsidiary shall default in the payment of any Indebtedness or any lease obligations in an aggregate amount of $500,000 or more beyond any grace period provided with respect thereto, or any other event or condition shall exist under any agreement or instrument under which any such Indebtedness or lease obligation is created or evidenced beyond any applicable grace period, if the effect of such event or condition is to permit or cause the holder of such Indebtedness or lease obligation (or a trustee on behalf of any such holder) to (i) cause any such Indebtedness or lease obligation to be prepaid or to become due prior to its date of maturity or (ii) require the Borrower or any Restricted Subsidiary to purchase, prepay or redeem any such Indebtedness or lease obligation; (k) Any real property lease where the Borrower or any Restricted Subsidiary is the lessee shall terminate or cease to be effective, and termination or cessation thereof, together with all other leases, if any, which have been terminated or cease to be effective, could reasonably be expected to have a Material Adverse Effect; provided, however, that termination or cessation of a lease shall not constitute an Event of Default if another lease reasonably satisfactory to the Determining Lenders is contemporaneously substituted therefor; (l) Any provision of any Loan Document shall for any reason cease to be valid and binding on or enforceable against any party to it (other than the Administrative Lender or any Lender) other than in accordance with its terms, or any such party (other than the Administrative Lender or any Lender) shall so assert in writing; (m) Any Collateral Document shall for any reason (other than pursuant to the terms thereof) cease to create a valid and perfected first priority Lien in any Collateral subject thereto; or (n) A Change of Control shall occur. Section 8.2 Remedies. If an Event of Default shall have occurred and shall be continuing: (a) With the exception of an Event of Default specified in Section 8.1(f) or (g) hereof, the Administrative Lender shall, upon the direction of the Determining Lenders, terminate the Commitments and/or declare the principal of and interest on the Advances and all Obligations and other amounts owed under the Loan Documents to be forthwith due and payable without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, anything in the Loan Documents to the contrary notwithstanding. (b) Upon the occurrence of an Event of Default specified in Section 8.1(f) or (g) hereof, such principal, interest and other amounts shall thereupon and concurrently therewith - 77 - 84 become due and payable and the Commitments shall forthwith terminate, all without any action by the Administrative Lender, any Lender or any holders of the Notes and without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in the Loan Documents to the contrary notwithstanding. (c) If any Letter of Credit shall be then outstanding, the Administrative Lender may, and upon the direction of the Determining Lenders shall, demand upon the Borrower to, and forthwith upon such demand, the Borrower shall, pay to the Administrative Lender in same day funds at the office of the Administrative Lender for deposit in the L/C Cash Collateral Account, an amount equal to the maximum amount available to be drawn under the Letters of Credit then outstanding. (d) The Administrative Lender and the Lenders may exercise all of the Rights granted to them under the Loan Documents or under Applicable Law. (e) The Rights of the Administrative Lender and the Lenders hereunder shall be cumulative, and not exclusive. ARTICLE 9 Changes in Circumstances Section 9.1 LIBOR Basis Determination Inadequate. If with respect to any proposed LIBOR Advance for any Interest Period, (i) any Lender determines that deposits in dollars (in the applicable amount) are not being offered to that Lender in the relevant market for such Interest Period or (ii) the Determining Lenders determine that the LIBOR Rate for such proposed LIBOR Advance does not adequately cover the cost to any Lender(s) of making and maintaining such proposed LIBOR Advance for such Interest Period, such Lender or Determining Lenders, as the case may be, shall forthwith give notice thereof to the Borrower, whereupon until such Lender or Determining Lenders, as the case may be, notify the Borrower that the circumstances giving rise to such situation no longer exist, the obligation of the applicable Lender(s) to make LIBOR Advances shall be suspended; provided, however, such Lender or the Determining Lenders, as the case may be, shall promptly notify the Borrower if the circumstances giving rise to such situation no longer exist. Section 9.2 Illegality. If any change in applicable law, rule or regulation, or adoption thereof, or any change in any interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its LIBOR Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency, shall make it unlawful or impossible for such Lender (or its LIBOR Lending Office) to make, maintain or fund its LIBOR Advances, such Lender shall so notify the Borrower and the - 78 - 85 Administrative Lender. Before giving any notice to the Borrower pursuant to this Section, the notifying Lender shall designate a different LIBOR Lending Office or other lending office if such designation will avoid the need for giving such notice and will not, in the sole judgment of the Lender, be materially disadvantageous to the Lender. Upon receipt of such notice, notwithstanding anything contained in Article 2 hereof, the Borrower shall repay in full the then outstanding principal amount of each LIBOR Advance owing to the notifying Lender, together with accrued interest thereon and any reimbursement required under Section 2.9 hereof, on either (a) the last day of the Interest Period applicable to such Advance, if the Lender may lawfully continue to maintain and fund such Advance to such day, or (b) immediately, if the Lender may not lawfully continue to fund and maintain such Advance to such day or if the Borrower so elects. Concurrently with repaying each affected LIBOR Advance owing to such Lender if the Borrower does not terminate this Agreement, notwithstanding anything contained in Article 2 hereof, the Borrower may, without any requirement to satisfy the conditions precedent set forth in Section 3.1, 3.2 or 3.3, borrow a Base Rate Advance from such Lender, and such Lender shall make such Base Rate Advance, in an amount such that the outstanding principal amount of the Advances owing to such Lender shall equal the outstanding principal amount of the Advances owing immediately prior to such repayment. Section 9.3 Increased Costs. (a) If after the Agreement Date any change in or adoption of any law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof or compliance by any Lender (or its LIBOR Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or compatible agency: (i) shall subject a Lender (or its LIBOR Lending Office) to any Tax (net of any tax benefit engendered thereby) with respect to its LIBOR Advances or its obligation to make such Advances, or shall change the basis of taxation of payments to a Lender (or to its LIBOR Lending Office) of the principal of or interest on its LIBOR Advances or in respect of any other amounts due under this Agreement, as the case may be, or its obligation to make such Advances (except for changes in the rate of tax on the overall net income, net worth or capital of the Lender and franchise taxes, doing business taxes or minimum taxes imposed upon such Lender); or (ii) shall impose, modify or deem applicable any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, a Lender's LIBOR Lending Office or shall impose on the Lender (or its LIBOR Lending Office) or on the London interbank market any other condition affecting its LIBOR Advances or its obligation to make such Advances (but excluding any reserves or deposits that are included in the calculation of LIBOR Basis); - 79 - 86 and the result of any of the foregoing is to increase the cost to a Lender (or its LIBOR Lending Office) of making or maintaining any LIBOR Advances, or to reduce the amount of any sum received or receivable by a Lender (or its LIBOR Lending Office) with respect thereto, by an amount deemed by a Lender to be material, then, within 30 days after demand by a Lender, the Borrower agrees to pay to such Lender such additional amount as will compensate such Lender for such increased costs or reduced amounts, subject to Section 11.9 hereof. The affected Lender will as soon as practicable notify the Borrower of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section and will designate a different LIBOR Lending Office or other lending office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the reasonable judgment of the affected Lender made in good faith, be disadvantageous to such Lender. (b) A certificate of any Lender claiming compensation under this Section and setting forth the additional amounts to be paid to it hereunder shall certify that such amounts or costs were actually incurred by such Lender and shall show in reasonable detail an accounting of the amount payable and the calculations used to determine in good faith such amount and shall be conclusive absent manifest or demonstrable error. In determining such amount, a Lender may use any reasonable averaging and attribution methods. Nothing in this Section 9.3 shall provide the Borrower or any Subsidiary of the Borrower the right to inspect the records, files or books of any Lender. If a Lender demands compensation under this Section, the Borrower may at any time, upon at least five Business Days' prior notice to the Lender, after reimbursement to the Lender by the Borrower in accordance with this Section of all costs incurred, prepay in full the then outstanding LIBOR Advances of the Lender, together with accrued interest thereon to the date of prepayment, along with any reimbursement required under Section 2.9 hereof. Concurrently with prepaying such LIBOR Advances, the Borrower may borrow a Base Rate Advance from the Lender, and the Lender shall make such Base Rate Advance, in an amount such that the outstanding principal amount of the Advances owing to such Lender shall equal the outstanding principal amount of the Advances owing immediately prior to such prepayment. Section 9.4 Effect On Base Rate Advances. If notice has been given pursuant to Section 9.1, 9.2 or 9.3 hereof suspending the obligation of a Lender to make LIBOR Advances, or requiring LIBOR Advances of a Lender to be repaid or prepaid, then, unless and until the Lender notifies the Borrower that the circumstances giving rise to such repayment no longer apply, all Advances which would otherwise be made by such Lender as LIBOR Advances shall be made instead as Base Rate Advances. Section 9.5 Capital Adequacy. If after the Agreement Date, (a) the introduction of or any change in or in the interpretation of any law, rule or regulation or (b) compliance by a Lender with any law, rule or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) adopted or promulgated after the Agreement Date affects or would affect the amount of capital required or expected to be maintained by a Lender or any corporation controlling such Lender, and such Lender determines that the amount of such capital is increased by or based upon the existence of such Lender's - 80 - 87 commitment or Advances hereunder and other commitments or advances of such Lender of this type, then, within 30 days after demand by such Lender, subject to Section 11.9, the Borrower shall immediately pay to such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender with respect to such circumstances, to the extent that such Lender reasonably determines in good faith such increase in capital to be allocable to the existence of such Lender's Commitments hereunder. A certificate as to any additional amounts payable to any Lender under this Section 9.5 submitted to the Borrower by such Lender shall certify that such amounts were actually incurred by such Lender or corporation controlling such Lender and shall show in reasonable detail an accounting of the amount payable and the calculations used to determine in good faith such amount and shall be conclusive absent manifest or demonstrable error. In determining such amount, such Lender or a corporation controlling such Lender may use any reasonable averaging and attribution methods. Notwithstanding the foregoing, nothing in this Section 9.5 shall provide the Borrower or any Subsidiary of the Borrower the right to inspect the records, files or books of any Lender or any corporation controlling such Lender. Section 9.6 Replacement Lender. If (i) any Lender is unable or unwilling to make, maintain or fund any LIBOR Advance pursuant to Section 9.1 or 9.2 or (ii) the Borrower becomes obligated to pay additional amounts to any Lender described in Section 9.3 or 9.5, the Borrower may designate a financial institution reasonably acceptable to the Administrative Lender to replace such Lender by purchasing for cash and receiving an assignment of such Lender's pro rata share of such Lender's Commitment and the Rights of such Lender under the Loan Documents without recourse to or warranty by, or expense to, such Lender, for a purchase price equal to the outstanding amounts owing to such Lender (including such additional amounts owing to such Lender pursuant to Section 9.2, 9.3 or 9.5). Upon execution of an Assignment Agreement, such other financial institution shall be deemed to be a "Lender" for all purposes of this Agreement as set forth in Section 11.6 hereof. ARTICLE 10 Agreement Among Lenders Section 10.1 Agreement Among Lenders. The Lenders agree among themselves that: (a) Administrative Lender. Each Lender hereby appoints the Administrative Lender as its nominee in its name and on its behalf, to receive all documents and items to be furnished hereunder; to act as nominee for and on behalf of all Lenders under the Loan Documents; to, except as otherwise expressly set forth herein, take such action as may be requested by the Determining Lenders, provided that, (i) unless and until the Administrative Lender shall have received such requests, the Administrative Lender may take such administrative action, or refrain from taking such administrative action, as it may deem advisable and in the best interests of the Lenders, and (ii) the Administrative Lender shall not be required to take any action that exposes - 81 - 88 the Administrative Lender to personal liability or that is contrary to any Loan Document or Applicable Law; to arrange the means whereby the proceeds of the Advances of the Lenders are to be made available to the Borrower; to distribute promptly to each Lender information, requests and documents received from the Borrower hereunder and not otherwise provided to such Lender by the Borrower or any other Person, and each payment (in like funds received) with respect to any of such Lender's Advances, or the ratable amount of fees or other amounts; and to deliver to the Borrower requests, demands, approvals and consents received from the Lenders. Administrative Lender agrees to promptly distribute to each Lender, at such Lender's address set forth below information, requests, documents and payments received from the Borrower and not otherwise provided to such Lender by the Borrower or any other Person. The Administrative Lender shall have no fiduciary relationship in respect of any Lender by reason of this Agreement or any other Loan Document. The Administrative Lender shall have no duties or responsibilities except those expressly set forth in this Agreement. The duties of the Administrative Lender are mechanical and administrative in nature. (b) Replacement of Administrative Lender. Should the Administrative Lender or any successor Administrative Lender ever cease to be a Lender hereunder, or should the Administrative Lender or any successor Administrative Lender ever resign as Administrative Lender, or should the Administrative Lender or any successor Administrative Lender ever be removed with cause or without cause by the action of all Lenders (other than the Administrative Lender), then the Lender appointed by the other Lenders (with the consent of the Borrower, which consent shall not be unreasonably withheld) shall forthwith become the Administrative Lender, and the Borrower and the Lenders shall execute such documents as any Lender may reasonably request to reflect such change. If the Administrative Lender also then serves in the capacity of the Swing Line Bank or the Issuing Bank, such resignation or removal shall constitute resignation or removal of the Swing Line Bank and the Issuing Bank. Any resignation or removal of the Administrative Lender or any successor Administrative Lender shall become effective upon the appointment by the Lenders of a successor Administrative Lender; provided, however, if no successor Administrative Lender shall have been so appointed and shall have accepted such appointment within 30 days after the retiring Administrative Lender's giving of notice of resignation or the Lenders' removal of the retiring Administrative Lender, then the retiring Administrative Lender may, on behalf of the Lenders, appoint a successor Administrative Lender, which shall be a commercial bank organized under the Laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as the Administrative Lender hereunder by a successor Administrative Lender, such successor Administrative Lender shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Lender, and the retiring Administrative Lender shall be discharged from its duties and obligations under the Loan Documents, provided that if the retiring or removed Administrative Lender is unable to appoint a successor Administrative Lender, the Administrative Lender shall, after the expiration of a 60 day period from the date of notice, be relieved of all obligations as Administrative Lender hereunder. Notwithstanding any Administrative Lender's resignation or removal hereunder, the - 82 - 89 provisions of this Article shall continue to inure to its benefit as to any actions taken or omitted to be taken by it while it was the Administrative Lender under this Agreement. (c) Expenses. Each Lender shall pay its pro rata share, based on its Specified Percentage, of any expenses paid by the Administrative Lender directly and solely in connection with any of the Loan Documents if Administrative Lender does not receive reimbursement therefor from other sources within 60 days after the date incurred. Any amount so paid by the Lenders to the Administrative Lender shall be returned by the Administrative Lender pro rata to each paying Lender to the extent later paid by the Borrower or any other Person on the Borrower's behalf to the Administrative Lender. (d) Delegation of Duties. The Administrative Lender may execute any of its duties hereunder by or through officers, directors, employees, attorneys or agents, and shall be entitled to (and shall be protected in relying upon) advice of counsel concerning all matters pertaining to its duties hereunder. (e) Reliance by Administrative Lender. The Administrative Lender and its officers, directors, employees, attorneys and agents shall be entitled to rely and shall be fully protected in relying on any writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telex or teletype message, statement, order, or other document or conversation reasonably believed by it or them in good faith to be genuine and correct and to have been signed or made by the proper Person and, with respect to legal matters, upon opinions of counsel selected by the Administrative Lender. The Administrative Lender may, in its reasonable judgment, deem and treat the payee of any Note as the owner thereof for all purposes hereof. (f) Limitation of Administrative Lender's Liability. Neither the Administrative Lender nor any of its officers, directors, employees, attorneys or agents shall be liable for any action taken or omitted to be taken by it or them hereunder in good faith and believed by it or them to be within the discretion or power conferred to it or them by the Loan Documents or be responsible for the consequences of any error of judgment, except for its or their own gross negligence or wilful misconduct. Except as aforesaid, the Administrative Lender shall be under no duty to enforce any rights with respect to any of the Advances, or any security therefor. The Administrative Lender shall not be compelled to do any act hereunder or to take any action towards the execution or enforcement of the powers hereby created or to prosecute or defend any suit in respect hereof, unless indemnified to its reasonable satisfaction against loss, cost, liability and expense unless expressly provided to the contrary herein. The Administrative Lender shall not be responsible in any manner to any Lender for the effectiveness, enforceability, genuineness, validity or due execution of any of the Loan Documents, or for any representation, warranty, document, certificate, report or statement made herein or furnished in connection with any Loan Documents, or be under any obligation to any Lender to ascertain or to inquire as to the performance or observation of any of the terms, covenants or conditions of any Loan Documents on the part of the Borrower. TO THE EXTENT NOT REIMBURSED BY THE BORROWER, EACH LENDER HEREBY SEVERALLY INDEMNIFIES AND HOLDS HARMLESS THE - 83 - 90 ADMINISTRATIVE LENDER, PRO RATA ACCORDING TO ITS SPECIFIED PERCENTAGE, FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND/OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, ASSERTED AGAINST, OR INCURRED BY THE ADMINISTRATIVE LENDER (IN SUCH CAPACITY) IN ANY WAY WITH RESPECT TO ANY LOAN DOCUMENTS OR ANY ACTION TAKEN OR OMITTED BY THE ADMINISTRATIVE LENDER UNDER THE LOAN DOCUMENTS (INCLUDING ANY NEGLIGENT ACTION OF THE ADMINISTRATIVE LENDER), EXCEPT TO THE EXTENT THE SAME ARE FINALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION TO RESULT FROM GROSS NEGLIGENCE OR WILFUL MISCONDUCT BY THE ADMINISTRATIVE LENDER. THE INDEMNITY PROVIDED IN THIS SECTION 10.1(f) SHALL SURVIVE TERMINATION OF THIS AGREEMENT. (g) Liability Among Lenders. No Lender shall incur any liability (other than the sharing of expenses and other matters specifically set forth herein and in the other Loan Documents) to any other Lender, except for acts or omissions in bad faith. (h) Rights as Lender. With respect to its commitment hereunder, the Advances made by it and the Notes issued to it, the Administrative Lender shall have the same rights as a Lender and may exercise the same as though it were not the Administrative Lender, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Administrative Lender in its individual capacity. The Administrative Lender or any Lender may accept deposits from, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower and any of its Affiliates, and any Person who may do business with or own securities of the Borrower or any of its Affiliates, all as if the Administrative Lender were not the Administrative Lender hereunder and without any duty to account therefor to the Lenders. Section 10.2 Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Lender or any other Lender and based upon the financial statements referred to in Sections 4.1(j), 6.1, and 6.2 hereof, and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Lender or any other Lender and based upon such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. Each Lender also acknowledges that its decision to fund the initial Revolving Credit Advances shall constitute evidence to the Administrative Lender that such Lender has deemed all of the conditions set forth in Section 3.1 to have been satisfied. Section 10.3 Benefits of Article. None of the provisions of this Article shall inure to the benefit of any Person other than Lenders and, with respect to Section 10.1(b), the Borrower; consequently, no such other Person shall be entitled to rely upon, or to raise as a defense, in any - 84 - 91 manner whatsoever, the failure of the Administrative Lender or any Lender to comply with such provisions. ARTICLE 11 Miscellaneous Section 11.1 Notices. (a) All notices and other communications under this Agreement shall be in writing (except in those cases where giving notice by telephone is expressly permitted) and shall be deemed to have been given on the date personally delivered or sent by telecopy (answerback received) or by facsimile transmission, or three days after deposit in the mail, designated as certified mail, return receipt requested, postage-prepaid, or one day after being entrusted to a reputable commercial overnight delivery service, addressed to the party to which such notice is directed at its address determined as provided in this Section. All notices and other communications under this Agreement shall be given to the parties hereto at the following addresses: (i) If to the Borrower, at: Signature Resorts, Inc. 1875 S. Grant Street, Suite 650 San Mateo, California 94402 Attn: Chief Financial Officer, Treasurer and General Counsel Telephone: 650-312-7171 Facsimile: 650-312-7174 With a copy to: Leo Rose III Schreeder, Wheeler & Flint, LLP The Candler Building, 16th Floor 127 Peachtree Street, N.E. Atlanta, Georgia 30303-1845 Telephone: 404-681-3450 Facsimile: 404-681-1046 - 85 - 92 (ii) If to the Administrative Lender, at: NationsBank of Texas, N.A. 901 Main Street, 67th Floor Dallas, Texas 75202 Attn: Tom Blake Senior Vice President Telephone: 214-508-0193 Facsimile: 214-508-0980 (iii) If to a Lender, at its address shown below its name on the signature pages hereof, or if applicable, set forth in its Assignment Agreement. (b) Any party hereto may change the address to which notices shall be directed by giving 10 days' written notice of such change to the other parties. Section 11.2 Expenses. The Borrower shall promptly pay: (a) all reasonable out-of-pocket expenses of the Administrative Lender in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Loan Documents, the transactions contemplated hereunder and thereunder, and the making of Advances hereunder, including without limitation the reasonable fees and disbursements of Special Counsel; (b) all reasonable out-of-pocket expenses and reasonable attorneys' fees of the Administrative Lender in connection with the administration of the transactions contemplated in this Agreement and the other Loan Documents and the preparation, negotiation, execution and delivery of any waiver, amendment or consent by the Administrative Lender relating to this Agreement or the other Loan Documents; and (c) all reasonable costs, out-of-pocket expenses and reasonable attorneys' fees of the Administrative Lender and each Lender incurred for enforcement, collection, restructuring, refinancing and "work-out", or otherwise incurred in obtaining performance under the Loan Documents, which in each case shall include without limitation fees and expenses of consultants, counsel for the Administrative Lender and any Lender, and administrative fees for the Administrative Lender. Section 11.3 Waivers. The rights and remedies of the Lenders under this Agreement and the other Loan Documents shall be cumulative and not exclusive of any rights or remedies which they would otherwise have. No failure or delay by the Administrative Lender or any Lender in exercising any right shall operate as a waiver of such right. The Lenders expressly reserve the - 86 - 93 right to require strict compliance with the terms of this Agreement in connection with any funding of a request for an Advance or issuance of a Letter of Credit. In the event that any Lender decides to fund an Advance at a time when the Borrower is not in strict compliance with the terms of this Agreement, such decision by such Lender shall not be deemed to constitute an undertaking by the Lender to fund any further requests for Advances or preclude the Lenders from exercising any rights available under the Loan Documents or at law or equity. Any waiver or indulgence granted by the Lenders shall not constitute a modification of this Agreement, except to the extent expressly provided in such waiver or indulgence, or constitute a course of dealing by the Lenders at variance with the terms of the Agreement such as to require further notice by the Lenders of the Lenders' intent to require strict adherence to the terms of the Agreement in the future. Any such actions shall not in any way affect the ability of the Administrative Lender or the Lenders, in their discretion, to exercise any rights available to them under this Agreement or under any other agreement, whether or not the Administrative Lender or any of the Lenders are a party thereto, relating to the Borrower. Section 11.4 Calculation by the Lenders Conclusive and Binding. Any mathematical calculation required or expressly permitted to be made by the Administrative Lender or any Lender under this Agreement shall be made in its reasonable judgment and in good faith, and shall when made, absent manifest error, be controlling. Section 11.5 Set-Off. In addition to any rights now or hereafter granted under Applicable Law and not by way of limitation of any such rights, upon the occurrence and during the continuation of an Event of Default, each Lender and any subsequent holder of any Note, and any assignee of any Note is hereby authorized by the Borrower at any time or from time to time, without notice to the Borrower or any other Person, any such notice being hereby expressly waived, to set-off, appropriate and apply any deposits (general or special (except trust and escrow accounts), time or demand, including without limitation Indebtedness evidenced by certificates of deposit, in each case whether matured or unmatured) and any other Indebtedness at any time held or owing by such Lender or holder to or for the credit or the account of the Borrower, against and on account of the Obligations and other liabilities of the Borrower to such Lender or holder, irrespective of whether or not (a) the Lender or holder shall have made any demand hereunder, or (b) the Lender or holder shall have declared the principal of and interest on the Advances and other amounts due hereunder to be due and payable as permitted by Section 8.2. Any sums obtained by any Lender or by any assignee or subsequent holder of any Note shall be subject to pro rata treatment of all Obligations and other liabilities hereunder. Any Lender exercising any Rights under this Section 11.5 shall give the Borrower prompt notice thereof after such exercise. Section 11.6 Assignment. (a) The Borrower may not assign or transfer any of its rights or obligations hereunder or under the other Loan Documents without the prior written consent of the Lenders. - 87 - 94 (b) No Lender shall be entitled to assign or grant a participation in its interest in this Agreement, its Notes or its Advances, except as set forth in this Agreement. (c) Without the consent of the Borrower, any Lender may at any time sell participations in all or any part of its Advances and Reimbursement Obligations (collectively, "Participations") to any banks or other financial institutions ("Participants") provided that neither such Participation nor any agreement relating thereto shall confer on any Person (other than the parties hereto) any right to vote on, approve or sign amendments or waivers, or any other independent benefit or any legal or equitable right, remedy or other claim under this Agreement or any other Loan Documents, other than the right to vote on, approve, or sign amendments or waivers or consents with respect to items that would result in (i) any increase in the commitment of any Participant; or (ii)(A) the extension of the date of maturity of, or (B) the extension of the due date for any payment of principal, interest or fees respecting, or (C) the reduction of the amount of any installment of principal or interest on or the change or reduction of any mandatory reduction required hereunder, or (D) a reduction of the rate of interest on, the Advances, the Letters of Credit, or the Reimbursement Obligations to which such Participant is entitled; or (iii) the release of security for the Obligations, including without limitation any guarantee, except pursuant to this Agreement or the other Loan Documents; or (iv) the reduction of any fees payable hereunder to which such Participant is entitled. Notwithstanding the foregoing, the Borrower agrees that the Participants shall be entitled to the benefits of Article 9 hereof as though they were Lenders and the Lenders may, subject to Section 11.14 hereof, provide copies of all financial information received from the Borrower to such Participants. (d) Each Lender may assign to one or more financial institutions organized under the laws of the United States, or any state thereof, or under the laws of any other country that is a member of the Organization for Economic Cooperation and Development, or a political subdivision of any such country, which is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business (each, an "Assignee") its rights and obligations under this Agreement and the other Loan Documents; provided, however, that (i) each such assignment shall be subject to the prior written consent of the Administrative Lender and Borrower, which consent shall not be unreasonably withheld (provided, however, notwithstanding anything herein to the contrary, no consent of the Borrower is required for any assignment during any time that an Event of Default has occurred and is continuing or for any assignment at any time by a Lender to any Affiliate of such Lender or to any other Lender), (ii) no such assignment shall be in an amount of Commitments less than $10,000,000 unless such lesser amount represents the entirety of the Commitments of the applicable Lender, (iii) the applicable Lender, Administrative Lender and applicable Assignee shall execute and deliver to the Administrative Lender an Assignment and Acceptance Agreement (an "Assignment Agreement") in substantially the form of Exhibit F hereto, together with the Notes subject to such assignment, (iv) the Assignee executing the Assignment, shall deliver to the Administrative Lender a processing fee of $3,500 and (v) each such assignment shall be a constant, not a varying, percentage of the assigning Lender's Rights and obligations in respect of the Advances. Upon such execution, delivery and acceptance from and after the effective date specified in each Assignment, which effective date - 88 - 95 shall be at least three Business Days after the execution thereof, (A) the Assignee thereunder shall be party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment, have the rights and obligations of a Lender hereunder and (B) the applicable Lender shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment, relinquish such rights (excluding any rights to indemnity which would have survived the termination of this Agreement, which rights of indemnity shall apply to both the assigning Lender and the Assignee) and be released from such obligations under this Agreement. (e) Notwithstanding anything in clause (d) above to the contrary, any Lender may assign and pledge all or any portion of its Advances and Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A of F.R.S. Board and any Operating Circular issued by such Federal Reserve Bank; provided, however, that no such assignment under this clause (e) shall release the assignor Lender from its obligations hereunder. (f) Upon its receipt of an Assignment Agreement executed by a Lender and an Assignee, and any Note or Notes subject to such assignment, the Borrower shall, within five Business Days after its receipt of such Assignment Agreement, at no expense to the Borrower, execute and deliver to the Administrative Lender in exchange for the surrendered Notes new Notes to the order of such Assignee in an amount equal to the portion of the Advances and Commitments assigned to it pursuant to such Assignment Agreement and new Notes to the order of the assignor Lender in an amount equal to the portion of the Advances and Commitments retained by it hereunder. Such new Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Notes, shall be dated the effective date of such Assignment Agreement and shall otherwise be in substantially the form of Exhibit A. (g) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 11.6, disclose to the assignee or Participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower, provided such Person agrees in writing to handle such information in accordance with the standards set forth in Section 11.14 hereof. (h) Except as specifically set forth in this Section 11.6, nothing in this Agreement or any other Loan Documents, expressed or implied, is intended to or shall confer on any Person other than the respective parties hereto and thereto and their successors and assignees permitted hereunder and thereunder any benefit or any legal or equitable right, remedy or other claim under this Agreement or any other Loan Documents. (i) Notwithstanding anything in this Section 11.6 to the contrary, no Assignee or Participant (nor the assigning or participating Lender) shall be entitled to receive (whether individually or collectively) any greater payment under Section 2.14 or Section 9.3 or Section 9.5 than such assigning or participating Lender would have been entitled to receive with respect to the interest assigned or participated to such Assignee or Participant. - 89 - 96 Section 11.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such separate counterparts shall together constitute but one and the same instrument. Section 11.8 Severability. Any provision of this Agreement which is for any reason prohibited or found or held invalid or unenforceable by any court or governmental agency shall be ineffective to the extent of such prohibition or invalidity or unenforceability without invalidating the remaining provisions hereof in such jurisdiction or affecting the validity or enforceability of such provision in any other jurisdiction. Section 11.9 Interest and Charges. It is not the intention of any parties to this Agreement to make an agreement in violation of the laws of any applicable jurisdiction relating to usury. Regardless of any provision in any Loan Documents, no Lender shall ever be entitled to receive, collect or apply, as interest on the Obligations, any amount in excess of the Highest Lawful Amount. If any Lender or participant ever receives, collects or applies, as interest, any such excess, such amount which would be excessive interest shall be deemed a partial repayment of principal and treated hereunder as such; and if principal is paid in full, any remaining excess shall be paid to the Borrower. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the Highest Lawful Amount, the Borrower and the Lenders shall, to the maximum extent permitted under Applicable Law, (a) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effect thereof, and (c) amortize, prorate, allocate and spread in equal parts, the total amount of interest throughout the entire contemplated term of the Obligations so that the interest rate is uniform throughout the entire term of the Obligations; provided, however, that if the Obligations are paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the Highest Lawful Amount, the Lenders shall refund to the Borrower the amount of such excess or credit the amount of such excess against the total principal amount of the Obligations owing, and, in such event, the Lenders shall not be subject to any penalties provided by any laws for contracting for, charging or receiving interest in excess of the Highest Lawful Amount or the Highest Lawful Rate. This Section shall control every other provision of all agreements pertaining to the transactions contemplated by or contained in the Loan Documents. Section 11.10 Headings. Headings used in this Agreement are for convenience only and shall not be used in connection with the interpretation of any provision hereof. Section 11.11 Amendment and Waiver. The provisions of this Agreement may not be amended, modified or waived except by the written agreement of the Borrower and the Determining Lenders; provided, however, that no such amendment, modification or waiver shall be made (a) without the consent of all Lenders, if it would (i) increase the Specified Percentage or commitment of any Lender, or (ii) extend or postpone the date of maturity of, extend the due date for any payment of principal or interest on, reduce the amount of any installment of principal or interest on, or reduce the rate of interest on, any Revolving Credit Advance, the - 90 - 97 Reimbursement Obligations or other amount owing under any Loan Documents to which such Lender is entitled, or (iii) release any security for or guaranty of the Obligations (except pursuant to this Agreement or the other Loan Documents), or (iv) reduce the fees payable hereunder to which such Lender is entitled, or (v) revise this Section 11.11, or (vi) waive the date for payment of any principal, interest or fees hereunder or (vii) amend the definition of Determining Lenders; (b) without the consent of the Swing Line Bank, if it would alter the rights, duties or obligations of the Swing Line Bank; (c) without the consent of the Administrative Lender, if it would alter the rights, duties or obligations of the Administrative Lender; or (d) without the consent of the Issuing Bank, if it would alter the rights, duties or obligations of the Issuing Bank. Neither this Agreement nor any term hereof may be amended orally, nor may any provision hereof be waived orally but only by an instrument in writing signed by the Administrative Lender and, in the case of an amendment, by the Borrower. Section 11.12 Exception to Covenants. Neither the Borrower nor any Subsidiary of the Borrower shall be deemed to be permitted to take any action or fail to take any action which is permitted as an exception to any of the covenants contained herein or which is within the permissible limits of any of the covenants contained herein if such action or omission would result in the breach of any other covenant contained herein. Section 11.13 No Liability of Issuing Bank. The Borrower assumes all risks of the acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of such Letter of Credit. NEITHER THE ISSUING BANK NOR ANY LENDER NOR ANY OF THEIR RESPECTIVE OFFICERS OR DIRECTORS SHALL BE LIABLE OR RESPONSIBLE FOR: (A) THE USE THAT MAY BE MADE OF ANY LETTER OF CREDIT OR ANY ACTS OR OMISSIONS OF ANY BENEFICIARY OR TRANSFEREE IN CONNECTION THEREWITH; (B) THE VALIDITY, SUFFICIENCY OR GENUINENESS OF DOCUMENTS, OR OF ANY ENDORSEMENT THEREON, EVEN IF SUCH DOCUMENTS SHOULD PROVE TO BE IN ANY OR ALL RESPECTS INVALID, INSUFFICIENT, FRAUDULENT OR FORGED; (C) PAYMENT BY THE ISSUING BANK AGAINST PRESENTATION OF DOCUMENTS THAT DO NOT COMPLY WITH THE TERMS OF A LETTER OF CREDIT, INCLUDING FAILURE OF ANY DOCUMENTS TO BEAR ANY REFERENCE OR ADEQUATE REFERENCE TO THE LETTER OF CREDIT, EXCEPT FOR ANY PAYMENT MADE UPON THE ISSUING BANK'S GROSS NEGLIGENCE OR WILFUL MISCONDUCT; OR (D) ANY OTHER CIRCUMSTANCES WHATSOEVER IN MAKING OR FAILING TO MAKE PAYMENT UNDER ANY LETTER OF CREDIT, INCLUDING, WITHOUT LIMITATION, ANY SUCH CIRCUMSTANCES INVOLVING THE SIMPLE OR MERE NEGLIGENCE OF THE ISSUING BANK EXCEPT THAT THE BORROWER SHALL HAVE A CLAIM AGAINST THE ISSUING BANK, AND THE ISSUING BANK SHALL BE LIABLE TO THE BORROWER, TO THE EXTENT OF ANY DIRECT, BUT NOT CONSEQUENTIAL, DAMAGES SUFFERED BY THE BORROWER THAT A COURT OF COMPETENT JURISDICTION DETERMINES WERE CAUSED BY (I) THE ISSUING BANK'S WILFUL MISCONDUCT OR GROSS NEGLIGENCE OR (II) THE ISSUING BANK'S WILFUL - 91 - 98 FAILURE TO MAKE LAWFUL PAYMENT UNDER A LETTER OF CREDIT AFTER THE PRESENTATION TO IT OF A DRAFT AND CERTIFICATES STRICTLY COMPLYING WITH THE TERMS AND CONDITIONS OF THE LETTER OF CREDIT. In furtherance and not in limitation of the foregoing, the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. Section 11.14 Confidentiality. Each Lender and the Administrative Lender agrees (on behalf of itself and each of its directors, officers, employees and representatives) to use reasonable precautions to keep confidential, in accordance with customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices, any non-public information supplied to it by the Borrower pursuant to this Agreement which is identified by the Borrower as being confidential at the time the same is delivered to the Lenders or the Administrative Lender, provided that nothing herein shall limit the disclosure of any such information (a) to the extent required by statute, rule, regulation or judicial process, (b) to counsel for any Lender or the Administrative Lender, (c) to bank examiners, auditors or accountants of any Lender, (d) to the Administrative Lender or any other Lender, (e) in connection with any Litigation to which any one or more of Lenders is a party, provided, further, that, unless specifically prohibited by Applicable Law or court order, each Lender shall, prior to disclosure thereof, notify Borrower of any request for disclosure of any such non-public information (i) by any Tribunal or representative thereof (other than any such request in connection with an examination of such Lender's financial condition by such governmental agency) or (ii) pursuant to legal process, or (f) to any Assignee or Participant (or prospective Assignee or Participant) so long as such Assignee or Participant (or prospective Assignee or Participant) agrees in writing to handle such information in accordance with the provisions of this Section 11.14. Section 11.15 No Liability of Lenders to Purchasers. The Lenders do not assume and shall have no responsibility, obligation or liability to the Purchasers, the Lenders' relationship being solely that of a creditor who has taken, as security for Indebtedness owed to it, an Assignment of Pledged Documents. SECTION 11.16 GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS) AND THE UNITED STATES OF AMERICA. THE LOAN DOCUMENTS ARE PERFORMABLE IN DALLAS, TEXAS, AND BORROWER AND EACH SURETY, GUARANTOR, ENDORSER AND ANY OTHER PARTY EVER LIABLE FOR PAYMENT OF ANY MONEY PAYABLE WITH RESPECT TO THE LOAN DOCUMENTS, JOINTLY AND SEVERALLY WAIVE THE RIGHT TO BE SUED ELSEWHERE. WITHOUT EXCLUDING ANY OTHER JURISDICTION, THE BORROWER, THE ADMINISTRATIVE LENDER AND EACH LENDER EACH AGREES THAT THE STATE AND FEDERAL COURTS OF TEXAS LOCATED IN DALLAS, TEXAS, SHALL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION WITH - 92 - 99 THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND HEREBY SUBMITS WITH RESPECT TO ITSELF AND ITS PROPERTY TO THE JURISDICTION OF ANY SUCH COURT FOR THE PURPOSE OF ANY SUIT, ACTION, PROCEEDING OR JUDGMENT RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. SECTION 11.17 WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE ADMINISTRATIVE LENDER AND THE LENDERS HEREBY KNOWINGLY VOLUNTARILY, IRREVOCABLY AND INTENTIONALLY WAIVE, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. THIS PROVISION IS A MATERIAL INDUCEMENT TO EACH LENDER ENTERING INTO THIS AGREEMENT AND MAKING ANY ADVANCES HEREUNDER. SECTION 11.18 ENTIRE AGREEMENT. THIS WRITTEN AGREEMENT, TOGETHER WITH THE OTHER LOAN DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES REGARDING THE SUBJECT MATTER HEREIN AND THEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. ================================================================================ REMAINDER OF PAGE LEFT INTENTIONALLY BLANK ================================================================================ - 93 - 100 IN WITNESS WHEREOF, this Credit Agreement is executed as of the date first set forth above. BORROWER: SIGNATURE RESORTS, INC. By: /s/ DEWEY W. CHAMBERS ------------------------------------- ------------------------------------- ------------------------------------- ADMINISTRATIVE LENDER: NATIONSBANK OF TEXAS, N.A., as Administrative Lender By: /s/ TOM BLAKE ------------------------------------- Tom Blake Senior Vice President DOCUMENTATION AGENT: SOCIETE GENERALE, as Documentation Agent By: /s/ J. BLAINE SHAUM ------------------------------------- Name: J. Blaine Shaum ------------------------------------ Title: Regional Manager ----------------------------------- 2029 Century Park East, Suite 2900 Los Angeles, California 90067 - 94 - 101 LENDERS: NATIONSBANK OF TEXAS, N.A., as a Lender, Swing Line Bank and Issuing Bank Specified Percentage: 30.00% By: /s/ TOM BLAKE ------------------------------------- Tom Blake Senior Vice President 901 Main Street, 67th Floor Dallas, Texas 75202 Attn: Tom Blake Senior Vice President - 95 - 102 SOCIETE GENERALE, as a Lender Specified Percentage: 25.00% By: /s/ J. BLAINE SHAUM ------------------------------------- Name: J. Blaine Shaum ------------------------------------ Title: Regional Manager ----------------------------------- 2029 Century Park East, Suite 2900 Los Angeles, California 90067 - 96 - 103 CREDIT LYONNAIS NEW YORK BRANCH Specified Percentage: 15.00% By: /s/ RODRICK ROHRBACH ------------------------------------- Name: Rodrick Rohrbach ------------------------------------ Title: Senior vice President ----------------------------------- 1301 Avenue of the Americas New York, New York 10019 - 97 - 104 BT COMMERCIAL CORPORATION Specified Percentage: 15.00% By: /s/ RITA DAGELEN-KESKINYAN ------------------------------------- Name: Rita Dagelen-Keskinyan ------------------------------------ Title: Senior Vice President ----------------------------------- 14 Wall Street, 3rd Floor New York, New York 10005 - 98 - 105 BANK OF HAWAII Specified Percentage: 15.00% By: /s/ JOSEPH T. DONALDSON ------------------------------------- Name: Joseph T. Donaldson ------------------------------------ Title: Vice President ----------------------------------- - 99 - 106 SCHEDULE 1 LIBOR LENDING OFFICES NATIONSBANK OF TEXAS, N.A. 901 Main Street, 67th Floor Dallas, Texas 75202 CREDIT LYONNAIS NEW YORK BRANCH 1301 Avenue of the Americas New York, New York 10019 SOCIETE GENERALE 2029 Century Park East, Suite 2900 Los Angeles, California 90067 BT COMMERCIAL CORPORATION 14 Wall Street, 3rd Floor New York, New York 10005 BANK OF HAWAII 130 Merchant Street 20th Floor Honolulu, Hawaii 96813 SCHEDULE 1 - Page 1 107 SCHEDULE 2 EXISTING LIENS PROPERTY SUBJECT AMOUNT OF TO LIEN LIENHOLDER DEBT SECURED MATURITY DATE 108 SCHEDULE 3 EXISTING LITIGATION AND MATERIAL LIABILITIES 109 SCHEDULE 4 SUBSIDIARIES State of Incorporation Percentage Name or Organization of Ownership Owner 110 SCHEDULE 5 EXISTING INVESTMENTS 111 SCHEDULE 6 EXISTING INDEBTEDNESS 112 SCHEDULE 7 AUTHORIZATION, QUALIFICATION AND GOOD STANDING 113 SCHEDULE 8 INTELLECTUAL PROPERTY AND DISPUTES RELATING THERETO 114 SCHEDULE 9 LABOR RELATIONS 115 SCHEDULE 10 LIST OF SPECIFIED RESORTS 116 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT to CREDIT AGREEMENT (this "First Amendment"), dated as of March 30, 1998, is entered into by and among SIGNATURE RESORTS, INC., a Maryland corporation, (the "Borrower"), ALL SEASONS RESORTS, INC., an Arizona corporation, ALL SEASONS RESORTS, INC., a Texas corporation, MMG DEVELOPMENT CORP., a Florida corporation, MMG HOLDING CORP., a Florida corporation, PORT ROYAL RESORT, L.P., a South Carolina limited partnership, GRAND BEACH RESORT, LIMITED PARTNERSHIP, a Georgia limited partnership, POWHATAN ASSOCIATES, a Virginia Joint Venture, GREENSPRINGS ASSOCIATES, a Virginia Joint Venture, LAKE TAHOE RESORT PARTNERS, LLC, a California limited liability company (the foregoing parties other than the Borrower being referred to herein singularly as a "Guarantor" and collectively as the "Guarantors"), each of the financial institutions that is listed as a signatory party hereto as a "Lender" (collectively, the "Lenders"), NATIONSBANK OF TEXAS, N.A., in its capacity as the Administrative Lender under the Credit Agreement (the "Administrative Lender") and SOCIETE GENERALE, in its capacity as the Documentation Agent under the Credit Agreement (the "Documentation Agent"). BACKGROUND A. The Borrower, the Lenders, the Administrative Lender and the Documentation Agent are parties to a certain Credit Agreement dated as of February 18, 1998 (said Credit Agreement, as amended, supplemented, modified and/or restated, being referred to herein as the the "Credit Agreement"); the terms defined in the Credit Agreement and not otherwise defined herein shall be used herein as defined in the Credit Agreement and, to the extent appropriate, as amended hereby. B. The Guarantors have heretofore guaranteed all of the indebtedness, obligations and liabilities of the Borrower to the Lenders under, or in connection with, the Credit Agreement. C. The Borrower, the Lenders, the Administrative Lender and the Documentation Agent desire to amend the Credit Agreement and the Guarantors wish to consent to such amendments. NOW, THEREFORE, in consideration of the covenants, conditions and agreements hereafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are all hereby acknowledged, the Borrower, the Guarantors, the Lenders, the Administrative Lender and the Documentation Agent covenant and agree as follows: 1. AMENDMENTS. 1.1 The definition of "Commitment" set forth in Article I of the Credit Agreement is hereby amended to read as follows: 117 "`Commitment' means $117,500,000, as reduced from time to time pursuant to Section 2.6 hereof and as increased from time to time pursuant to Section 1.10 of the First Amendment (provided, however, that the aggregate amount of the Commitment shall not be increased to more than $150,000,000 without the prior written consent of all Lenders)." 1.2 The definition of "Eligible Notes Receivable" set forth in Article I of the Credit Agreement is hereby amended to read as follows: "`Eligible Notes Receivable' means at the time of any determination thereof, the Notes Receivable of the Borrower and the Restricted Subsidiaries (at least 85% of which the Purchasers in respect thereof are residents of the United States, Puerto Rico, the United States Virgin Islands or Canada) which are reasonably acceptable to the Determining Lenders in their discretion for the purposes of determining the Borrowing Base and as to which the following requirements have been fulfilled with respect to each Note Receivable: (a) The Borrower or a Restricted Subsidiary has lawful and absolute title to such Note Receivable; (b) (i) The interests of the Borrower or the applicable Restricted Subsidiary(ies) in such Note Receivable are subject to a first priority security interest in favor of the Administrative Lender pursuant to the Collateral Documents, prior to the rights of, and enforceable against, all other Persons and (ii) the interests of the Borrower or the applicable Restricted Subsidiary in the liens and other rights and agreements relating to such Note Receivable are subject to a first priority security interest in favor of the Administrative Lender pursuant to the Collateral Documents, prior to the rights of, and enforceable against, all other Persons; provided, however, that in the case of Notes Receivable attributable to Sales of Fee Simple Intervals, the Borrower or the applicable Restricted Subsidiary shall have a grace period of 60 days from and after the date of execution of the applicable Note Receivable by the applicable Purchaser in order to remedy any deficiency under clause (ii) above; (c) The Note Receivable shall not have a term of greater than one-hundred twenty (120) months and the Note Receivable shall be payable in equal monthly payments in amounts sufficient to repay in full the principal balance thereof and accrued interest thereon during such term; provided, however, that Notes Receivable having terms greater than one-hundred twenty (120) months but not greater than one-hundred eighty (180) months may be included as Eligible Notes Receivable to the extent that such longer term Notes Receivable otherwise satisfy the criteria for inclusion as Eligible Notes Receivable; (d) The Purchaser in respect of such Note Receivable shall have timely made at least the first regularly scheduled installment payment due thereon; - 2 - 118 (e) The Purchaser in respect of such Note Receivable has made a cash down payment of at least ten percent (10%) of the aggregate actual purchase price of all Time-Share Interests purchased by such Purchaser, all of the Notes Receivable with respect to such Purchaser qualify as, and are included as, Eligible Notes Receivable and as Collateral hereunder and no part of such cash down payment by such Purchaser has been made or loaned to the Purchaser by the Borrower or any of its Subsidiaries or an Affiliate of the Borrower or any of its Subsidiaries; (f) The terms of such Note Receivable have not been restructured, rewritten or otherwise modified in any manner that would reduce the interest rate with respect thereto, reduce the principal amount thereof, reduce the amount of any scheduled payment(s) with respect thereto, extend the maturity date thereof (unless such extension was granted solely for the purpose of upgrading the applicable Purchaser to a larger Unit and/or an additional Time-Share Interest in the Project), release or impair any collateral securing same, release or impair any obligations or duties of any Purchaser with respect thereto or in any manner that would otherwise result in such Note Receivable not qualifying as an Eligible Note Receivable hereunder; (g) No installment of such Note Receivable is more than fifty-nine (59) days past due; (h) The Unit in respect of such Note Receivable has been completed, developed, and furnished pursuant to the specifications provided in the Purchase Documents or a certificate of occupancy or a bond insuring the completion thereof has been posted; (i) The Purchaser is not an Affiliate of, related to or employed by, the Borrower or any of its Subsidiaries nor is the Purchaser in default under any Note Receivable or other obligation of such Purchaser to the Borrower or to any of the Borrower's Subsidiaries; (j) The Note Receivable is free and clear of all Liens, and subject to no claims of rescission, invalidity, unenforceability, illegality, defense, discount, offset or counterclaim; (k) The Purchaser in respect of such Note Receivable has no right to rescind the purchase of the Time-Share Interest; (l) All sales and financing documents relating to the Note Receivable have been executed and delivered to the Administrative Lender and have not been modified from the standard forms theretofore approved by the Administrative Lender; (m) The terms of such Note Receivable and all related instruments comply with all Laws; (n) (i) In the case of each Note Receivable attributable to a Sale of Fee Simple Interval, such Note Receivable is recognized on the books of the Borrower or the applicable Restricted Subsidiary, as applicable, as a bona fide sale of a fee simple interest time-share estate in one or more Time-Share Interests, and such sale is evidenced by Purchase Documents and secured by a first priority mortgage or deed of trust on the purchased Time-Share Interest, which mortgage or deed of trust has been assigned of record by the Borrower or the applicable Restricted Subsidiary - 3 - 119 to the Administrative Lender; provided, however, that the Borrower or the applicable Restricted Subsidiary shall have a grace period of 60 days from and after the date of execution of the applicable Note Receivable by the applicable Purchaser in order to effectuate the assignment of record to the Administrative Lender of the mortgage or deed of trust securing such Note Receivable, and (ii) In the case of each Note Receivable attributable to a Sale Under Contract For Deed, such Note Receivable is recognized on the books of the Borrower or the applicable Restricted Subsidiary, as applicable, as a bona fide sale of a fee simple interest time-share estate in one or more Units, and such sale is evidenced by Purchase Documents pursuant to which the Borrower or the applicable Restricted Subsidiary has retained record title to the real property covered thereby, and such real property is subject to a first priority mortgage or deed of trust from the Borrower or the applicable Restricted Subsidiary in favor of the Administrative Lender; (o) The Time-Share Interest purchased and to which the Note Receivable relates is not subject to any Lien (other than Liens for ad valorem taxes that are not yet due and payable, Liens for association assessments that are not yet due and payable and Liens in favor of the Administrative Lender), and either (i) the Unit with respect to the Time-Share Interest purchased and to which such Note Receivable relates is not subject to any Lien (other than Liens for ad valorem taxes that are not yet due and payable, Liens for association assessments that are not yet due and payable and Liens in favor of the Administrative Lender) or (ii) the Time-Share Interest purchased and to which the Note Receivable relates has been permanently and irrevocably released from any such Lien (including, without limitation, any after-acquired property provisions thereof) with respect to such Unit; (p) (i) In the case of each Note Receivable attributable to a Sale of Fee Simple Interval, the Note Receivable is secured by a Deed of Trust which is insured under a mortgagee title insurance policy [or if such mortgagee's title insurance policy has not been issued, a binding, irrevocable and unconditional (other than for conditions acceptable to the Administrative Lender) commitment to issue such mortgagee's title insurance policy] in favor of the Administrative Lender acceptable to the Administrative Lender, subject only to those exceptions to title as the Administrative Lender approves, and (ii) in the case of each Note Receivable attributable to a Sale Under Contract For Deed, the Deed of Trust granted to the Administrative Lender by the Borrower or the applicable Restricted Subsidiary in connection therewith is insured under a mortgagee title insurance policy [or if such mortgagee's title insurance policy has not been issued, a binding, irrevocable and unconditional (other than for conditions acceptable to the Administrative Lender) commitment to issue such mortgagee's title insurance policy] in favor of the Administrative Lender acceptable to the Administrative Lender, subject only to those exceptions to title as the Administrative Lender approves; provided, however, that the Borrower or the applicable Restricted Subsidiary shall have a grace period of 60 days from and after the date of execution of the applicable Note Receivable by the applicable Purchaser in order to remedy any deficiency under this clause; (q) Payments under the Note Receivable are to be in legal tender of the United States; - 4 - 120 (r) The Note Receivable and the other Purchase Documents are valid, genuine and enforceable against the Purchaser; (s) The Purchaser in respect of the Note Receivable has not assigned his or her obligations under such Note Receivable or rights in the applicable Time-Share Interest, except to the extent that any such Purchaser has assigned its interest in a Time-Share Interest to such Purchaser's former spouse in connection with divorce proceedings between such Purchaser and such former spouse or to a member of such Purchaser's immediate family and, in either case, such Purchaser remains primarily liable with respect to such Note Receivable; (t) The payments due under such Note Receivable have been made by the Purchaser in respect thereof and not by the Borrower or any of its Subsidiaries or any Affiliate of the Borrower or any of its Subsidiaries on such Purchaser's behalf; (u) The Purchaser in respect of such Note Receivable is not subject to any Debtor Relief Laws and is not an adverse party in any Litigation (and has not threatened any Litigation) with the Borrower or any of its Subsidiaries or any Lender; (v) The Borrower or the applicable Restricted Subsidiary, as applicable, has performed all of its obligations to the Purchasers in respect of such Note Receivable, and there shall be no executory obligations to such Purchaser to be performed by the Borrower or the applicable Restricted Subsidiary; and (w) The Project containing the Unit subject to such Note Receivable is located in the United States of America or in such other jurisdiction(s) as may, from time to time, be designated in writing by the Determining Lenders. Notwithstanding anything to the contrary contained herein, (i) the aggregate outstanding principal balance of Notes Receivable included in the Borrowing Base and attributable to Sales Under Contracts For Deed shall not, at any time, exceed ten percent (10%) of the aggregate outstanding principal balance of all Eligible Notes Receivable included in the Borrowing Base, (ii) the aggregate outstanding principal balance of Notes Receivable included in the Borrowing Base and having terms greater than one-hundred twenty (120) months shall not, at any time, exceed fifteen percent (15%) of the aggregate outstanding principal balance of all Eligible Note Receivable included in the Borrowing Base and (iii) the aggregate outstanding principal balance of Notes Receivable included in the Borrowing Base and with respect to which any grace period under clause(s) (b),(n) and/or (p) of the foregoing definition of "Eligible Notes Receivable" remains in effect shall not, at any time, exceed the lesser of (x) $15,000,000 and (y) fifteen percent (15%) of the aggregate outstanding principal balance of all Eligible Notes Receivable included in the Borrowing Base." 1.3 The definition of "Net Exposure Under Securitization" set forth in Article I of the Credit Agreement is hereby amended to read as follows: - 5 - 121 "`Net Exposure Under Securitization' means, for any date of calculation, the sum of (i) any and all obligations and liabilities of the Borrower or any Restricted Subsidiary under, or in connection with, any Securitization, as of such date of calculation, to the extent that same constitute recourse liabilities of the Borrower or of such Restricted Subsidiary and (ii) the fair market value of any and all property of the Borrower or of any Restricted Subsidiary that is pledged or encumbered, or as to which the interest(s) of the Borrower or any Restricted Subsidiary are subordinated or otherwise impaired, as security for or as a credit enhancement or otherwise in connection with, any Securitization." 1.4 The definition of "Note Receivable" set forth in Article I of the Credit Agreement is hereby amended to read as follows: "`Note Receivable' means a promissory note executed by a Purchaser in favor of the Borrower or a Restricted Subsidiary which has arisen out of a Sale of Fee Simple Interval or a Sale Under Contract For Deed to a Purchaser." 1.5 The definition of "Specified Percentage" set forth in Article I of the Credit Agreement is hereby amended to read as follows: "`Specified Percentage' means, as to any Lender, the percentage indicated beside its name on the signature pages of the First Amendment, or if applicable, specified in its most recent Assignment Agreement or the most recent amendment to this Agreement and, following any increase in the Commitment pursuant to Section 1.10 of the First Amendment, as to any Lender, (i) if such Lender has not agreed to increase its portion of the Commitment, a percentage equal to the quotient of (expressed as a percentage) (x) such Lender's Specified Percentage immediately prior to such increase in the Commitment, times the Commitment immediately prior to such increase divided by (y) the Commitment, as increased, or (ii) if such Lender has agreed to increase its portion of the Commitment, a percentage acceptable to such Lender and the Administrative Lender." 1.6 The definition of "Time Share Interest" set forth in Article I of the Credit Agreement is hereby amended to read as follows: "`Time Share Interest' means the property, rights, and interests acquired by a Purchaser under a Sale of Fee Simple Interval or a Sale Under Contract For Deed." - 6 - 122 1.7 Article I of the Credit Agreement is hereby amended by adding thereto the following additional defined terms: "`First Amendment' means that certain First Amendment hereto, dated as of March 30, 1998." "`Sale of Fee Simple Interval' means a sale of an undivided fee simple ownership interest as tenants in common with all other Purchasers with respect to any Unit with respect to the exclusive right to use such Unit and the common areas for the Project with respect to such Unit for a specified length of time, on an annual or a biennial basis, pursuant to which the Purchaser acquires record title to such interest contemporaneously with, or substantially contemporaneously with, the consummation of such sale." "`Sale Under Contract For Deed' means a sale of an undivided fee simple ownership interest as tenants in common with all other Purchasers with respect to any Unit with respect to the exclusive right to use such Unit and the common areas for the Project with respect to such Unit for a specified length of time, on an annual or a biennial basis, pursuant to which the Purchaser acquires beneficial title to such interest contemporaneously with, or substantially contemporaneously with, the consummation of such sale, but the Purchaser does not receive record title to such interest until the Purchaser has satisfied all of the conditions precedent set forth in the applicable sales documentation (including, without limitation, the payment in full of the purchase price for such interest)." 1.8 Section 7.13 of the Credit Agreement is hereby deleted in its entirety and the following is hereby substituted in lieu thereof: "Section 7.13 Maximum Senior Debt to Total Capital. The Borrower shall not permit the ratio of Senior Debt to Total Capital to exceed 0.30 to 1 at the end of any fiscal quarter." 1.9 Section 7.14 of the Credit Agreement is hereby deleted in its entirety and the following is hereby substituted in lieu thereof: "Section 7.14 Maximum Total Debt to Total Capital. The Borrower shall not permit the ratio of Total Debt to Total Capital to exceed 0.73 to 1 at the end of any fiscal quarter." 1.10 Notwithstanding anything to the contrary contained in the Credit Agreement, the parties hereto acknowledge and agree that hereafter, upon request of the - 7 - 123 Borrower, the Commitment may, from time to time, be increased to an aggregate amount of up to $150,000,000 with the consent of only such of the Lenders as are increasing their respective portion of such Commitment, it being the express intent and understanding of the parties hereto that the consent of any Lender shall not be required in connection with any such increase in the Commitment if, and to the extent that, the dollar amount of such Lender's portion of the Commitment is not increased thereby. The Administrative Lender shall use its best efforts to notify each Lender of any such increase in the Commitment at least two (2) days prior to the effective date thereof. 2. ADDITIONAL COVENANTS; REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its execution and delivery hereof, the Borrower and each Guarantor covenants, agrees, represents and warrants that, as of the date hereof and after giving effect to the amendments contemplated by the foregoing Section 1: (a) Neither the execution and delivery of this Amendment nor the consummation of the transactions contemplated hereby shall terminate, limit or otherwise reduce the obligations and/or liabilities of such Guarantor under, or in connection with, such Guarantor's guaranty of the Obligations or any other Loan Document executed by such Guarantor, all of which obligations and liabilities are hereby ratified and confirmed by each Guarantor; (b) No event has occurred and is continuing which constitutes a Default or an Event of Default; (c) The Borrower has full power and authority to execute and deliver this First Amendment and this First Amendment, and the Credit Agreement, as amended hereby, constitute the legal, valid and binding obligations of the Borrower, enforceable in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law); (d) Each Guarantor has full power and authority to execute and deliver this First Amendment and this First Amendment constitutes the legal, valid and binding obligations of such Guarantor, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law); and (e) No authorization, approval, consent, or other action by, notice to, or filing with, any governmental authority or other Person (other than the consent of the respective Board of Directors of each of the Borrower and each Guarantor), is required for the execution, delivery or performance by the Borrower or any Guarantor of this First Amendment. 3. CONDITIONS OF EFFECTIVENESS. This First Amendment shall be effective as of March 30, 1998, subject to the following: - 8 - 124 (a) the Administrative Lender shall have received a counterpart of this First Amendment executed by each Lender and by the Documentation Agent; (b) the Administrative Lender shall have received a counterpart of this First Amendment executed by the Borrower and by each Guarantor; (c) the Administrative Lender shall have received all of the payments required to be made by the Borrower as of the date of this Amendment pursuant to the terms of a certain fee letter agreement, of even date herewith, among the Borrower and the Administrative Lender; (d) the Administrative Lender shall have received certified resolutions of the respective board of directors of each of the Borrower and each Guarantor authorizing the execution, delivery and performance of this First Amendment; and (e) the Administrative Lender shall have received, in form and substance satisfactory to the Administrative Lender, such other documents, certificates and instruments as the Administrative Lender shall require. 4. REFERENCE TO THE CREDIT AGREEMENT. (a) Upon the effectiveness of this First Amendment, each reference in the Credit Agreement to "this Agreement", "hereunder", "herein", or words of like import shall mean and be a reference to the Credit Agreement, as affected and amended hereby. (b) The Credit Agreement, as amended by the amendments referred to above, and all other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. 5. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all reasonable costs and expenses of the Administrative Lender in connection with the preparation, reproduction, execution and delivery of this First Amendment and the other instruments and documents to be delivered hereunder (including the reasonable fees and out-of-pocket expenses of counsel for the Administrative Lender with respect thereto and with respect to advising the Administrative Lender as to its rights and responsibilities under the Credit Agreement, as hereby amended). 6. EXECUTION IN COUNTERPARTS. This First Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 7. GOVERNING LAW; BINDING EFFECT. This First Amendment shall be governed by and construed in accordance with the laws of the State of Texas and shall be binding upon the Borrower, each Guarantor, each Lender, the Administrative Lender and the Documentation Agent and their respective successors and assigns. - 9 - 125 8. HEADINGS. Section headings in this First Amendment are included herein for convenience of reference only and shall not constitute a part of this First Amendment for any other purpose. 9. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS FIRST AMENDMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as of the date first above written. BORROWER: SIGNATURE RESORTS, INC. By: /s/ DEWEY W. CHAMBERS --------------------------------- Dewey W. Chambers --------------------------------- Vice President --------------------------------- GUARANTORS: ALL SEASONS RESORTS, INC., an Arizona corporation By: /s/ DEWEY W. CHAMBERS --------------------------------- Name: Dewey W. Chambers ------------------------------- Title: Vice President ------------------------------ ALL SEASONS RESORTS, INC., a Texas corporation By: /s/ DEWEY W. CHAMBERS --------------------------------- Name: Dewey W. Chambers ------------------------------- Title: President ------------------------------ MMG DEVELOPMENT CORP., a Florida corporation - 10 - 126 By: /s/ DEWEY W. CHAMBERS --------------------------------- Name: Dewey W. Chambers ------------------------------- Title: Vice President ------------------------------ MMG HOLDING CORP., a Florida corporation By: /s/ DEWEY W. CHAMBERS --------------------------------- Name: Dewey W. Chambers ------------------------------- Title: Vice President ------------------------------ PORT ROYAL RESORT, L.P., a South Carolina limited partnership By: Argosy/KGI Port Royal Partners, a South Carolina general partnership, as its general partner By: KGI Port Royal, Inc., a South Carolina corporation, as its general partner By: /s/ DEWEY W. CHAMBERS ----------------------------- Name: Dewey W. Chambers --------------------------- Title: Vice President -------------------------- - 11 - 127 GRAND BEACH RESORT, LIMITED PARTNERSHIP, a Georgia limited partnership By: Grand Beach Partners, L.P., a California limited partnership, as its general partner By: Argosy/KGI Grand Beach Investment Partnership, a California general partnership, as its general partner By: Argosy Grand Beach, Inc., a Georgia corporation, as its general partner By: /s/ DEWEY W. CHAMBERS --------------------------- Name: Dewey W. Chambers ------------------------- Title: Vice President ------------------------ POWHATAN ASSOCIATES, a Virginia Joint Venture By: Plantation Resort Group, Inc., a Virginia corporation, Joint Venturer By: /s/ DEWEY W. CHAMBERS ----------------------------------- Name: Dewey W. Chambers --------------------------------- Title: Vice President --------------------------------- By: Williamsburg Vacations, Inc., a Virginia corporation, Joint Venturer By: /s/ DEWEY W. CHAMBERS ----------------------------------- Name: Dewey W. Chambers --------------------------------- Title: Vice President --------------------------------- - 12 - 128 GREENSPRINGS ASSOCIATES, a Virginia Joint Venture By: Plantation Resort Group, Inc., a Virginia corporation, Joint Venturer By: /s/ DEWEY W. CHAMBERS ----------------------------------- Name: Dewey W. Chambers --------------------------------- Title: Vice President --------------------------------- By: Greensprings Plantation Resort, Inc., a Virginia corporation, Joint Venturer By: /s/ DEWEY W. CHAMBERS ----------------------------------- Name: Dewey W. Chambers --------------------------------- Title: Vice President --------------------------------- LAKE TAHOE RESORT PARTNERS, LLC, a California limited liability company By: AKGI Lake Tahoe Investments, Inc., a California corporation, as its managing member By: /s/ DEWEY W. CHAMBERS ----------------------------------- Name: Dewey W. Chambers --------------------------------- Title: Vice President --------------------------------- By: KGK Lake Tahoe Development, Inc., a California corporation, as its member By: /s/ DEWEY W. CHAMBERS ----------------------------------- Name: Dewey W. Chambers --------------------------------- - 13 - 129 Title: Vice President --------------------------------- - 14 - 130 ADMINISTRATIVE LENDER: NATIONSBANK OF TEXAS, N.A., as Administrative Lender By: /s/ TOM BLAKE --------------------------------- Tom Blake Senior Vice President DOCUMENTATION AGENT: SOCIETE GENERALE, as Documentation Agent By: /s/ J. BLAINE SHAUM --------------------------------- Name: J. Blaine Shaum ------------------------------- Title: Regional Manager ------------------------------ 2029 Century Park East, Suite 2900 Los Angeles, California 90067 LENDERS: NATIONSBANK OF TEXAS, N.A., as a Lender, Swing Line Bank and Issuing Bank SPECIFIED PERCENTAGE: 31.91489362% By: /s/ TOM BLAKE --------------------------------- Tom Blake Senior Vice President 901 Main Street, 67th Floor Dallas, Texas 75202 Attn: Tom Blake Senior Vice President - 15 - 131 SOCIETE GENERALE, as a Lender SPECIFIED PERCENTAGE: 26.59574468% By: /s/ J. BLAINE SHAUM --------------------------------- Name: J. Blaine Shaum ------------------------------- Title: Regional Manager ------------------------------ 2029 Century Park East, Suite 2900 Los Angeles, California 90067 - 16 - 132 BT COMMERCIAL CORPORATION SPECIFIED PERCENTAGE: 15.95744681% By: /s/ ALBERT L. FISCHETTI --------------------------------- Name: Albert L. Fischetti ------------------------------- Title: Senior Vice President ------------------------------ 14 Wall Street, 3rd Floor New York, New York 10005 - 17 - 133 CREDIT LYONNAIS NEW YORK BRANCH SPECIFIED PERCENTAGE: 12.76595745% By: /s/ JAN HAZELTON --------------------------------- Name: Jan Hazelton ------------------------------- Title: Vice President ------------------------------ 1301 Avenue of the Americas New York, New York 10019 - 18 - 134 BANK OF HAWAII SPECIFIED PERCENTAGE: 12.76595745% By: /s/ DONNA R. PARKER --------------------------------- Name: Donna R. Parker ------------------------------- Title: Vice President ------------------------------ ------------------------------ ------------------------------ - 19 - 135 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT to CREDIT AGREEMENT (this "Second Amendment"), dated as of May 29, 1998, is entered into by and among SIGNATURE RESORTS, INC., a Maryland corporation, (the "Borrower"), ALL SEASONS RESORTS, INC., an Arizona corporation, ALL SEASONS RESORTS, INC., a Texas corporation, MMG DEVELOPMENT CORP., a Florida corporation, MMG HOLDING CORP., a Florida corporation, PORT ROYAL RESORT, L.P., a South Carolina limited partnership, GRAND BEACH RESORT, LIMITED PARTNERSHIP, a Georgia limited partnership, POWHATAN ASSOCIATES, a Virginia Joint Venture, GREENSPRINGS ASSOCIATES, a Virginia Joint Venture, LAKE TAHOE RESORT PARTNERS, LLC, a California limited liability company (the foregoing parties other than the Borrower being referred to herein singularly as a "Guarantor" and collectively as the "Guarantors"), each of the financial institutions that is listed as a signatory party hereto as a "Lender" (collectively, the "Lenders"), NATIONSBANK, N.A., successor by merger to NationsBank of Texas, N.A., in its capacity as the Administrative Lender under the Credit Agreement (the "Administrative Lender") and SOCIETE GENERALE, in its capacity as the Documentation Agent under the Credit Agreement (the "Documentation Agent"). BACKGROUND A. The Borrower, the Lenders, the Administrative Lender and the Documentation Agent are parties to a certain Credit Agreement dated as of February 18, 1998 (said Credit Agreement, as amended, supplemented, modified and/or restated, being referred to herein as the the "Credit Agreement"); the terms defined in the Credit Agreement and not otherwise defined herein shall be used herein as defined in the Credit Agreement and, to the extent appropriate, as amended hereby. B. The Guarantors have heretofore guaranteed all of the indebtedness, obligations and liabilities of the Borrower to the Lenders under, or in connection with, the Credit Agreement. C. The Borrower, the Lenders, the Administrative Lender and the Documentation Agent desire to amend the Credit Agreement and the Guarantors wish to consent to such amendments. NOW, THEREFORE, in consideration of the covenants, conditions and agreements hereafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are all hereby acknowledged, the Borrower, the Guarantors, the Lenders, the Administrative Lender and the Documentation Agent covenant and agree as follows: 136 1. AMENDMENTS. 1.1 Article I of the Credit Agreement is hereby amended by adding thereto the following additional defined term: "`Adjusted Net Worth' means the sum of the following for the Borrower and the Restricted Subsidiaries, on a consolidated basis, determined in accordance with GAAP, (a) Net Worth minus (b) the sum of the following (without duplication in respect of items already deducted in arriving at Net Worth): Intangible Assets, and any write-up in the book value of assets resulting from revaluation thereof subsequent to December 31, 1996." 1.2 Article I of the Credit Agreement is hereby amended by deleting the defined term "Tangible Net Worth" therefrom. 1.3 The definition of "Intangible Assets" set forth in Article I of the Credit Agreement is hereby amended to read as follows: "`Intangible Assets' means those assets which are treated as intangible pursuant to GAAP, and in any event including, without limitation: (a) obligations, if any, owing by Affiliates to the Borrower or to any Restricted Subsidiary, (b) accounts, notes or mortgages receivable which are deemed by the Borrower, any of the Restricted Subsidiaries or the Administrative Lender to be uncollectible or which should be subject to a reserve for bad debts in accordance with GAAP or which are subject to claims or set-offs (to the extent of such claim or set-off); (c) leases and leasehold improvements; (d) any asset which is intangible or lacks intrinsic and marketable value or collectibility, including without limitation noncompetition agreements, patents, copyrights, trademarks, franchises or organization or research and development costs; (e) organizational and experimental expense; and (f) unamortized debt discount and expense; provided, however, that goodwill shall not be included as an Intangible Asset for purposes of this Agreement." 1.4 The definition of "Total Capital" set forth in Article I of the Credit Agreement is hereby amended to read as follows: "`Total Capital' means, as of any date of determination, the sum of (a) Total Debt plus (b) Adjusted Net Worth." 2 137 1.5 Section 7.12 of the Credit Agreement is hereby deleted in its entirety and the following is hereby substituted in lieu thereof: "Section 7.12 Minimum Adjusted Net Worth. The Borrower shall not permit the Adjusted Net Worth to be less than an amount equal to the sum of (a) $155,000,000, plus (b) 50% of cumulative Net Income of the Borrower and the Restricted Subsidiaries for the period from, but not including, June 30, 1997 through the date of calculation (but excluding from the calculation of such cumulative Net Income the effect, if any, of any fiscal quarter (or portion of a fiscal quarter not then ended) of the Borrower or any Restricted Subsidiary for which Net Income was a negative number), plus (c) 75% of the Net Cash Proceeds received by the Borrower after June 30, 1997 as a result of any offering of Equity or pursuant to any conversion or exchange of convertible Indebtedness or preferred Capital Stock into common Capital Stock of the Borrower, plus (d) an amount equal to 75% of the Adjusted Net Worth, calculated with respect to such Person, of any Person that becomes a Restricted Subsidiary or is merged into or consolidated with the Borrower or any Restricted Subsidiary after June 30, 1997 or substantially all of the assets of which are acquired by the Borrower or any Restricted Subsidiary after June 30, 1997, (in each case determined as of the date that such Person becomes a Restricted Subsidiary or is merged into or consolidated with the Borrower or a Restricted Subsidiary or that such assets are so acquired), provided that the purchase price paid therefor is paid in equity securities of the Borrower or any Subsidiary of the Borrower." 1.6 Exhibit "E" to the Credit Agreement is hereby deleted in its entirety and Exhibit "E-1" attached hereto is substituted in lieu thereof. From and after the effective date of this Second Amendment, any and all references in the Credit Agreement to "Exhibit 'E'" shall be deemed to be references to "Exhibit 'E-1'" attached hereto. 2. ADDITIONAL COVENANTS; REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its execution and delivery hereof, the Borrower and each Guarantor covenants, agrees, represents and warrants that, as of the date hereof and after giving effect to the amendments contemplated by the foregoing Section 1: (a) Neither the execution and delivery of this Amendment nor the consummation of the transactions contemplated hereby shall terminate, limit or otherwise reduce the obligations and/or liabilities of such Guarantor under, or in connection with, such Guarantor's guaranty of the Obligations or any other Loan Document executed by such Guarantor, all of which obligations and liabilities are hereby ratified and confirmed by each Guarantor; 3 138 (b) No event has occurred and is continuing which constitutes a Default or an Event of Default; (c) The Borrower has full power and authority to execute and deliver this Second Amendment and this Second Amendment, and the Credit Agreement, as amended hereby, constitute the legal, valid and binding obligations of the Borrower, enforceable in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law); (d) Each Guarantor has full power and authority to execute and deliver this Second Amendment and this Second Amendment constitutes the legal, valid and binding obligations of such Guarantor, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law); and (e) No authorization, approval, consent, or other action by, notice to, or filing with, any governmental authority or other Person (other than the consent of the respective Board of Directors of each of the Borrower and each Guarantor), is required for the execution, delivery or performance by the Borrower or any Guarantor of this Second Amendment. 3. CONDITIONS OF EFFECTIVENESS. This Second Amendment shall be effective as of May 29, 1998, subject to the following: (a) the Administrative Lender shall have received a counterpart of this Second Amendment executed by each Lender and by the Documentation Agent; (b) the Administrative Lender shall have received a counterpart of this Second Amendment executed by the Borrower and by each Guarantor; (c) the Administrative Lender shall have received certified resolutions of the respective board of directors of each of the Borrower and each Guarantor authorizing the execution, delivery and performance of this Second Amendment; and (d) the Administrative Lender shall have received, in form and substance satisfactory to the Administrative Lender, such other documents, certificates and instruments as the Administrative Lender shall require. 4 139 4. REFERENCE TO THE CREDIT AGREEMENT. (a) Upon the effectiveness of this Second Amendment, each reference in the Credit Agreement to "this Agreement", "hereunder", "herein", or words of like import shall mean and be a reference to the Credit Agreement, as affected and amended hereby. (b) The Credit Agreement, as amended by the amendments referred to above, and all other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. 5. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all reasonable costs and expenses of the Administrative Lender in connection with the preparation, reproduction, execution and delivery of this Second Amendment and the other instruments and documents to be delivered hereunder (including the reasonable fees and out-of-pocket expenses of counsel for the Administrative Lender with respect thereto and with respect to advising the Administrative Lender as to its rights and responsibilities under the Credit Agreement, as hereby amended). 6. EXECUTION IN COUNTERPARTS. This Second Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 7. GOVERNING LAW; BINDING EFFECT. This Second Amendment shall be governed by and construed in accordance with the laws of the State of Texas and shall be binding upon the Borrower, each Guarantor, each Lender, the Administrative Lender and the Documentation Agent and their respective successors and assigns. 8. HEADINGS. Section headings in this Second Amendment are included herein for convenience of reference only and shall not constitute a part of this Second Amendment for any other purpose. 9. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS SECOND AMENDMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. 5 140 10. IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment as of the date first above written. BORROWER: SIGNATURE RESORTS, INC. By: /s/ DEWEY W. CHAMBERS ------------------------------------------- Dewey W. Chambers Vice President and Treasurer GUARANTORS: ALL SEASONS RESORTS, INC., an Arizona corporation By: /s/ DEWEY W. CHAMBERS ------------------------------------------- Dewey W. Chambers Vice President and Treasurer ALL SEASONS RESORTS, INC., a Texas corporation By: /s/ DEWEY W. CHAMBERS ------------------------------------------- Dewey W. Chambers Vice President and Treasurer MMG DEVELOPMENT CORP., a Florida corporation By: /s/ DEWEY W. CHAMBERS ------------------------------------------- Dewey W. Chambers Vice President and Treasurer 6 141 MMG HOLDING CORP., a Florida corporation By: /s/ DEWEY W. CHAMBERS ------------------------------------------- Dewey W. Chambers Vice President and Treasurer PORT ROYAL RESORT, L.P., a South Carolina limited partnership By: Argosy/KGI Port Royal Partners, a ------------------------------------------- South Carolina general partnership, as its general partner By: KGI Port Royal, Inc., a South ---------------------------------------- Carolina corporation, as its general partner By: /s/ DEWEY W. CHAMBERS ------------------------------------ Dewey W. Chambers Vice President and Treasurer GRAND BEACH RESORT, LIMITED PARTNERSHIP, a Georgia limited partnership By: Grand Beach Partners, L.P., a California limited partnership, as its general partner By: Argosy/KGI Grand Beach Investment Partnership, a California general partnership, as its general partner By: Argosy Grand Beach, Inc., a Georgia corporation, as its general partner By: /s/ DEWEY W. CHAMBERS ------------------------------- Dewey W. Chambers Vice President and Treasurer 7 142 POWHATAN ASSOCIATES, a Virginia Joint Venture By: Plantation Resort Group, Inc., a Virginia corporation, Joint Venturer By: /s/ DEWEY W. CHAMBERS -------------------------------------- Dewey W. Chambers Vice President and Treasurer By: Williamsburg Vacations, Inc., a Virginia corporation, Joint Venturer By: /s/ DEWEY W. CHAMBERS -------------------------------------- Dewey W. Chambers Vice President and Treasurer GREENSPRINGS ASSOCIATES, a Virginia Joint Venture By: Plantation Resort Group, Inc., a Virginia corporation, Joint Venturer By: /s/ DEWEY W. CHAMBERS ---------------------------------------- Dewey W. Chambers Vice President and Treasurer By: Greensprings Plantation Resort, Inc., a Virginia corporation, Joint Venturer By: /s/ DEWEY W. CHAMBERS ---------------------------------------- Dewey W. Chambers Vice President and Treasurer 8 143 LAKE TAHOE RESORT PARTNERS, LLC, a California limited liability company By: AKGI Lake Tahoe Investments, Inc., a California corporation, as its managing member By: /s/ DEWEY W. CHAMBERS ---------------------------------------- Dewey W. Chambers Vice President and Treasurer By: KGK Lake Tahoe Development, Inc., a California corporation, as its member By: Dewey W. Chambers Vice President and Treasurer ADMINISTRATIVE LENDER: NATIONSBANK, N.A., successor by merger to NationsBank of Texas, N.A., as Administrative Lender By: /s/ TOM BLAKE ------------------------------------------- Tom Blake Senior Vice President DOCUMENTATION AGENT: SOCIETE GENERALE, as Documentation Agent By: /s/ J. BLAINE SHAUM Name: J. Blaine Shaum Title: Managing Director 2029 Century Park East, Suite 2900 Los Angeles, California 90067 9 144 LENDERS: NATIONSBANK, N.A., successor by merger to NationsBank of Texas, N.A., as a Lender, Swing Line Bank and Issuing Bank SPECIFIED PERCENTAGE: 31.91489362% By: /s/ TOM BLAKE ------------------------------------------- Tom Blake Senior Vice President 901 Main Street, 67th Floor Dallas, Texas 75202 Attn: Tom Blake Senior Vice President 10 145 SOCIETE GENERALE, as a Lender SPECIFIED PERCENTAGE: 26.59574468% By: /s/ J. BLAINE SHAUM ------------------------------------------- Name: J. Blaine Shaum ----------------------------------------- Title: Managing Director ---------------------------------------- 2029 Century Park East, Suite 2900 Los Angeles, California 90067 11 146 BANKERS TRUST COMPANY SPECIFIED PERCENTAGE: 15.95744681% By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- 130 Liberty Street, 14th Floor New York, New York 10003 12 147 CREDIT LYONNAIS NEW YORK BRANCH SPECIFIED PERCENTAGE: 12.76595745% By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- 1301 Avenue of the Americas New York, New York 10019 13 148 BANK OF HAWAII SPECIFIED PERCENTAGE: 12.76595745% By: /s/ ROBERT M. WHEELER III ------------------------------------------- Name: Robert M. Wheeler III ----------------------------------------- Title: Vice President ---------------------------------------- 14 149 EXHIBIT "E-1" COMPLIANCE CERTIFICATE ________,______ NationsBank, N.A., as Administrative Lender 901 Main Street, 67th Floor Dallas, Texas 75202 Attention: Tom Blake, Senior Vice President This Compliance Certificate is made as of _______, ____. The undersigned certifies that the calculations set forth herein are true, accurate, and complete, and are made in accordance with the provisions of the Credit Agreement among Signature Resorts, Inc., NationsBank, N.A., successor by merger to NationsBank of Texas, N.A., as Administrative Lender, Societe Generale, as Documentation Agent and Lenders, dated as of February 18, 1998 (as amended, modified or supplemented, "Credit Agreement"). All defined terms used herein but not specifically defined shall have the meanings set forth in the Credit Agreement. 1. Covenant Calculations. D. Section 7.3(g). Guaranties of Indebtedness 1. Maximum aggregate amount - 10% of combined total assets of $__________ the Borrower and the Restricted Subsidiaries 2. Actual $__________ 3. Difference [(1) - (2)] $__________ E. Section 7.3(i). Investments in any Person other than the Borrower or a Restricted Subsidiary 1. Maximum aggregate amount - 10% of combined total assets of $__________ the Borrower and the Restricted Subsidiaries 2. Actual $__________ 3. Difference [(1) - (2)] $__________ F. Section 7.3(j). Other Investments 1. Maximum in aggregate amount outstanding at any time $7,500,000 2. Actual $__________
EXHIBIT "E-1" - PAGE 1 150 3. Difference [(1) - (2)] $__________ G. Section 7.5(f). Other Asset Sales 1. Maximum in aggregate amount during any one fiscal year $5,000,000 2. Actual $__________ 3. Difference [(1) - (2)] $__________ H. Section 7.7. Capital Expenditures 1. Maximum during any fiscal year in aggregate amount $10,000,000 2. Actual $__________ 3. Difference [(1) - (2)] $__________ I. Section 7.8(c). Dividends payable by the Borrower in respect of its Capital Stock 1. Maximum in aggregate amount during any fiscal year a. 50% of Net Income of the Borrower (excluding from $__________ calculation any Net Income attributable to any Subsidiary of the Borrower other than the Restricted Subsidiaries) during the immediately preceding fiscal year of the Borrower b. Maximum [(a) + $10,000,000] $__________ 2. Actual $__________ 3. Difference [(1) - (2)] $__________ J. Section 7.11. Minimum Interest Coverage Ratio 1. Minimum at the end of any fiscal quarter 2.50 to 1 2. Actual, calculated for the four consecutive fiscal quarters ending on the date of calculation a. EBITDA, calculated on a consolidated basis for the Borrower and its Subsidiaries (1) Pretax Net Income (excluding therefrom, to the $__________ extent included in determining Pretax Net Income, any items of extraordinary gain, including net gains on the sale of assets other than asset sales in the ordinary course of business, and adding thereto, to the extent included in determining Pretax Net Income, any items of extraordinary loss, including net losses on the sale of assets) (2) Interest expense $__________
EXHIBIT "E-1" - PAGE 2 151 (3) Non-recurring charges incurred as a result of $__________ business combinations utilizing the pooling accounting method to the extent that such charges would be permitted to be capitalized utilizing the purchase accounting method (4) Depreciation $__________ (5) Amortization $__________ (6) Other non-cash charges (to the extent included $__________ in determining EBIT) (7) EBITDA [(1) + (2) + (3) + (4) + (5) + (6)] $__________ b. Interest Expense (including interest expense pursuant to $__________ Capitalized Lease Obligations) c. Interest Coverage Ratio [(a) to (b)] _________ to 1 K. Section 7.12. Minimum Adjusted Net Worth 1. Minimum a. 50% of cumulative Net Income of the Borrower and $__________ the Restricted Subsidiaries for the period from, but not including, June 30, 1997 through the date of calculation (but excluding from the calculation of such cumulative Net Income the effect, if any, of any fiscal quarter (or portion of a fiscal quarter not then ended) of the Borrower or any Restricted Subsidiary for which Net Income was a negative number) b. 75% of the Net Cash Proceeds received by the $__________ Borrower after June 30, 1997 as a result of any offering of Equity or pursuant to any conversion or exchange of convertible Indebtedness or preferred Capital Stock into common Capital Stock of the Borrower c. 75% of the Adjusted Net Worth of any Person that $__________ becomes a Restricted Subsidiary or is merged into or consolidated with the Borrower or any Restricted Subsidiary after June 30, 1997 or substantially all of the assets of which are acquired by the Borrower or any Restricted Subsidiary after June 30, 1997 (in each case determined as of the date that such Person becomes a Restricted Subsidiary or is merged into or consolidated with the Borrower or a Restricted Subsidiary or that such assets are so acquired) provided that the purchase price paid therefor is paid in equity securities of the Borrower or any Subsidiary of the Borrower
EXHIBIT "E-1" - PAGE 3 152 d. Minimum Adjusted Net Worth [(a) + (b) + (c) + $ $155,000,000] 2. Actual (for Borrower and the Restricted Subsidiaries, on a consolidated basis) a. Net Worth $__________ b. Intangible Assets (exclusive of goodwill) (1) Obligations, if any, owing by Affiliates to the $__________ Borrower or to any Restricted Subsidiary (2) Accounts, notes or mortgages receivable which $__________ are deemed by the Borrower, any of the Restricted Subsidiaries or the Administrative Lender to be uncollectible or which should be subject to a reserve for bad debts in accordance with GAAP or which are subject to claims or set-offs (to the extent of such claim or set-off) (3) Leases and leasehold improvements $__________ (4) Any asset which is intangible or lacks intrinsic $__________ and marketable value or collectibility, including without limitation noncompetition agreements, patents, copyrights, trademarks, franchises or organization or research and development costs (5) Organizational and experimental expense $__________ (6) Unamortized debt discount and expense $__________ (7) Intangible Assets [(1) + (2) + (3) + (4) + $__________ (5) + (6)] c. Any write-up in the book value of assets resulting from $__________ revaluation thereof subsequent to December 31, 1996 d. Actual Adjusted Net Worth [(a) - (b) - (c)] $__________ 3. Difference [(2) - (1)] $__________ L. Section 7.13. Maximum Senior Debt to Total Capital 1. Maximum at the end of any fiscal quarter 0.30 to 1 2. Actual a. Senior Debt (1) Total Debt (a) Indebtedness for borrowed money $__________
EXHIBIT "E-1" - PAGE 4 153 (b) Obligations evidenced by bonds, $__________ debentures, notes or other similar instruments (c) Obligations to pay the deferred $__________ purchase price of property or services other than trade payables incurred in the ordinary course of business (d) Obligations in respect of letters of $__________ credit, banker's acceptances and similar instruments (e) Obligations under Hedge Agreements $__________ (f) Capitalized Lease Obligations $__________ (g) Obligations in respect of payment, $__________ performance and similar bonds (h) Net Exposure Under Securitization $__________ (i) Total Debt [(a) + (b) + (c) + (d) + $__________ (e) + (f) + (g) + (h)] (2) Subordinated Debt (a) The 5.75% Convertible Subordinated $__________ Notes, issued by the Borrower as of January 15, 1997, in the aggregate original principal amount of $138,000,000, due in 2007 (b) The 9.75% Senior Subordinated Notes, $__________ issued by the Borrower as of August 1, 1997, in the aggregate original principal amount of $200,000,000, due October 1, 2007 (c) Any other Indebtedness of the $__________ Borrower or any Subsidiary of the Borrower having maturities and terms, and which is subordinated to payment of the Obligations in a manner, approved in writing by the Administrative Lender and the Determining Lenders, with only such changes or amendments as are not prohibited by Section 7.19 of the Credit Agreement (d) Subordinated Debt [(a) + (b) +(c)] $__________ (3) Senior Debt [(1) - (2)] $__________
EXHIBIT "E-1" - PAGE 5 154 b. Total Capital (1) Total Debt (I.2.a.(1)(i) above) $__________ (2) Adjusted Net Worth (H.2.d. above) $__________ (3) Total Capital [(1) + (2)] $__________ c. Actual Senior Debt to Total Capital [(a) to (b)] to 1 -------- M. Section 7.14. Maximum Total Debt to Total Capital 1. Maximum at the end of any fiscal quarter after December 31, 0.73 to 1 1997 2. Actual a. Total Debt (I.2.a.(1)(i) above) $__________ b. Total Capital (I.2.b.(3) above) $__________ c. Actual Total Debt to Total Capital [(a) to (b)] to 1 -------- N. Section 7.15. Sale and Leaseback 1. Maximum aggregate amount during any fiscal year $2,000,000 2. Actual $__________ 3. Difference [(1) - (2)] $__________
The undersigned hereby further certifies to the following as of the date of this Certificate: 1. The undersigned has reviewed the relevant terms of this Certificate and has made, or caused to be made, under his/her supervision, a review of the transactions and condition of the Borrower from the beginning of the accounting period covered by the financial statements being delivered herewith to the date of this Certificate and that such review has not disclosed the existence during such period of any condition or event which constitutes a Default or Event of Default. 2. The Borrower is in compliance in all material respects with all of the terms and conditions of the Credit Agreement and other Loan Documents. EXHIBIT "E-1" - PAGE 6 155 3. The financial statements delivered to Administrative Lender have been prepared according to GAAP applied on a consistent basis in all material respects with those previously delivered. SIGNATURE RESORTS, INC. By: --------------------------------- Name: Title: EXHIBIT "E-1" - PAGE 7 156 THIRD AMENDMENT TO CREDIT AGREEMENT THIS THIRD AMENDMENT to CREDIT AGREEMENT (this "Amendment"), dated as of August 13, 1998, is entered into by and among SUNTERRA CORPORATION (formerly known as Signature Resorts, Inc.), a Maryland corporation, (the "Borrower"), ALL SEASONS RESORTS, INC., an Arizona corporation, ALL SEASONS RESORTS, INC., a Texas corporation, MMG DEVELOPMENT CORP., a Florida corporation, MMG HOLDING CORP., a Florida corporation, PORT ROYAL RESORT, L.P., a South Carolina limited partnership, GRAND BEACH RESORT, LIMITED PARTNERSHIP, a Georgia limited partnership, POWHATAN ASSOCIATES, a Virginia Joint Venture, GREENSPRINGS ASSOCIATES, a Virginia Joint Venture, LAKE TAHOE RESORT PARTNERS, LLC, a California limited liability company, (the foregoing parties other than the Borrower being referred to herein singularly as a "Guarantor" and collectively as the "Guarantors"), each of the financial institutions that is listed as a signatory party hereto as a "Lender" (collectively, the "Lenders"), NATIONSBANK, N.A., successor by merger to NationsBank of Texas, N.A., in its capacity as the Administrative Lender under the Credit Agreement (the "Administrative Lender") and SOCIETE GENERALE, in its capacity as the Documentation Agent under the Credit Agreement (the "Documentation Agent"). BACKGROUND A. The Borrower, the Lenders, the Administrative Lender and the Documentation Agent are parties to a certain Credit Agreement dated as of February 18, 1998 (said Credit Agreement, as amended, supplemented, modified and/or restated, being referred to herein as the the "Credit Agreement"); the terms defined in the Credit Agreement and not otherwise defined herein shall be used herein as defined in the Credit Agreement and, to the extent appropriate, as amended hereby. B. The Guarantors have heretofore guaranteed all of the indebtedness, obligations and liabilities of the Borrower to the Lenders under, or in connection with, the Credit Agreement. C. The Borrower, the Lenders, the Administrative Lender and the Documentation Agent desire to amend the Credit Agreement and the Guarantors wish to consent to such amendments. NOW, THEREFORE, in consideration of the covenants, conditions and agreements hereafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are all hereby acknowledged, the Borrower, the Guarantors, the Lenders, the Administrative Lender and the Documentation Agent covenant and agree as follows: 157 1. AMENDMENTS. 1.1 The definition of "Adjusted Net Worth" set forth in Article I of the Credit Agreement is hereby amended to read as follows: "`Adjusted Net Worth' means the sum of the following for the Borrower and the Restricted Subsidiaries, on a consolidated basis, determined in accordance with GAAP, (a) Net Worth minus (b) any write-up in the book value of assets resulting from revaluation thereof subsequent to December 31, 1996." 1.2 Article I of the Credit Agreement is hereby amended by deleting the defined term "Intangible Assets" therefrom. 1.3 Section 7.7 of the Credit Agreement is hereby deleted in its entirety and the following is hereby substituted in lieu thereof: "Section 7.7 Capital Expenditures. The Borrower shall not, and shall not permit any Restricted Subsidiary to, make or commit to make any Capital Expenditures (i) in an aggregate amount in excess of $30,000,000 during the fiscal year ending December 31, 1998, or (ii) in an aggregate amount in excess of $25,000,000 during any fiscal year thereafter." 1.4 Section 7.13 of the Credit Agreement is hereby deleted in its entirety and the following is hereby substituted in lieu thereof: "Section 7.13 Maximum Senior Debt to Total Capital. The Borrower shall not permit the ratio of Senior Debt to Total Capital to exceed (i) 0.30 to 1 at the end of any fiscal quarter (other than the fiscal quarter ending December 31, 1998) or (ii) 0.35 to 1 at the end of the fiscal quarter ending December 31, 1998." 1.5 Exhibit "E" to the Credit Agreement is hereby deleted in its entirety and Exhibit "E-2" attached hereto is substituted in lieu thereof. From and after the effective date of this Amendment, any and all references in the Credit Agreement to "Exhibit 'E'" shall be deemed to be references to "Exhibit 'E-2'" attached hereto. 2. ADDITIONAL COVENANTS; REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its execution and delivery hereof, the Borrower and each Guarantor covenants, agrees, represents and warrants that, as of the date hereof and after giving effect to the amendments contemplated by the foregoing Section 1: 2 158 (a) Neither the execution and delivery of this Amendment nor the consummation of the transactions contemplated hereby shall terminate, limit or otherwise reduce the obligations and/or liabilities of such Guarantor under, or in connection with, such Guarantor's guaranty of the Obligations or any other Loan Document executed by such Guarantor, all of which obligations and liabilities are hereby ratified and confirmed by each Guarantor; (b) No event has occurred and is continuing which constitutes a Default or an Event of Default; (c) The Borrower has full power and authority to execute and deliver this Amendment and this Amendment, and the Credit Agreement, as amended hereby, constitute the legal, valid and binding obligations of the Borrower, enforceable in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law); (d) Each Guarantor has full power and authority to execute and deliver this Amendment and this Amendment constitutes the legal, valid and binding obligations of such Guarantor, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law); and (e) No authorization, approval, consent, or other action by, notice to, or filing with, any governmental authority or other Person (other than the consent of the respective Board of Directors of each of the Borrower and each Guarantor), is required for the execution, delivery or performance by the Borrower or any Guarantor of this Amendment. 3. CONDITIONS OF EFFECTIVENESS. This Amendment shall be effective as of June 29, 1998, subject to the following: (a) the Administrative Lender shall have received a counterpart of this Amendment executed by the Determining Lenders; (b) the Administrative Lender shall have received a counterpart of this Amendment executed by the Borrower and by each Guarantor; (c) the Administrative Lender shall have received certified resolutions of the respective board of directors of each of the Borrower and each Guarantor authorizing the execution, delivery and performance of this Amendment; and 3 159 (d) the Administrative Lender shall have received, in form and substance satisfactory to the Administrative Lender, such other documents, certificates and instruments as the Administrative Lender shall require. 4. REFERENCE TO THE CREDIT AGREEMENT. (a) Upon the effectiveness of this Amendment, each reference in the Credit Agreement to "this Agreement", "hereunder", "herein", or words of like import shall mean and be a reference to the Credit Agreement, as affected and amended hereby. (b) The Credit Agreement, as amended by the amendments referred to above, and all other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. 5. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all reasonable costs and expenses of the Administrative Lender in connection with the preparation, reproduction, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder (including the reasonable fees and out-of-pocket expenses of counsel for the Administrative Lender with respect thereto and with respect to advising the Administrative Lender as to its rights and responsibilities under the Credit Agreement, as hereby amended). 6. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 7. GOVERNING LAW; BINDING EFFECT. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas and shall be binding upon the Borrower, each Guarantor, each Lender, the Administrative Lender and the Documentation Agent and their respective successors and assigns. 8. HEADINGS. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 9. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS AMENDMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. 4 160 10. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. BORROWER: SUNTERRA CORPORATION (formerly known as Signature Resorts, Inc.), a Maryland corporation By: /s/ DEWEY W. CHAMBERS ------------------------------------------- Dewey W. Chambers Vice President and Treasurer GUARANTORS: ALL SEASONS RESORTS, INC., an Arizona corporation By: /s/ DEWEY W. CHAMBERS ------------------------------------------- Dewey W. Chambers Vice President and Treasurer ALL SEASONS RESORTS, INC., a Texas corporation By: /s/ DEWEY W. CHAMBERS ------------------------------------------- Dewey W. Chambers Vice President and Treasurer MMG DEVELOPMENT CORP., a Florida corporation By: /s/ DEWEY W. CHAMBERS ------------------------------------------- Dewey W. Chambers Vice President and Treasurer 5 161 MMG HOLDING CORP., a Florida corporation By: /s/ DEWEY W. CHAMBERS ------------------------------------------- Dewey W. Chambers Vice President and Treasurer PORT ROYAL RESORT, L.P., a South Carolina limited partnership By: Argosy/KGI Port Royal Partners, a South Carolina general partnership, as its general partner By: KGI Port Royal, Inc., a South Carolina corporation, as its general partner By: /s/ DEWEY W. CHAMBERS ----------------------------------- Dewey W. Chambers Vice President and Treasurer GRAND BEACH RESORT, LIMITED PARTNERSHIP, a Georgia limited partnership By: Grand Beach Partners, L.P., a California limited partnership, as its general partner By: Argosy/KGI Grand Beach Investment Partnership, a California general partnership, as its general partner By: Argosy Grand Beach, Inc., a Georgia corporation, as its general partner By: /s/ DEWEY W. CHAMBERS ------------------------------- Dewey W. Chambers Vice President and Treasurer 6 162 POWHATAN ASSOCIATES, a Virginia Joint Venture By: Plantation Resort Group, Inc., a Virginia corporation, Joint Venturer By: /s/ DEWEY W. CHAMBERS --------------------------------------- Dewey W. Chambers Vice President and Treasurer By: Williamsburg Vacations, Inc., a Virginia corporation, Joint Venturer By: /s/ DEWEY W. CHAMBERS --------------------------------------- Dewey W. Chambers Vice President and Treasurer GREENSPRINGS ASSOCIATES, a Virginia Joint Venture By: Plantation Resort Group, Inc., a Virginia corporation, Joint Venturer By: /s/ DEWEY W. CHAMBERS --------------------------------------- Dewey W. Chambers Vice President and Treasurer By: Greensprings Plantation Resort, Inc., a Virginia corporation, Joint Venturer By: /s/ DEWEY W. CHAMBERS --------------------------------------- Dewey W. Chambers Vice President and Treasurer 7 163 LAKE TAHOE RESORT PARTNERS, LLC, a California limited liability company By: AKGI Lake Tahoe Investments, Inc., a California corporation, as its managing member By: /s/ DEWEY W. CHAMBERS --------------------------------------- Dewey W. Chambers Vice President and Treasurer By: KGK Lake Tahoe Development, Inc., a California corporation, as its member By: /s/ DEWEY W. CHAMBERS --------------------------------------- Dewey W. Chambers Vice President and Treasurer 8 164 ADMINISTRATIVE LENDER: NATIONSBANK, N.A., successor by merger to NationsBank of Texas, N.A., as Administrative Lender By: /s/ TOM BLAKE ------------------------------------------- Tom Blake Senior Vice President 9 165 DOCUMENTATION AGENT: SOCIETE GENERALE, as Documentation Agent By: /s/ DONALD L. SCHUBERT ------------------------------------------- Name: Donald L. Schubert ----------------------------------------- Title: Managing Director ---------------------------------------- 2029 Century Park East, Suite 2900 Los Angeles, California 90067 10 166 LENDERS: NATIONSBANK, N.A., successor by merger to NationsBank of Texas, N.A., as a Lender, Swing Line Bank and Issuing Bank SPECIFIED PERCENTAGE: 31.91489362% By: /s/ TOM BLAKE ------------------------------------------- Tom Blake Senior Vice President 901 Main Street, 67th Floor Dallas, Texas 75202 Attn: Tom Blake Senior Vice President 11 167 SOCIETE GENERALE, as a Lender SPECIFIED PERCENTAGE: 26.59574468% By: /s/ DONALD L. SCHUBERT ------------------------------------------- Name: Donald L. Schubert ----------------------------------------- Title: Managing Director ---------------------------------------- 2029 Century Park East, Suite 2900 Los Angeles, California 90067 12 168 BANKERS TRUST COMPANY SPECIFIED PERCENTAGE: 15.95744681% By: /s/ LAURA S. BURWICK ------------------------------------------- Name: Laura S. Burwick ----------------------------------------- Title: Principal ---------------------------------------- 130 Liberty Street, 14th Floor New York, New York 10003 13 169 CREDIT LYONNAIS NEW YORK BRANCH SPECIFIED PERCENTAGE: 12.76595745% By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- 1301 Avenue of the Americas New York, New York 10019 14 170 BANK OF HAWAII SPECIFIED PERCENTAGE: 12.76595745% By: /s/ DAVID L. WARD ------------------------------------------- Name: David L. Ward ----------------------------------------- Title: Officer ---------------------------------------- ---------------------------------------- ---------------------------------------- 15 171 EXHIBIT "E-2" COMPLIANCE CERTIFICATE ________, _____ NationsBank, N.A., as Administrative Lender 901 Main Street, 67th Floor Dallas, Texas 75202 Attention: Tom Blake, Senior Vice President This Compliance Certificate is made as of , . The undersigned certifies that the calculations set forth herein are true, accurate, and complete, and are made in accordance with the provisions of the Credit Agreement among Sunterra Corporation (formerly known as Signature Resorts, Inc.), NationsBank, N.A., successor by merger to NationsBank of Texas, N.A., as Administrative Lender, Societe Generale, as Documentation Agent and Lenders, dated as of February 18, 1998 (as amended, modified or supplemented, "Credit Agreement"). All defined terms used herein but not specifically defined shall have the meanings set forth in the Credit Agreement. 1. Covenant Calculations. D. Section 7.3(g). Guaranties of Indebtedness 1. Maximum aggregate amount - 10% of combined total assets of $__________ the Borrower and the Restricted Subsidiaries 2. Actual $__________ 3. Difference [(1) - (2)] $__________ E. Section 7.3(i). Investments in any Person other than the Borrower or a Restricted Subsidiary 1. Maximum aggregate amount - 10% of combined total assets of $__________ the Borrower and the Restricted Subsidiaries 2. Actual $__________ 3. Difference [(1) - (2)] $__________ F. Section 7.3(j). Other Investments 1. Maximum in aggregate amount outstanding at any time $7,500,000 2. Actual $__________
EXHIBIT "E-2" - PAGE 1 172 3. Difference [(1) - (2)] $__________ G. Section 7.5(f). Other Asset Sales 1. Maximum in aggregate amount during any one fiscal year $5,000,000 2. Actual $__________ 3. Difference [(1) - (2)] $__________ H. Section 7.7. Capital Expenditures 1. Maximum during any fiscal year in aggregate amount ($30MM $__________ during FYE 12/31/98; $25MM during any fiscal year thereafter) 2. Actual $__________ 3. Difference [(1) - (2)] $__________ I. Section 7.8(c). Dividends payable by the Borrower in respect of its Capital Stock 1. Maximum in aggregate amount during any fiscal year a. 50% of Net Income of the Borrower (excluding from $__________ calculation any Net Income attributable to any Subsidiary of the Borrower other than the Restricted Subsidiaries) during the immediately preceding fiscal year of the Borrower b. Maximum [(a) + $10,000,000] $__________ 2. Actual $__________ 3. Difference [(1) - (2)] $__________ J. Section 7.11. Minimum Interest Coverage Ratio 1. Minimum at the end of any fiscal quarter 2.50 to 1 2. Actual, calculated for the four consecutive fiscal quarters ending on the date of calculation a. EBITDA, calculated on a consolidated basis for the Borrower and its Subsidiaries (1) Pretax Net Income (excluding therefrom, to the $__________ extent included in determining Pretax Net Income, any items of extraordinary gain, including net gains on the sale of assets other than asset sales in the ordinary course of business, and adding thereto, to the extent included in determining Pretax Net Income, any items of extraordinary loss, including net losses on the sale of assets)
EXHIBIT "E-2" - PAGE 2 173 (2) Interest expense $__________ (3) Non-recurring charges incurred as a result of $__________ business combinations utilizing the pooling accounting method to the extent that such charges would be permitted to be capitalized utilizing the purchase accounting method (4) Depreciation $__________ (5) Amortization $__________ (6) Other non-cash charges (to the extent included $__________ in determining EBIT) (7) EBITDA [(1) + (2) + (3) + (4) + (5) + (6)] $__________ b. Interest Expense (including interest expense pursuant to $__________ Capitalized Lease Obligations) c. Interest Coverage Ratio [(a) to (b)] __________to 1 K. Section 7.12. Minimum Adjusted Net Worth 1. Minimum a. 50% of cumulative Net Income of the Borrower and $__________ the Restricted Subsidiaries for the period from, but not including, June 30, 1997 through the date of calculation (but excluding from the calculation of such cumulative Net Income the effect, if any, of any fiscal quarter (or portion of a fiscal quarter not then ended) of the Borrower or any Restricted Subsidiary for which Net Income was a negative number) b. 75% of the Net Cash Proceeds received by the $__________ Borrower after June 30, 1997 as a result of any offering of Equity or pursuant to any conversion or exchange of convertible Indebtedness or preferred Capital Stock into common Capital Stock of the Borrower
EXHIBIT "E-2" - PAGE 3 174 c. 75% of the Adjusted Net Worth of any Person that $__________ becomes a Restricted Subsidiary or is merged into or consolidated with the Borrower or any Restricted Subsidiary after June 30, 1997 or substantially all of the assets of which are acquired by the Borrower or any Restricted Subsidiary after June 30, 1997 (in each case determined as of the date that such Person becomes a Restricted Subsidiary or is merged into or consolidated with the Borrower or a Restricted Subsidiary or that such assets are so acquired) provided that the purchase price paid therefor is paid in equity securities of the Borrower or any Subsidiary of the Borrower d. Minimum Adjusted Net Worth [(a) + (b) + (c) + $__________ $155,000,000] 2. Actual (for Borrower and the Restricted Subsidiaries, on a consolidated basis) a. Net Worth $__________ b. Any write-up in the book value of assets resulting from $__________ revaluation thereof subsequent to December 31, 1966 c. Actual Adjusted Net Worth [(a) - (b)] $__________ 3. Difference [(2) - (1)] $__________ L. Section 7.13. Maximum Senior Debt to Total Capital 1. Maximum at the end of applicable fiscal quarter (0.35 to 1 for 0.__ to 1 the fiscal quarter ending 12/31/98 and 0.30 to 1 for any other fiscal quarter) 2. Actual a. Senior Debt (1) Total Debt (a) Indebtedness for borrowed money $__________ (b) Obligations evidenced by bonds, $__________ debentures, notes or other similar instruments (c) Obligations to pay the deferred $__________ purchase price of property or services other than trade payables incurred in the ordinary course of business
EXHIBIT "E-2" - PAGE 4 175 (d) Obligations in respect of letters of $__________ credit, banker's acceptances and similar instruments (e) Obligations under Hedge Agreements $__________ (f) Capitalized Lease Obligations $__________ (g) Obligations in respect of payment, $__________ performance and similar bonds (h) Net Exposure Under Securitization $__________ (i) Total Debt [(a) + (b) + (c) + (d) + $__________ (e) + (f) + (g) + (h)] (2) Subordinated Debt (a) The 5.75% Convertible Subordinated $__________ Notes, issued by the Borrower as of January 15, 1997, in the aggregate original principal amount of $138,000,000, due in 2007 (b) The 9.75% Senior Subordinated Notes, $__________ issued by the Borrower as of August 1, 1997, in the aggregate original principal amount of $200,000,000, due October 1, 2007 (c) Any other Indebtedness of the $__________ Borrower or any Subsidiary of the Borrower having maturities and terms, and which is subordinated to payment of the Obligations in a manner, approved in writing by the Administrative Lender and the Determining Lenders, with only such changes or amendments as are not prohibited by Section 7.19 of the Credit Agreement (d) Subordinated Debt [(a) + (b) +(c)] $__________ (3) Senior Debt [(1) - (2)] $__________ b. Total Capital (1) Total Debt (I.2.a.(1)(i) above) $__________ (2) Adjusted Net Worth (K.2.c. above) $__________ (3) Total Capital [(1) + (2)] $__________ c. Actual Senior Debt to Total Capital [(a) to (b)] _________ to 1
EXHIBIT "E-2" - PAGE 5 176 M. Section 7.14. Maximum Total Debt to Total Capital 1. Maximum at the end of any fiscal quarter after December 31, 0.73 to 1 1997 2. Actual a. Total Debt (I.2.a.(1)(i) above) $__________ b. Total Capital (I.2.b.(3) above) $__________ c. Actual Total Debt to Total Capital [(a) to (b)] __________ to 1 N. Section 7.15. Sale and Leaseback 1. Maximum aggregate amount during any fiscal year $2,000,000 2. Actual $__________ 3. Difference [(1) - (2)] $__________
The undersigned hereby further certifies to the following as of the date of this Certificate: 1. The undersigned has reviewed the relevant terms of this Certificate and has made, or caused to be made, under his/her supervision, a review of the transactions and condition of the Borrower from the beginning of the accounting period covered by the financial statements being delivered herewith to the date of this Certificate and that such review has not disclosed the existence during such period of any condition or event which constitutes a Default or Event of Default. 2. The Borrower is in compliance in all material respects with all of the terms and conditions of the Credit Agreement and other Loan Documents. 3. The financial statements delivered to Administrative Lender have been prepared according to GAAP applied on a consistent basis in all material respects with those previously delivered. SUNTERRA CORPORATION (formerly known as Signature Resorts, Inc.), a Maryland corporation By: --------------------------------- Name: ----------------------------- Title: ----------------------------- EXHIBIT "E-2" - PAGE 6 EX-10.3 4 RECEIVABLES PURCHASE AGREEMENT 1 EXHIBIT 10.3 RECEIVABLES PURCHASE AGREEMENT DATED AS OF DECEMBER 17, 1998 AMONG BLUE BISON FUNDING CORP., AS SELLER, SUNTERRA CORPORATION AS INITIAL SERVICER, BARTON CAPITAL CORPORATION, AS PURCHASER, AND SOCIETE GENERALE, AS AGENT 2 TABLE OF CONTENTS
SECTION PAGE - ------- ---- ARTICLE I THE COMMITMENT; PURCHASE AND REINVESTMENT LIMITS 1.01 Commitment............................................................2 1.02 Purchase and Reinvestment Limits......................................2 1.03 Making Purchases from Seller..........................................2 1.04 Number of Yield Periods...............................................3 1.05 Commitment Termination Date...........................................3 1.06 Purchase and Reinvestment Termination Date............................3 1.07 Voluntary Termination of Commitment or Reduction of Facility Limit...........................................3 ARTICLE II UNDIVIDED INTEREST AND PURCHASER'S SHARE 2.01 Undivided Interest....................................................4 2.02 Investment............................................................5 2.03 Net Pool Balance......................................................5 2.04 Loss Reserve..........................................................5 ARTICLE III SETTLEMENTS 3.01 Establishment and Use of Accounts.....................................6 3.02 Settlement and Reinvestment Procedures................................7 3.03 Special Settlement Procedures; Reduction of Investment, etc.......................................................9 3.04 Reporting............................................................11 3.05 Payments and Computations, etc.......................................12 3.06 Dividing or Combining Undivided Interests............................12 ARTICLE IV FEES AND YIELD PROTECTION 4.01 Fees.................................................................13 4.02 Yield Protection.....................................................13 ARTICLE V CONDITIONS OF PURCHASES
i 3 TABLE OF CONTENTS (CONTINUED)
SECTION PAGE - ------- ---- 5.01 Conditions Precedent to Initial Purchase.............................16 5.02 Conditions Precedent to All Purchases and Reinvestments........................................................18 ARTICLE VI REPRESENTATIONS AND WARRANTIES 6.01 Representations and Warranties of Seller.............................19 6.02 Representations and Warranties of Sunterra...........................26 ARTICLE VII GENERAL COVENANTS OF SELLER AND SERVICER 7.01 Affirmative Covenants of Seller and Sunterra.........................30 7.02 Reporting Requirements of Seller.....................................36 7.03 Negative Covenants of Seller.........................................37 ARTICLE VIII ADMINISTRATION AND COLLECTION 8.01 Designation of Servicer..............................................41 8.02 Duties of Servicer and Seller........................................42 8.03 Rights of the Account Agent..........................................45 8.04 Responsibilities of Seller...........................................47 8.05 Certain Responsibilities of Sunterra.................................47 8.06 Further Action Evidencing Purchases..................................48 ARTICLE IX SECURITY INTEREST 9.01 Grant of Security Interest...........................................48 9.02 Further Assurances...................................................49 9.03 Remedies.............................................................49 ARTICLE X LIQUIDATION EVENTS 10.01 Liquidation Events...................................................49 10.02 Remedies.............................................................51
ii 4 TABLE OF CONTENTS (CONTINUED)
SECTION PAGE - ------- ---- ARTICLE XI THE AGENT 11.01 Authorization and Action.............................................52 11.02 Exculpation..........................................................52 11.03 Agent and Affiliates.................................................53 ARTICLE XII ASSIGNMENT OF PURCHASER'S INTEREST 12.01 Restrictions on Assignments..........................................53 12.02 Rights of Assignee...................................................54 12.03 Evidence of Assignment; Endorsement on Certificate.........................................................54 ARTICLE XIII INDEMNIFICATION 13.01 Indemnity by Seller..................................................55 ARTICLE XIV MISCELLANEOUS 14.01 Amendments, etc......................................................58 14.02 Notices, etc.........................................................59 14.03 No Waiver; Remedies..................................................59 14.04 Binding Effect; Survival.............................................59 14.05 Costs, Expenses and Taxes............................................60 14.06 No Proceedings.......................................................61 14.07 Captions and Cross References........................................61 14.08 Integration..........................................................61 14.09 Confidentiality......................................................61 14.10 Governing Law........................................................62 14.11 Waiver of Jury Trial.................................................62 14.12 Execution in Counterparts............................................62
iii 5 TABLE OF CONTENTS (CONTINUED)
SECTION PAGE - ------- ---- APPENDICES APPENDIX A Definitions SCHEDULES SCHEDULE 6.01(f) Description of Proceedings of Seller SCHEDULE 6.01(m) List of Offices of Seller and Servicer Where Records are Kept SCHEDULE 6.01(n) List of Account Banks SCHEDULE 6.01(q) List of Trade Names SCHEDULE 6.02(f) Description of Proceedings of Sunterra SCHEDULE 7.01(f) Description of Credit and Collection Policies SCHEDULE A List of Vacation Ownership Resorts SCHEDULE B List of Market Areas EXHIBITS EXHIBIT 1.03(a) Notice of Purchase EXHIBIT 3.05(a) Form of Periodic Report EXHIBIT 5.01(a) Form of Certificate EXHIBIT 5.01(h)(i) [Reserved] EXHIBIT 5.01(h)(ii) Form of Collection Account Agreement EXHIBIT 5.01(h)(iii) Form of Reserve Account Agreement EXHIBIT 5.01(i)(i) Form of Opinions of Willkie, Farr & Gallagher EXHIBIT 5.01(i)(ii) Form of Opinions of General Counsels EXHIBIT 5.01(i)(iii) Form of Opinions of Local Counsels
iv 6 RECEIVABLES PURCHASE AGREEMENT dated as of December 17, 1998 THIS IS A RECEIVABLES PURCHASE AGREEMENT among BLUE BISON FUNDING CORP., a Delaware corporation ("Seller"), SUNTERRA CORPORATION, a Maryland corporation ("Sunterra"), as the initial Servicer, BARTON CAPITAL CORPORATION, a Delaware corporation, as purchaser (in such capacity, together with its successors and assigns in such capacity, the "Purchaser") and SOCIETE GENERALE, a banking corporation organized under the laws of France, acting through its Chicago Branch ("SG"), as agent for Purchaser (in such capacity, together with its successors and assigns in such capacity, the "Agent"). Unless otherwise indicated, capitalized terms used in this Agreement are defined in Appendix A. Background 1. Seller is a party to a Purchase and Sale Agreement with Sunterra, pursuant to which Seller has purchased, and expects to purchase Receivables from Sunterra. Seller intends to sell interests, herein called Undivided Interests, in Pool Receivables. Seller and Purchaser have agreed, on the terms and subject to the conditions contained in this Agreement, that Purchaser will purchase such Undivided Interests from Seller from time to time during the term of this Agreement. 2. Seller and Purchaser have also agreed that, on the terms and subject to the conditions set forth in this Agreement, certain of the Collections related to such Undivided Interests shall be reinvested in additional undivided interests in Pool Receivables. 3. Seller, Purchaser and the Agent have asked Sunterra to undertake certain collecting and servicing responsibilities in respect of the Receivables and Sunterra, as initial Servicer, is willing to undertake such responsibilities. 4. SG has been requested, and is willing, to act as the Agent. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto agree as follows: 7 ARTICLE I THE COMMITMENT; PURCHASE AND REINVESTMENT LIMITS 1.01 Commitment. On the terms and subject to the conditions set forth in this Agreement (including Article V), Purchaser agrees to make Purchases and Reinvestments from time to time from the date hereof to the Commitment Termination Date as follows: (a) Purchases. Purchaser shall purchase from Seller Undivided Interests (as defined in Section 2.01). Each such purchase is herein called a "Purchase". (b) Reinvestments. Pursuant to Section 3.02(a), Purchaser shall make reinvestments in Pool Receivables (herein called "Reinvestments") by permitting Servicer to reinvest certain of the Collections in additional undivided interests in Pool Receivables. Purchaser's obligation to make such Purchases and Reinvestments is herein called the "Commitment". 1.02 Purchase and Reinvestment Limits. Under no circumstances shall Purchaser be obligated to make any Purchase or Reinvestment to the extent that, after giving effect to such Purchase or Reinvestment, as the case may be: (a) Facility Limit. The Aggregate Investment would exceed an amount equal to $100,000,000 as such amounts may be reduced pursuant to Section 1.07 (such amounts, as so reduced, herein being called the "Facility Limit"). (b) Aggregate Undivided Interest Limit. The Aggregate Undivided Interest (expressed as a percentage) would exceed 100% (the "Aggregate Undivided Interest Limit"). 1.03 Making Purchases from Seller. (a) Notice of Purchase. Each Purchase shall be made on a Business Day pursuant to a notice substantially in the form of Exhibit 1.03(a) from Seller to the Agent and shall be received by the Agent not later than 2:00 p.m. (New York City time) on the second Business Day before the date of such Purchase. Each such notice of a Purchase shall specify the desired amount and date of such Purchase and the desired duration of the initial Yield Period for the resulting Undivided Interest, which amount shall not be less than $1,000,000. The Agent shall select the duration of such initial, and each subsequent, Yield Period in its discretion; provided that the Agent shall use reasonable 2 8 efforts, taking into account market conditions, to accommodate Seller's preferences. (b) Amount of Purchase. The amount of each Purchase shall be equal to the lesser of (x) the amount proposed by Seller pursuant to Section 1.03(a) and (y) the maximum amount permitted under Section 1.02. (c) Funding of Purchase. On the date of each Purchase, Purchaser shall, upon satisfaction of the applicable conditions set forth in Article V, make available to the Agent at its office at 181 West Madison Street in Chicago, Illinois not later than 1:00 p.m. (New York City time), the amount in payment of its Purchase in same day funds and, after receipt by the Agent of such funds, the Agent will immediately transfer such funds to the Collection Account or such other account designated by the Seller. 1.04 Number of Yield Periods. Unless otherwise consented to by the Agent, the number of Yield Periods hereunder at any one time, after giving effect to any Purchase, or any division or combination of Undivided Interests, shall not exceed 8. 1.05 Commitment Termination Date. The "Commitment Termination Date" shall be the earlier to occur of (i) December 17, 2001 (such date, as the same may be extended pursuant to this Section 1.05, being herein called the "Scheduled Commitment Termination Date"), and (ii) the date on which the Commitment is terminated pursuant to Section 1.06, 1.07, or 10.02. 1.06 Purchase and Reinvestment Termination Date. The Commitment shall terminate with respect to Purchases and Reinvestments, and Purchaser shall have no obligation to make any further Purchases or Reinvestments hereunder, upon the termination of either (i) the Banks' commitments under the Standby Purchase Agreement or (ii) the Enhancement Bank's commitment under the Enhancement Agreement. Purchaser agrees to give Seller at least 30 days' prior written notice of the termination of the Commitment with respect to Purchases and Reinvestments pursuant to the foregoing sentence. 1.07 Voluntary Termination of Commitment or Reduction of Facility Limit. Seller may, upon at least ten Business Days' notice to the Agent, terminate the Commitment in whole or reduce in part the unused portion of the Facility Limit; provided, however, that (a) each partial reduction shall be in an amount equal to $5,000,000 or an integral multiple thereof and (b) after giving effect to any partial reduction, the remaining Facility Limit will not be less than $25,000,000. 3 9 ARTICLE II UNDIVIDED INTEREST AND PURCHASER'S SHARE 2.01 Undivided Interest. (a) Definition and Computation of Undivided Interest. For purposes of this Agreement, "Undivided Interest" means an undivided ownership interest, expressed as a floating percentage determined from time to time, in (A) all then outstanding Pool Receivables, (B) all rights to, but not the obligations under, all Related Security with respect to such Pool Receivables, and (C) all Collections with respect to, and other proceeds of, such Pool Receivables and Related Security. Each Undivided Interest shall be computed as follows: UI = I + LR ------ NPB where: UI = the Undivided Interest at any time; I = the Investment in such Undivided Interest at such time, as determined pursuant to Section 2.02; LR = the Loss Reserve for such Undivided Interest at such time, as determined pursuant to Section 2.04; and NPB = the Net Pool Balance at such time, as determined pursuant to Section 2.03. The "related" Undivided Interest with respect to any of the foregoing items shall mean the Undivided Interest as to which such item is calculated. (b) Frequency of Computation of Purchaser's Interest. Each Undivided Interest initially shall be computed as of the opening of Servicer's business on the date of the Purchase of such Undivided Interest from Seller. Thereafter, such Undivided Interest shall be recomputed as of the opening of business on any day on which the Aggregate Investment shall be increased and upon receipt of each Periodic Report using the information in such Periodic Report. In addition, until such Undivided Interest shall be reduced to zero, such Undivided Interest shall be deemed to be recomputed automatically as of the close of Servicer's business on each day (other than a day on which an actual recomputation is done), and, as so recomputed, shall 4 10 constitute the percentage ownership interest held by Purchaser on such day in the Pool Receivables. Such Undivided Interest shall become zero at such time as (i) the Purchaser shall have received the accrued Earned Return for such Undivided Interest, shall have recovered the Investment in such Undivided Interest and shall have received all other amounts payable to Purchaser pursuant to this Agreement in respect of such Undivided Interest, (ii) the Agent shall have received all amounts payable to the Agent pursuant to this Agreement, (iii) Servicer shall have received the accrued Servicer's Fee allocated to such Undivided Interest and (iv) all other amounts payable by the Seller in connection with such Undivided Interest are paid. Each Undivided Interest shall remain constant, and the Net Pool Balance shall be deemed to remain constant for purposes of computing such Undivided Interest, from the time as of which any such computation or recomputation is made until the time as of which the next such recomputation, if any, shall be made. 2.02 Investment. (a) Subject to subsection (b), the "Investment" in an Undivided Interest at any time means an amount equal to (i) the sum of the original Dollar amount paid by Purchaser to Seller for such Undivided Interest at the time Purchaser acquired it by Purchase pursuant to Section 1.03, less (ii) the aggregate amount of Collections of Pool Receivables theretofore received and actually distributed to Purchaser on account of such Investment pursuant to Section 3.02(a) and (b). (b) If at any time any distribution of any portion of such Collections is rescinded or must otherwise be returned for any reason, the Investment shall not be considered reduced to the extent of such rescission or return. (c) The "related" Investment with regard to a Yield Period or Undivided Interest (or portion thereof) means the Investment calculated with regard to such Yield Period or Undivided Interest (or such portion), as the case may be. 2.03 Net Pool Balance. The "Net Pool Balance" at any time means an amount equal to the aggregate Unpaid Balance of the Eligible Receivables in the Receivables Pool at such time. 2.04 Loss Reserve. The "Loss Reserve" for any Undivided Interest on any day means an amount determined as follows: 5 11 LR = LRP x I where LR = the Loss Reserve for such Undivided Interest at the time of computation; LRP = the "Loss Reserve Percentage" which, as to each Undivided Interest at the time of such computation, shall be an amount equal to (a) 5%, divided by (b) 1, minus 5%; and I = the Investment in such Undivided Interest at the time of such computation, as determined pursuant to Section 2.02. ARTICLE III SETTLEMENTS 3.01 Establishment and Use of Accounts. (a) Collection Account. Seller hereby agrees to establish and maintain a Collection Account on or before the first Purchase hereunder. The Collection Account shall be used to receive Collections (directly or via transfer from the Lockbox Accounts) and for the other purposes described in the Transaction Documents. Servicer shall cause all Collections to be deposited into such Collection Account on the day on which such Collections are available cash funds. No funds other than Collections or Purchases shall be deposited or transferred into such Collection Account. (b) Lockbox Accounts. Seller has established the Lockbox Accounts listed on Schedule 6.01(n) (and the related post office boxes). The Lockbox Accounts shall be used to receive Collections. (c) Reserve Account. Seller hereby agrees to establish and maintain a Reserve Account on or before the first Purchase hereunder. The Reserve Account shall be used to receive transfers of certain amounts of Collections pursuant to Section 3.02(b) and for other purposes described in Section 3.03(d). No funds other than Collections and proceeds from the sale by the Seller to the Purchaser of Undivided Interests shall be transferred or deposited into the Reserve Account. All funds on deposit in the Reserve Account shall, subject to Section 3.03(e) be invested by the Servicer (and at the direction of Seller so long as no 6 12 Liquidation Event shall have occurred and be continuing) in Permitted Investments. All income and gain or loss realized from any such investment shall be credited or debited (as applicable) to the Reserve Account. (d) Agent's Account. The Agent hereby agrees to establish the Agent's Account on or before the date of the first Purchase hereunder. The Agent's Account shall be used to receive payments of amounts that are to be distributed by the Agent to itself and/or to Purchaser, and for the other purposes described in the Transaction Documents. 3.02 Settlement and Reinvestment Procedures. (a) Settlement Procedures for Principal Collections. The Servicer shall, on each day on which Collections of Principal Receivables are received (or deemed received) by the Seller or Servicer or are deposited into the Lockbox Accounts, transfer such Collections therefrom and deposit such Collections into the Collection Account. The Servicer shall apply such Collections as follows: (i) on each Funding Date, if such day is not a Liquidation Day, subject to clause (ii) below and upon the satisfaction of the conditions set forth in Section 5.02, such Principal Collections allocable to each Undivided Interest shall be reinvested on such Funding Date by the Servicer by means of a Reinvestment in the related Undivided Interest and shall be paid to the Seller, thereby causing a recomputation of such Undivided Interest pursuant to Section 2.01; provided, that if the conditions set forth in Section 5.02 are not satisfied on such Funding Date, such Principal Collections shall not be reinvested but shall be held on deposit in the Collection Account and applied in accordance with clause (ii) below; and (ii) during the Liquidation Period (or during any Settlement Period that Collections are held on deposit in the Collection Account pursuant to the proviso to clause (i) above), all Principal Collections on deposit in the Collection Account shall be held on deposit in the Collection Account and transferred by the Servicer from the Collection Account to the Agent's Account on each Settlement Date with respect to each Undivided Interest, and shall be applied by the Agent to the payment of the amounts, and in the priorities described in clause second through clause sixth of Section 3.02(b) (after giving effect to the application of Collections of Finance Charge Receivables and amounts withdrawn from the Reserve Account to pay such amounts 7 13 in accordance therewith); provided, that so long as the Commitment Termination Date has not occurred, if any Principal Collections are held in the Collection Account pursuant to the proviso to clause (i) above and have not otherwise been transferred to the Agent's Account and thereafter the conditions set forth in Section 5.02 are satisfied or are waived by the Agent, such previously set aside amounts shall be reinvested in accordance with the preceding clause (i) on the day of such subsequent satisfaction or waiver. (b) Settlement Procedure for Finance Charge Collections. The Servicer shall, on each day on which Collections of Finance Charge Receivables are received (or deemed received) by the Seller or Servicer or are deposited into the Lockbox Accounts, transfer such Collections therefrom and deposit such Collections into the Collection Account. The Servicer shall set aside and hold such Collections in trust within the Collection Account for payment on the following dates and in the following order of priority: first, to the Servicer on each Month End Date in payment of the accrued and unpaid Servicing Fees payable for the calendar month then ended (plus, if applicable, any accrued and unpaid Servicing Fees payable for any prior calendar months); second, to the Agent's Account for the payment, on each Settlement Date with respect to each Undivided Interest, of the Earned Return which accrued on such Undivided Interest for the Settlement Period ending on such date (plus, if applicable, the amount of Earned Return accrued and unpaid for any prior Settlement Periods with respect to such Undivided Interest and to the extent permitted by law, interest thereon); third, to the Agent's Account on each Month End Date, for the payment of all Fees accrued during the month then ended; fourth, during the Liquidation Period, to the Agent's Account, on each Settlement Date with respect to each Undivided Interest, to reduce the Aggregate Investment to zero; fifth, to the Agent's Account for the payment, on each Settlement Date with respect to each Undivided Interest, of all amounts payable pursuant to Section 4.02 in respect of such Undivided Interest; sixth, to the Agent's Account for the payment, on each Settlement Date with respect to each Undivided Interest, of all other Obligations then payable by the Seller to Purchaser or the Agent under the Transaction Documents; seventh, to the Reserve Account, on each Settlement Date with respect to each Undivided Interest, such amount as shall be necessary to cause the amount on deposit therein to be equal to the Reserve Account Required Amount (after giving effect to all payments to be made therefrom on such Settlement Date pursuant to Section 3.03(d)); and eighth, so long as no Liquidation Event or 8 14 Unmatured Liquidation Event shall be continuing, the balance, if any, to be paid to Seller. (c) Order of Distribution. Upon receipt of funds deposited into the Agent's Account pursuant to paragraphs (a) and (b) of this Section 3.02, the Agent shall distribute such funds for the purposes and in the order of priority set forth in such paragraphs (a) and (b), as applicable. 3.03 Special Settlement Procedures; Reduction of Investment, etc. (a) Deemed Collections. If on any day (i) the Unpaid Balance of any Pool Receivable is reduced or cancelled as a result of a setoff in respect of any claim by the Obligor thereof against Seller, Sunterra or any Affiliate of Sunterra (whether such claim arises out of the same or a related or unrelated transaction); (ii) any of the representations or warranties of Seller or Sunterra set forth in Section 6.01(k) or (t) is no longer true with respect to a Receivable; or (iii) the related title insurance policy with respect to any Pool Receivable shall not have been issued within 60 days from the date such Pool Receivable first became a Pool Receivable; then, on such day, Seller shall be deemed to have received a Collection of the relevant Receivable(s) in the amount of the Unpaid Balance (or portion thereof) of such Receivable(s), together with accrued and unpaid interest thereon. On or before the fifteenth day after the Month End Date of each month that contains one or more days on which Seller is deemed to have received such a Collection, Seller shall transfer an amount equal to the aggregate amount of such deemed Collections to Servicer and Servicer shall distribute such transferred amount in the manner set forth in Section 3.02, as if such transferred amount actually had been received by Seller or Servicer on the date of such transfer from the Obligors of such Pool Receivables and as if such transferred amount actually had been deposited into a Lockbox Account on the date of such transfer. (b) Seller's Reduction of Investment. If at any time Seller shall wish to cause the reduction of the Investment in an Undivided Interest (but not to commence the 9 15 liquidation, or reduction to zero, of all Undivided Interests), such reduction shall be made as follows: (i) Seller shall give the Agent at least three Business Days' prior written notice thereof (including the amount of such proposed reduction and the proposed date on which such reduction will commence), (ii) on the proposed date of commencement of such reduction and on each day thereafter, Servicer shall stop reinvesting Principal Collections allocable to such Undivided Interest until the amount thereof not so reinvested shall equal the desired amount of reduction, and (iii) Servicer shall hold such Principal Collections for the benefit of Purchaser in the Collection Account, for payment to the Agent on the next following Settlement Date or, subject to Seller's obligation pursuant to Section 4.03, any other date with respect to such Undivided Interest, and the Investment in such Undivided Interest shall be deemed reduced in the amount to be paid to the Agent only when in fact so paid and allocated by the Agent to the Investment in such Undivided Interest; provided that (A) the amount of any such reduction shall be not less than $1,000,000, and the Investment in such Undivided Interest after giving effect to such reduction shall be not less than $1,000,000 unless such Investment shall have been reduced to zero), (B) Seller shall use reasonable efforts to attempt to choose a reduction amount, and the date of commencement thereof, so that such reduction shall commence and conclude in the same Yield Period, and (C) if two or more Undivided Interests shall be outstanding at the time of any proposed reduction, such proposed reduction shall be applied, unless the Agent shall consent otherwise, to the Undivided Interest with the shortest remaining Yield Period. (c) Allocations of Obligor Payments. Except as otherwise required by law, all Collections received from a particular Obligor in respect of any Receivable shall be applied to the Receivables payable by such Obligor in the order of the age of such Receivables, starting with the oldest such Receivable. 10 16 (d) Use of Reserve Account. If on any date sufficient Finance Charge Collections are not available in the Collection Account for application to payment of the amounts described in Section 3.02(b) clause first through sixth on the dates specified therein, the Servicer shall withdraw from the Reserve Account an amount equal to the lesser of (i) such amounts and (ii) the amount on deposit in the Reserve Account, and shall apply the funds so withdrawn to the payment of such amounts in the order of priority set forth in Section 3.02(b). In addition, during the Liquidation Period on the date that a Receivable becomes a Defaulted Receivable, the Servicer shall withdraw from the Reserve Account an amount equal to the aggregate Unpaid Balance of such Defaulted Receivable and apply it pursuant to Section 3.02(a)(ii) as a Principal Collection. To the extent the amount on deposit in the Reserve Account exceeds the Reserve Account Required Amount (after giving effect to all payments to be made therefrom and all deposits thereto on any date of distribution pursuant to this Section 3.03(d)), so long as no Liquidation Event or Unmatured Liquidation Event shall have occurred or be continuing, the Servicer shall transfer such excess amount to the Seller. On the date after the Commitment Termination Date when the Aggregate Undivided Interest shall have been reduced to zero and all Obligations of Seller shall have been fully and finally paid and performed, the Servicer shall pay to Seller any funds remaining in the Reserve Account. (e) Permitted Investments. Any amount in the Collection Account and the Reserve Account, as the case may be, may be invested by Seller (or Servicer on Seller's behalf) in Permitted Investments; provided, however, that such investments shall mature not later than one Business Day next preceding the Settlement Date for any Undivided Interest next succeeding the date of such investment. All amounts earned on Permitted Investments shall be for the account of the Seller. 3.04 Reporting. (a) No later than 11:00 a.m., New York City time, on the second Business Day before the date of each Purchase other than the initial Purchase hereunder, as a condition precedent to each such Purchase, Servicer shall prepare and forward to the Agent a certificate containing a calculation of (i) the Net Pool Balance (the calculation of which shall be based upon the information contained in the most recent Periodic Report) and (ii) the Aggregate Investment and the Loss Reserve (in each case, after giving effect, on a pro forma basis, to such Purchase). 11 17 (b) On or prior to the fifteenth day of each month, Servicer shall prepare and forward to the Agent a Periodic Report relating to all outstanding Pool Receivables and all Undivided Interests owned by Purchaser, as of the close of business of Servicer on the immediately preceding Month End Date. 3.05 Payments and Computations, etc. (a) All amounts to be paid or deposited into the Agent's Account by Seller or Servicer hereunder shall be paid or deposited in accordance with the terms hereof no later than 1:00 p.m. (New York City time) on the day when due in lawful money of the United States of America in same day funds. (b) Seller or Servicer, as applicable, shall, to the extent permitted by law, pay to the Agent (for the benefit of Purchaser or the Agent, as the case may be) interest on all amounts not paid or deposited when due hereunder, such interest to be calculated at the Default Rate from (and including) the date due and payable to the date paid and such interest shall be payable on demand; provided, however, that the applicable interest rate shall not at any time exceed the maximum rate permitted by applicable law. (c) All computations of interest, Earned Return and any fees hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) elapsed. 3.06 Dividing or Combining Undivided Interests. (a) Division of Undivided Interests. The Agent may at any time, as of the last day of any Yield Period for any then existing Undivided Interest, divide such existing Undivided Interest on such last day into two or more new Undivided Interests, each such new Undivided Interest having an Investment as designated by the Agent and all such new Undivided Interests collectively having aggregate Investments equal to the Investment in such existing Undivided Interest. (b) Combination of Undivided Interests. The Agent may at any time, as of the last day of any Yield Period for two or more existing Undivided Interests, on or before the date of any proposed Purchase of an Undivided Interest pursuant to Section 1.01 by Purchaser, on such last day or such date of Purchase, as the case may be, combine into one new Undivided Interest such existing and/or proposed Undivided 12 18 Interests or any combination thereof, such new Undivided Interest having an Investment equal to the aggregate Investments of such Undivided Interests so combined. (c) Effect of Division or Combination. On and after any division or combination of Undivided Interests as described above, each of the new Undivided Interests resulting from such division, or the new Undivided Interest resulting from such combination, as the case may be, shall be a separate Undivided Interest having an Investment as set forth above, and shall take the place of such existing Undivided Interest or Undivided Interests or proposed Undivided Interest, as the case may be, in each case under and for all purposes of this Agreement. ARTICLE IV FEES AND YIELD PROTECTION 4.01 Fees. Seller shall pay to Purchaser for its own account such fees on such dates and in such amounts as set forth in the agreement of even date herewith between the Agent and Seller (as such agreement may be amended, restated, supplemented or modified from time to time, the "Fee Letter"). 4.02 Yield Protection. (a) If (i) Regulation D, (ii) any law or regulation relating to deposit insurance or (iii) any Regulatory Change occurring after the date hereof (A) shall subject an Affected Party to any tax (other than income tax), duty or other charge with respect to the Certificate, any Undivided Interest owned by or funded by it, or any obligations or right to make Purchases or Reinvestments or to provide funding therefor, or shall change the basis of taxation of payments to the Affected Party of any Investments or Earned Return owned by, owed to or funded by it or any other amounts due under this Agreement or any of the other Transaction Documents in respect of the Certificate, any Undivided Interest owned by or funded by it or its obligations or rights, if any, to make Purchases or Reinvestments or to provide funding therefor (except for changes in the rate of tax on the overall net income of such Affected Party); or (B) shall impose, modify or deem applicable any reserve (including, without limitation, any reserve imposed by the Federal Reserve Board, but excluding any reserve included in the determination of Earned 13 19 Return), special deposit or similar requirement against assets of any Affected Party, deposits or obligations with or for the account of any Affected Party or with or for the account of any Affiliate (or entity deemed by the Federal Reserve Board to be an Affiliate) of any Affected Party, or credit extended by any Affected Party; or (C) shall change the amount of capital maintained or required or requested or directed to be maintained by any Affected Party; or (D) shall impose any other condition affecting the Certificate, any Undivided Interest owned or funded by any Affected Party or its obligations or rights, if any, to make Purchases or Reinvestments or to provide funding therefor; and the result of any of the foregoing is or would be (x) to increase the cost to (or in the case of Regulation D referred to above or any law or regulation relating to deposit insurance, to impose a cost on) (I) an Affected Party of funding or making or maintaining any Purchases or Reinvestments, any purchases, reinvestments, or loans or other extensions of credit under the Stand-by Purchase Agreement, or any commitment of such Affected Party with respect to any of the foregoing, or (II) the Agent for continuing its or Seller's relationship with Purchaser, (y) to reduce the amount of any sum received or receivable by an Affected Party under this Agreement or the Certificate, or under the Stand-by Purchase Agreement or the Enhancement Agreement with respect thereto, or (z) in the sole determination of such Affected Party, to reduce the rate of return on such Affected Party's capital as a consequence of its obligations hereunder or arising in connection herewith to a level below that which such Affected Party could otherwise have achieved, then within thirty days after demand by such Affected Party (which demand shall be accompanied by a statement setting forth the basis of such demand), Seller shall pay to the Agent (for the benefit of such Affected Party) such additional amount or amounts as will compensate such Affected Party for such additional or increased cost or such reduction. 14 20 (b) In determining any amount provided for or referred to in this Section 4.02, an Affected Party may use any reasonable averaging and attribution methods that it shall deem applicable. When making a claim under this Section 4.02, each Affected Party shall submit to Seller a statement as to such increased cost or reduced return (including calculation thereof in reasonable detail), which statement shall, in the absence of manifest error, constitute conclusive evidence of such increased cost or reduced return. Notwithstanding Seller's obligation to pay additional amounts or amounts necessary to compensate any Affected Party pursuant to this Section 4.02, and except in the case of any such Regulatory Change having retroactive effect, the Seller shall not be required to pay such additional amounts to the extent such amounts relate to periods prior to three months before the Seller's receipt of demand therefor. (c) If any of the events requiring payments of additional amounts by the Seller under this Section 4.02 occurs and the applicable Affected Party shall have made a demand for such payment hereunder, the applicable Affected Party shall take such steps as may be reasonable (consistent with its internal policy and legal and regulatory restrictions) to (i) change the jurisdiction of its funding office if such change would avoid the Seller being required to pay any additional amount or (ii)otherwise mitigate the effects of Regulation D, any law or regulation relating to deposit insurance or any Regulatory Change as set forth in this Section 4.02, above, in either case so long as such change or steps to mitigate, as applicable, would not increase any cost to any Affected Party or be otherwise disadvantageous to any Affected Party. 4.03 Funding Losses. Seller hereby agrees that upon demand by any Affected Party (which demand shall be accompanied by a statement setting forth the basis for the calculations of the amount being claimed) Seller will indemnify such Affected Party against any net loss or reasonable expense which such Affected Party may sustain or incur (including, without limitation, any net loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Affected Party to fund or maintain any Undivided Interest), as reasonably determined by such Affected Party, as a result of (a) any payment of any Investment or Earned Return thereon on a date other than the Settlement Date for such Undivided Interest, or (b) any failure of Seller to sell any Undivided Interest to Purchaser on a date specified therefor in a related notice of Purchase delivered pursuant to Section 1.03(a). 15 21 Such written statement shall, in the absence of manifest error, be rebuttably presumptive evidence of the subject matter thereof. ARTICLE V CONDITIONS OF PURCHASES 5.01 Conditions Precedent to Initial Purchase. The initial Purchase hereunder is subject to the condition precedent that the Agent shall have received, on or before the date of such Purchase, the following, each (unless otherwise indicated) dated such date and in form and substance satisfactory to the Agent: (a) A Certificate; (b) A copy of the resolutions of the Board of Directors of each of Seller and Sunterra approving each Transaction Document to be delivered by it and the transactions contemplated thereby, certified by the respective Secretary or Assistant Secretary an officer of each such Person; (c) Good standing certificates for each of Seller and Sunterra issued as of a date not earlier than 30 days prior to such initial Purchase by the Secretary of State of the jurisdiction of such Person's incorporation or formation and the jurisdiction of such Person's principal place of business; (d) A certificate of the Secretary or Assistant Secretary of each of Seller and Sunterra certifying the names and true signatures of the officers authorized on such Person's behalf to sign the Transaction Documents to be delivered by it (on which certificate Purchaser and the Agent may conclusively rely until such time as the Agent shall receive from such Person a revised certificate meeting the requirements of this subsection (d)); (e) The certificate of incorporation or other organizational document of each of Seller and Sunterra, duly certified by the Secretary of State of the jurisdiction of such Person's incorporation or formation as of a recent date acceptable to the Agent, together with a copy of the by-laws or other governing document of each of Seller and Sunterra, each duly certified by the Secretary or an Assistant Secretary of such Person; (f) On or prior to the date of the initial Purchase, (i) duly executed financing statements naming each Originator as debtor and Sunterra as secured party, (ii) 16 22 duly executed financing statements naming Sunterra as debtor and Seller as secured party, and the Purchaser as assignee of Seller, and (iii) duly executed financing statements naming Seller as the debtor and Purchaser as secured party, of the Receivables and related rights and, in the case of the financing statements naming Seller, as debtor, an undivided interest therein and of the other rights, instruments and moneys specified in Section 9.01, or other, similar instruments or documents, as may be necessary or, in the opinion of the Agent, desirable under the UCC of all appropriate jurisdictions or any comparable law of all appropriate jurisdictions to perfect Seller's interests and Purchaser's interests in all Receivables and Undivided Interests, as the case may be, and such other rights, accounts, instruments and moneys in which an interest may be assigned to Purchaser hereunder; (g) A written search report from a Person reasonably satisfactory to the Agent listing all effective financing statements that name Seller, Sunterra or any Originator as debtor or assignor and that are filed in the jurisdictions in which filings are to be made pursuant to subsection (f) above, together with copies of such financing statements (none of which, except for those described in subsection (f) above, shall cover any Receivable), and tax and judgment lien search reports from a Person reasonably satisfactory to the Agent showing no evidence of such liens filed against Seller, Sunterra or any Originator; (h) Duly executed copies of (i) the Collection Account Agreement with the Collection Account Bank and (ii) the Reserve Account Agreement with the Reserve Account Bank; (i) Favorable opinions from: (i) Willkie, Farr & Gallagher, special counsel to Seller, Sunterra and each Originator, substantially in the forms attached hereto as Exhibit 5.01(i)(i), (ii) General Counsels of Seller, Sunterra and each Originator, substantially in the forms attached hereto as Exhibit 5.01(i)(ii) and (iii) Local Counsels of Seller, Sunterra and each Originator, substantially in the forms attached hereto as Exhibit 5.01(i)(iii); (j) Such powers of attorney as the Agent shall reasonably request to enable the Agent to collect all amounts due under any and all Receivables following a Liquidation Event; (k) A Periodic Report calculated as of the most recent Month End Date; 17 23 (l) Evidence (i) of the execution and delivery by each of the parties thereto of each of the Transaction Documents and all documents, agreements and instruments contemplated thereby (which evidence shall include copies, either original or facsimile, of each of such documents, instruments and agreements), (ii) that each of the conditions precedent to the Transaction Documents has been satisfied to the Agent's satisfaction and (iii) that the initial purchases under the Purchase and Sale Agreement have been consummated; (m) The fees payable to the Agent pursuant to the Fee Letter, together with all costs and expenses due and payable pursuant to Section 14.05, if then invoiced; (n) Original UCC-3 financing statements that are duly executed and that shall effect, upon filing, the termination of all financing statements relating to the Receivables; (o) A certificate from an authorized officer of Sunterra and an authorized officer of Seller as to the satisfaction of the conditions set forth in Section 5.02; (p) A written statement from each of Moody's and S&P confirming that the transactions contemplated by this Agreement will not result in a downgrade or withdrawal of the current ratings of the Commercial Paper Notes; (q) Completion of a satisfactory due diligence review by the Agent of Seller, Servicer and each Originator; (r) Evidence satisfactory to the Agent of the execution and delivery by each of the parties thereto of the Interest Rate Protection Agreement; and (s) Evidence satisfactory to the Agent that the Custodian shall have taken possession pursuant to the Custodial Agreement of all Loan Documents (including the Notes) relating to the initial Pool Receivables to be sold by Sunterra to the Seller pursuant to the Purchase and Sale Agreement on the Closing Date. 5.02 Conditions Precedent to All Purchases and Reinvestments. Each Purchase (including the initial Purchase) and each Reinvestment shall be subject to the further conditions precedent (collectively, "Conditions Precedent" and individually, a "Condition Precedent") that on the date of such Purchase or Reinvestment the following statements shall be true (and in the case of paragraph (a) through (d) below, Seller by accepting the amount of such Purchase or by receiving the proceeds of such 18 24 Reinvestment, as the case may be, shall be deemed to have represented and warranted that): (a) The representations and warranties contained in Section 6.01 are true and correct on and as of such day with the same effect as though made on and as of such day and shall be deemed to have been made on such day; (b) No event has occurred and is continuing, or would result from such Purchase or Reinvestment, that constitutes a Liquidation Event or an Unmatured Liquidation Event; (c) After giving effect to each proposed Purchase or Reinvestment, the Aggregate Investment will not exceed the Facility Limit and the Aggregate Undivided Interest will not exceed the Aggregate Undivided Interest Limit; (d) The Commitment Termination Date has not occurred; and (e) The Agent shall have received evidence that the Custodian shall have taken possession on behalf of the Purchaser pursuant to the Custodial Agreement of all Loan Documents (including the Notes) relating to the Receivables to be included in the Receivables Pool with respect to such Purchase or Reinvestment. ARTICLE VI REPRESENTATIONS AND WARRANTIES 6.01 Representations and Warranties of Seller. In order to induce Purchaser and the Agent to enter into this Agreement and to make Purchases and Reinvestments hereunder, Seller hereby represents and warrants to Purchaser and the Agent as follows: (a) Organization and Good Standing. It has been duly organized and is validly existing as a corporation in good standing under the laws of its state of incorporation, with power and authority to own its properties and to conduct its business as such properties are presently owned and such business is presently conducted. (b) Due Qualification. It is duly licensed or qualified to do business as a foreign corporation in good standing in each jurisdiction in which (i) the ownership or lease of its property or the conduct of its business requires such licensing or qualification, and (ii) the failure to be so licensed or qualified would be reasonably likely to have a Material Adverse Effect. 19 25 (c) Power and Authority; Due Authorization. It has (i) all necessary power, authority and legal right to (A) execute, deliver and perform its obligations under this Agreement, the Certificate and each other Transaction Document to which it is a party, and (B) sell and assign Undivided Interests on the terms and subject to the conditions herein provided and (ii) duly authorized by all necessary corporate action such execution, delivery and performance of this Agreement and the other Transaction Documents to which it is a party and the sale and assignment of Undivided Interests on the terms and conditions herein provided. Seller had at all relevant times, and now has, all necessary power, authority and legal right to acquire and own the Receivables, to sell and assign Undivided Interests, and to incur obligations hereunder. (d) Binding Obligations. Each Purchase made pursuant to this Agreement shall constitute a valid sale, transfer, and assignment of the relevant Undivided Interests to Purchaser, or (as provided in Article IX) the assignment of a first priority security interest in the Pool Receivables and Related Security, in either case, which has been perfected and is enforceable against creditors of, and purchasers from, Seller; and this Agreement constitutes, and each other Transaction Document to be signed by Seller when duly executed and delivered will constitute, a legal, valid and binding obligation of Seller enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium, or other similar laws affecting the enforcement of creditors' rights generally, and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. (e) No Violation. The consummation of the transactions contemplated by this Agreement and the other Transaction Documents and the fulfillment of the terms hereof does not (i) conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under (A) the articles or certificate of incorporation or by-laws of Seller, or (B) any indenture, loan agreement, receivables purchase agreement, mortgage, deed of trust, or other material agreement or instrument to which Seller is a party or by which it or any of its properties is bound, (ii) result in or require the creation or imposition of any Adverse Claim upon any of Seller's properties pursuant to the terms of any such indenture, loan agreement, receivables purchase agreement, mortgage, deed of trust, or other agreement or instrument, other than the Transaction 20 26 Documents, or (iii) violate any law or any order, rule, or regulation applicable to Seller of any court or of any federal, state or foreign regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over Seller or any of its properties. (f) No Proceedings. Except as described in Schedule 6.01(f), (i) there is no order, judgment, decree, injunction, stipulation or consent order of or with any court or other government authority to which Seller is subject, and there is no action, suit, arbitration, regulatory proceeding or other litigation, proceeding, or to Seller's knowledge, governmental investigation pending, or to Seller's knowledge, overtly threatened in writing, before or by any court, regulatory body, administrative agency or other tribunal or governmental instrumentality, against Seller that if adversely determined, could reasonably be expected to have a Material Adverse Effect; and (ii) there is no action, suit, proceeding, arbitration, regulatory, or to Seller's knowledge, governmental investigation, pending or, to Seller's knowledge, overtly threatened in writing, before or by any court, regulatory body, administrative agency, or other tribunal or governmental instrumentality (A) asserting the invalidity of this Agreement, the Certificate or any other Transaction Document, (B) seeking to prevent the sale and assignment of any Undivided Interest, the issuance of the Certificate or the consummation of any of the other transactions contemplated by this Agreement or any other Transaction Document, or (C) seeking to adversely affect the federal income tax attributes of the Undivided Interests. (g) Bulk Sales Act. No transaction contemplated by this Agreement or any of the other Transaction Documents requires compliance with, or will be subject to avoidance under, any bulk sales act or similar law. (h) Government Approvals. Except for the filing of the UCC financing statements referred to in Article V, all of which, at the time required in Article V, shall have been duly made and shall be in full force and effect, no authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by Seller of any Transaction Document to which 21 27 it is a party, except for authorization, approvals, or other actions which have been obtained or taken, as applicable, and except for notice or filings which have been given or completed, as applicable. (i) Financial Condition. Since the date hereof, no event has occurred that has had, or is reasonably likely to have, a Material Adverse Effect. (j) Margin Regulations. No use of any funds obtained by Seller under this Agreement will conflict with or contravene any of Regulations T, U and X promulgated by the Federal Reserve Board. (k) Quality of Title. Each Receivable in which an Undivided Interest is to be sold to Purchaser (together with the Related Security for such Undivided Interest) shall be owned by Seller free and clear of any Adverse Claim (other than (A) any Adverse Claim arising solely as the result of any action taken by Purchaser or by the Agent and, (B) in the case of the Related Security constituting the Mortgage on the Vacation Interest securing a Mortgage Loan, (i) any mechanics and materialmen's lien thereon, (ii) the lien of any condominium, homeowners or timeshare association with respect to any annual maintenance fees or the lien of real property taxes, ground rents, water charges, sewer rents and assessments not yet delinquent or accruing interest or penalties, and (iii) covenants, conditions and restrictions, rights of way, easements and other matters of public record, none of which, individually or in the aggregate, materially interferes with the current use or operation of such Vacation Interest or the security intended to be provided by the related Mortgage or with the Obligor's ability to pay its obligations under the related Mortgage Loan when they become due, or materially and adversely affects the value of such Vacation Interest). When Purchaser makes a Purchase or Reinvestment it shall acquire and shall continue to maintain (at all times when the Aggregate Undivided Interest is not zero) a valid and upon the completion of the necessary action, perfected, first priority undivided fractional interest to the extent of its Undivided Interest in each Receivable and in the Related Security and Collections with respect thereto, free and clear of any Adverse Claim (other than any Adverse Claim arising solely as the result of any action taken by Purchaser or by the Agent). No effective financing statement or other instrument similar in effect covering any Receivable, any interest therein, or the Related Security or Collections with respect thereto is on file in any recording office except for financing statements that may be filed (i) in favor of Sunterra or any Originator in accordance with the Timeshare Loans, (ii) in favor of 22 28 Seller in accordance with the Purchase and Sale Agreement, (iii) in favor of Purchaser or the Agent in accordance with this Agreement, or (iv) in connection with any Adverse Claim arising solely as the result of any action taken by Purchaser (or any assignee thereof) or by the Agent. (l) Accuracy of Information. All written information heretofore or contemporaneously furnished by Seller to Purchaser or the Agent for purposes of, or in connection with, this Agreement and all other Transaction Documents or any transaction contemplated hereby or thereby is, and all other such factual, written information hereafter furnished (if prepared by Seller or, if not prepared by Seller, to the extent that information contained therein was supplied by Seller) by Seller to Purchaser or the Agent pursuant to, or in connection with, this Agreement and the other Transaction Documents, including, without limitation, each Periodic Report and financial statement, when taken as a whole with any other documents delivered within a reasonable time will be, true and accurate in all material respects on the date as of which such information is dated or certified, and will not contain any material misstatement of fact or be incomplete by omitting to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading on the date as of which such information is dated or certified. (m) Offices. The principal places of business and chief executive offices of Seller are located at the address referred to in Section 14.02, and the offices where Seller keeps all its books, records and documents evidencing Receivables, the related Timeshare Loans and all other agreements related to such Receivables are located at the addresses specified in Schedule 6.01(m) (or at such other locations, notified to the Agent in accordance with Section 7.01(e), in jurisdictions where all action required by Section 8.06 has been taken and completed). (n) Lockbox Accounts. The names and addresses of all the Lockbox Banks and other Account Banks, together with the account numbers of the lockbox accounts and other accounts at such Account Banks, are specified in Schedule 6.01(n) (or have been notified to the Agent in accordance with Section 7.03(d)). (o) Capitalization. The authorized capital stock of Seller consists of 1,000 shares of common stock, no par value ("Seller Common Stock"), all of which shares are currently issued and outstanding. All of such outstanding shares of Seller Common Stock are validly issued, fully paid 23 29 and nonassessable and are owned (beneficially and of record) by Sunterra free and clear of any Adverse Claims. (p) Licenses, Contingent Liabilities, and Labor Controversies. (i) Seller has not failed to obtain any licenses, permits, franchises or other governmental authorizations necessary to the ownership of its properties or to the conduct of its business, which violation or failure to obtain could reasonable be expected to have a Material Adverse Effect. (ii) There are no labor controversies pending against Seller, Sunterra or any Originator that have had (or are reasonably likely to have) a Material Adverse Effect. (iii) Other than any liability incident to any litigation or proceedings described in Section 6.01(f), Seller has no contingent liabilities not provided for or disclosed in its financial statements that, individually or in the aggregate, are material to Seller. (q) Trade Names. Seller does not use any trade name other than its actual corporate name and the trade names set forth in Schedule 6.01(q). From and after the date that fell five (5) years before the date hereof, Seller has not been known by any legal name other than its corporate name as of the date hereof, nor has any such Person been the subject of any merger or other corporate reorganization, except as set forth in Schedule 6.01(q). (r) Taxes. Seller has filed all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its respective books. (s) Compliance with Applicable Laws. Seller is in compliance with the requirements of all applicable laws, rules, regulations, and orders of all governmental authorities, including federal, state, local or foreign, except for such breaches and failures to comply which, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. 24 30 (t) Eligible Receivables. Each Receivable included in the calculation of the Net Pool Balance as an Eligible Receivable on the date of any Purchase or Reinvestment was an Eligible Receivable on such date. (u) Weighted Average Interest Rate. The weighted average interest rate payable on the Eligible Receivables is greater than or equal to 13.5%. (v) Foreign Tax Liability. The Seller is not aware that any Obligor has withheld any portion of payments with respect to any Timeshare Loan because of the requirements of a foreign taxing authority and no foreign taxing authority has contacted the Seller concerning a withholding or other foreign tax liability. (w) Investment Company. The Seller is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (x) Each homeowners association relating to each Vacation Ownership Resort in which a Vacation Interest is located was duly organized and is validly existing. Sunterra, an Affiliate thereof or a Person approved in writing by the Agent, it being understood that any Person managing a Vacation Ownership Resort on the date hereof or on the Initial Closing Date and who has been disclosed to the Agent, shall been deemed to have been approved by the Agent, manages each Vacation Ownership Resort and performs services for such homeowners association, pursuant to an agreement with such homeowners association, each of such agreements being in full force and effect. A true and correct copy of the management agreement between Sunterra or such Affiliate or Person and such homeowners association has been furnished to the Agent. Sunterra or such Affiliate or Person, as applicable, and the homeowners association have performed in all material respects all obligations under such agreements and are not in material default under such agreements. (y) The Vacation Ownership Resorts are insured through the applicable homeowners associations, in the event of fire or other casualty (other than earthquake, unless deemed necessary in the reasonable judgment of the applicable Originator) for the full replacement value thereof, and in the event that the Vacation Interest related to a Timeshare Loan should suffer any loss covered by casualty or other insurance, upon receipt of any insurance proceeds, such homeowners associations are required, during the time such Vacation Interests are covered by such insurance, under 25 31 their applicable governing instruments either to repair or rebuild the portions of the applicable Vacation Ownership Resorts or to pay such proceeds to the holders of any Mortgages secured by a timeshare estate in the portions of the applicable Vacation Ownership Resorts. Each such homeowners association that is located in a designated flood plain maintains flood insurance in an amount not less than the maximum level available under the National Flood Insurance Act of 1968, as amended. (z) Each Timeshare Loan secured by a Mortgage requires the Obligor to pay all taxes, insurance premiums and maintenance costs with respect to the related timeshare estate. Each Timeshare Loan secured by a Right-to-Use Agreement requires the Obligor to pay all maintenance costs with respect to the related timeshare estate. There are no material outstanding liens or encumbrances of any kind affecting the Vacation Interests, other than Permitted Encumbrances. (aa) The Vacation Interests and related Vacation Ownership Resorts are free of material damage and waste and there is no proceeding pending or, to the best knowledge of the Seller, threatened for the total or partial condemnation or taking of the Vacations Interests or Vacation Ownership Resorts by eminent domain. (bb) There is no condition presently existing, and to the best knowledge of Seller, no event has occurred or failed to occur prior to the date hereof, concerning a Vacation Ownership Resort relating to any hazardous or toxic materials or condition, or other environmental matters which would reasonably be expected to materially and adversely affect the present use of such Vacation Ownership Resort or the financial condition or business operations of the related homeowners' association, or the value of the Notes, Timeshare Loans or Related Rights. (cc) Units Complete. All of the condominium units related to the Timeshare Loans in the Vacation Ownership Resorts, located in buildings as to which construction thereof has been completed, have been completed as required by applicable state and local laws. 6.02 Representations and Warranties of Sunterra. In order to induce Purchaser and the Agent to enter into this Agreement, Sunterra as initial Servicer hereby represents and warrants to Purchaser and the Agent as follows: (a) Organization and Good Standing. It has been duly organized and is validly existing as a corporation in good 26 32 standing under the laws of its state of incorporation, with power and authority to own its properties and to conduct its business as such properties are presently owned and such business is presently conducted. (b) Due Qualification. It is duly licensed or qualified to do business as a foreign corporation in good standing in each jurisdiction in which (i) the ownership or lease of its property or the conduct of its business requires such licensing or qualification, and (ii) the failure to be so licensed or qualified would be reasonably expected to have a Material Adverse Effect. (c) Power and Authority; Due Authorization. It has (i) all necessary power, authority and legal right to execute, deliver and perform its obligations under this Agreement and each other Transaction Document to which it is a party in its capacity as Servicer and (ii) duly authorized by all necessary corporate action such execution, delivery and performance of this Agreement and such other Transaction Documents. (d) Binding Obligations. This Agreement constitutes, and each other Transaction Document to be signed by Sunterra, in its capacity as Servicer when duly executed and delivered will constitute, a legal, valid and binding obligation of Sunterra, in its capacity as Servicer, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium, or other similar laws affecting the enforcement of creditors' rights generally, and be general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. (e) No Violation. The consummation of the transactions contemplated by this Agreement and the other Transaction Documents to which it is a party in its capacity as Servicer and the fulfillment of the terms hereof does not (i) conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under (A) the certificate of incorporation or by-laws of Sunterra, or (B) any indenture, loan agreement, receivables purchase agreement, mortgage, deed of trust, or other material agreement or instrument to which Sunterra is a party or by which it or any of its properties is bound, (ii) result in or require the creation or imposition of any Adverse Claim upon any of its properties pursuant to the terms of any such indenture, loan agreement, receivables purchase agreement, mortgage, deed of trust, or other agreement or instrument, other than 27 33 the Transaction Documents, or (iii) violate any law or any order, rule, or regulation applicable to Sunterra of any court or of any federal, state or foreign regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over Sunterra or any of its properties. (f) No Proceedings. Except as described in Schedule 6.02(f), (i) there is no order, judgment, decree, injunction, stipulation or consent order of or with any court or other government authority to which Sunterra is subject, and there is no action, suit, arbitration, regulatory proceeding or other litigation, proceeding or to Seller's knowledge, governmental investigation pending or to Sunterra's knowledge, overtly threatened in writing, before or by any court, regulatory body, administrative agency or other tribunal or governmental instrumentality, against Sunterra, that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect; and (ii) there is no action, suit, proceeding, arbitration, regulatory, or to Seller's knowledge, governmental investigation, pending or to Sunterra's knowledge, overtly threatened in writing, before or by any court, regulatory body, administrative agency, or other tribunal or governmental instrumentality (A) asserting the invalidity of this Agreement and other Transaction Document to which Sunterra is a party as Servicer, (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or any other Transaction Document to which Sunterra is a party as Servicer, or (C) seeking any determination that could reasonably be expected to have a Material Adverse Effect. (g) Government Approvals. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by Sunterra of any Transaction Document to which it is a party in its capacity as Servicer, except for authorizations, approvals or other actions which have been obtained or taken as applicable, and except for notices or filings which have been given or completed, as applicable. 28 34 (h) Financial Condition. (i) The consolidated balance sheets of Sunterra and its consolidated subsidiaries as of December 31, 1997, and the related statements of income and shareholders' equity of Sunterra and its consolidated subsidiaries for the fiscal year then ended certified by Arthur Andersen LLP, Sunterra's independent accountants, copies of which will be furnished to the Agent, present fairly in all material respects the consolidated financial position of Sunterra and its consolidated subsidiaries as at such date and the consolidated results of the operations of Sunterra and its consolidated subsidiaries for the period ended on such date, all in accordance with GAAP consistently applied; (ii) Since September 30, 1998, no event has occurred that has had, or is reasonably likely to have, a Material Adverse Effect; and (iii) Sunterra has not and shall not fail (A) to make any payment when due of any Indebtedness (other than any Obligation constituting Indebtedness) of Sunterra, which Indebtedness is in a principal amount, at any time in excess of $500,000, or (B) in the performance or observance of any material obligation or condition with respect to such Indebtedness. (i) Accuracy of Information. All written information heretofore or contemporaneously furnished by Sunterra in its capacity as Servicer to Purchaser or the Agent for purposes of, or in connection with, this Agreement and all other Transaction Documents or any transaction contemplated hereby or thereby is, and all other such factual, written information hereafter furnished (if prepared by Sunterra in its capacity as Servicer or, if not prepared by Sunterra in its capacity as Servicer, to the extent that information contained therein was supplied by Sunterra in its capacity as Servicer) by Sunterra in its capacity as Servicer to Purchaser or the Agent pursuant to, or in connection with, this Agreement and the other Transaction Documents, including, without limitation, each Periodic Report and financial statement, will be, when taken as a whole with any other documents delivered within a reasonable time, true and accurate in all material respects on the date as of which such information is dated or certified, and will not contain any material misstatement of fact or be incomplete by omitting to state a material fact necessary to make the statements contained therein, in light of the circumstances 29 35 in which they were made, not misleading on the date as of which such information is dated or certified. (j) Account Banks. The names and addresses of all the Account Banks, together with the account numbers of the accounts at such Account Banks, are specified in Schedule 6.01(n) (or have been notified to the Agent in accordance with Section 7.03(d)). (k) Taxes. Sunterra has filed all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its respective books. (l) Compliance with Applicable Laws. Sunterra in its capacity as Servicer is in compliance with the requirements of all applicable laws, rules, regulations, and orders of all governmental authorities with respect to the Receivables and the related Timeshare Loans, including federal, state, local or foreign, except for such breaches and failures to comply which, individually or in the aggregate, would not be reasonably expected to have a Material Adverse Effect. (m) Year 2000 Problem. The Servicer has reviewed the areas within its business and operations which could be adversely affected by, and has developed or is developing a program to address on a timely basis, the risk that certain computer applications used by the Servicer may be unable to recognize and perform properly date-sensitive functions involving dates prior to and after December 31, 1999 (the "Year 2000 Problem"). The Year 2000 Problem will not result in any Material Adverse Effect. ARTICLE VII GENERAL COVENANTS OF SELLER AND SERVICER 7.01 Affirmative Covenants of Seller and Sunterra. From the date hereof until the first day, following the Commitment Termination Date, on which (i) all Undivided Interests shall be reduced to zero, and (ii) all Obligations that have ever been outstanding hereunder shall have been finally and fully paid and performed, Seller and Sunterra (in its capacity as Servicer) each hereby covenants and agrees with Purchaser and the Agent as to itself that, unless the Agent shall otherwise consent in writing, it shall: 30 36 (a) Compliance with Laws, Etc. Comply in all material respects with all applicable laws, rules, regulations and orders of all governmental authorities having jurisdiction over it. (b) Preservation of Corporate Existence. Preserve and maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified in good standing as a foreign corporation in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification would have a Material Adverse Effect. (c) Audits. (i) At any time and from time to time during regular business hours, upon two Business Days' prior written notice from the Agent, permit the Agent (or such other Person who may be designated from time to time by the Agent), or its agents or representatives, at Seller's expense, (A) to examine and make copies of and abstracts from all books, records and documents (including, without limitation, computer tapes and disks) in its possession or under its control relating to Receivables and the Undivided Interests, including, without limitation, the related Timeshare Loans and purchase orders and other agreements, and (B) to visit its offices and properties for the purpose of examining such materials described in clause (i)(A) next above, and to discuss matters relating to Receivables or its performance hereunder with any of its appropriate or designated officers or employees having knowledge of such matters; and (ii) without limiting the provisions of clause (i) next above, from time to time during regular business hours, upon two Business Days prior written notice from the Agent, permit certified public accountants or other auditors acceptable to the Agent to conduct, at Seller's or Sunterra's expense as the case may be, a review of its books and records with respect to the Receivables. Notwithstanding anything in this paragraph to the contrary, except in connection with examinations and audits made pursuant to this paragraph following the occurrence of a Liquidation Event or Unmatured Liquidation Event, Seller or Sunterra, as the case may be, shall only be responsible for expenses in connection with one examination or one audit (pursuant to the terms of this paragraph) per year. (d) Keeping of Records and Books of Account. Maintain and implement (or cause the Servicer to maintain and implement) administrative and operating procedures (including, without limitation, an ability to recreate records evidencing Receivables in the event of the destruction of the originals thereof), and keep and maintain 31 37 (or cause the Servicer to keep and maintain), all documents, books, records and other information which is reasonably necessary for the collection of all Receivables (including, without limitation, records adequate to permit the prompt identification of each new Receivable and all Collections of, and adjustments to, each existing Receivable). (e) Location of Records. Keep its principal place of business and chief executive office, and the offices where it keeps its records concerning the Receivables, all related Timeshare Loans and all other agreements related to such Receivables (and all original documents relating thereto), at its address(es) referred to in Section 6.01(m) in the case of Seller, or Section 14.02 in the case of Sunterra, or, upon 30 days' prior written notice to the Agent, at such other locations in jurisdictions in the United States where all action required by Section 8.06 shall have been taken and completed. (f) Credit and Collection Policies. Comply in all material respects with the Credit and Collection Policy in connection with each Receivable and each Timeshare Loan related thereto. (g) Collections. (i) Promptly remit to the Lockbox Accounts all Collections received by it; and (ii) instruct all Obligors to cause all payments made with respect to the Receivables to be deposited directly to one or more lockboxes or Lockbox Accounts. (h) Separate Corporate Existence. Each of Seller and Sunterra hereby acknowledges that Purchaser and the Agent are entering into the transactions contemplated by this Agreement in reliance upon Seller's identity as a legal entity separate from Servicer, the Originators and any Affiliate thereof. Therefore, from and after the date hereof, Seller shall take all reasonable steps to continue Seller's identity as a separate legal entity and to make it apparent to third Persons that Seller is an entity with assets and liabilities distinct from those of Servicer, any Originator and any Affiliate thereof, and is not a division of Servicer, any Originator or any other Person. Without limiting the generality of the foregoing and in addition to and consistent with the covenant set forth in Section 7.01(b), Seller shall take such actions as shall be required in order that: 32 38 (i) Seller will be a limited purpose corporation whose primary activities are restricted in its certificate of incorporation to (A) purchasing Receivables from Sunterra, owning, holding, selling, granting security interests, or selling interests, in Receivables, Timeshare Loans, Related Security and Collections purchased from Sunterra, entering into agreements for the servicing of such Receivables, (B) hold, pledge, transfer, issue and otherwise deal with securities (i) that evidence an ownership interest in the Receivables and that do not constitute indebtedness under the laws of the state ("State Law") which the Seller elects shall govern such securities ("Equity Securities") or (ii) that represent debt obligations of the Seller under State Law ("Debt Securities" and collectively with the Equity Securities, the "Securities"), or to sponsor trusts that issue such Securities. The Securities may be further secured by reserve funds, guaranteed investment contracts, letters of credit, insurance contracts, surety bonds or any other form of credit enhancements and (C) conducting such other activities as it deems necessary, appropriate, suitable or convenient to carry out activities described in (i)(A) and (i)(B) above; (ii) Not less than one member of Seller's Board of Directors (the "Independent Director") shall be an individual who is not (A) an officer or employee of, or the direct or indirect beneficial holder of any class of voting stock of, the Seller, its immediate or ultimate parent or any subsidiaries or affiliates thereof or (B) a member of the immediate family of any such stockholder, officer, employee or other director of the Seller or any affiliate thereof, provided, that the Independent Director may serve in similar capacities for other "special purpose entities" formed by Sunterra or its affiliates. As used herein, the term "affiliate" means any person controlling, under common control with, or controlled by the person in question, and the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through ownership or voting securities, by contract or otherwise. If the Independent Director resigns, dies or becomes incapacitated, or such position is otherwise vacant, no action requiring the unanimous affirmative vote of the board of directors shall be taken until a successor Independent Director is elected and qualified and approves such action. In the event of the death, incapacity, or resignation of the Independent Director, or a vacancy for any other 33 39 reason, a successor Independent Director shall be appointed by the remaining directors. (iii) No Independent Director shall at any time serve as a trustee in bankruptcy for any Affiliate of Servicer or any Originator; (iv) Any employee, consultant or agent of Seller will be compensated from Seller's own bank accounts for services provided to Seller except as provided herein in respect of the Servicer's Fee. Seller will engage no agents other than an agent for service of process and a Servicer for the Receivables, which Servicer will be fully compensated for its services to Seller by payment of the Servicer's Fee; (v) Seller will contract with Servicer to perform for Seller all operations required on a daily basis to service its Receivables. Seller will pay Servicer a monthly fee based on the level of Receivables being managed by Servicer. Seller will not incur any material indirect or overhead expenses for items shared between Seller and Servicer, any Originator or any other Affiliate thereof that are not reflected in the Servicer's Fee. To the extent, if any, that Seller, Servicer, any Originator and any other Affiliate thereof share items of expenses not reflected in the Servicer's Fee, such as legal, auditing and other professional services, such expenses will be allocated to the extent practical on the basis of actual use or the value of services rendered, and otherwise on a basis reasonably related to the actual use or the value of services rendered, it being understood that Sunterra shall pay all reasonable expenses relating to the preparation, negotiation, execution and delivery of the Transaction Documents and the Stand-by Purchase Agreement and any amendments thereto, including, without limitation, legal, commitment, agency and other fees; (vi) Seller's operating expenses will not be paid by Servicer, any Originator or any Affiliate thereof; (vii) Seller will have its own separate stationery and telephone number; (viii) Seller's books and records will be maintained separately from those of Servicer, the Originators and any Affiliate thereof; 34 40 (ix) Any financial statements which are consolidated to include Seller will contain detailed notes clearly stating that (A) all of Seller's assets are owned by Seller and (B) Seller is a separate corporate entity with creditors who have received ownership and security interests in Seller's assets; (x) Seller's assets will be maintained in a manner that facilitates their identification and segregation from those of Servicer, the Originators or any Affiliate thereof; (xi) Seller will strictly observe corporate formalities in its dealings with Servicer, the Originators and any Affiliate thereof, and funds or other assets of Seller will not be commingled with those of Servicer, the Originators or any Affiliate thereof. Seller shall not maintain joint bank accounts or other depository accounts to which Servicer, the Originators or any Affiliate thereof (other than Sunterra in its capacity as Servicer) has independent access. None of Seller's funds will at any time be pooled with any funds of Servicer, any Originator or any Affiliate thereof; (xii) Seller shall pay to Servicer, each Originator or the appropriate Affiliate thereof, as applicable, the marginal increase (or, in the absence of such increase, the market amount of its portion of) in the premium payable with respect to any insurance policy that covers Seller and Servicer, any Originator or any Affiliate thereof, but Seller shall not, directly or indirectly, be named or enter into an agreement to be named, as a direct or contingent beneficiary or loss payee, under any such insurance policy, with respect to any amounts payable due to occurrences or events related to Servicer, any Originator or any Affiliate thereof (other than Seller); and (xiii) Seller will maintain arm's length relationships with Servicer, each Originator and any Affiliate thereof. Any Person that renders or otherwise furnishes services to Seller will be compensated by Seller at market rates for such services. Seller will not be or will not hold itself out to be responsible for the debts of Servicer, any Originator or any Affiliate thereof or the decisions or actions respecting the daily business and affairs of Servicer, any Originator or any Affiliate thereof. 35 41 (i) Post Office Boxes. Prior to the date hereof, Sunterra shall deliver to the Agent a certificate from an authorized officer of Sunterra to the effect that (i) the name of the renter of all post office boxes into which Collections may from time to time be mailed have been changed to the name of Seller (unless such post office boxes are in the name of the relevant Lockbox Banks) and (ii) all relevant postmasters have been notified that Servicer and the Agent are authorized to collect mail delivered to such post office boxes (unless such post office boxes are in the name of the relevant Lockbox Banks). (j) Financial Covenants. In the event the Bank Revolver is canceled or terminated and there is no replacement thereof at such time, the financial covenants in effect in the Bank Revolver as of the date of its cancellation or termination shall be deemed to be incorporated herein by reference and Sunterra shall be deemed to make such covenants for purposes of this Agreement until such time as a replacement for the Bank Revolver becomes effective. 7.02 Reporting Requirements of Seller. From the date hereof until the first day, following the Commitment Termination Date, on which (i) the Aggregate Undivided Interest shall be reduced to zero, and (ii) all Obligations that have ever been outstanding hereunder shall have been finally and fully paid and performed, Seller will, unless Purchaser and the Agent shall otherwise consent in writing, furnish to the Agent: (a) Quarterly Financial Statements. As soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of Sunterra, and Seller, (i) copies of (A) the unaudited consolidated balance sheet of Sunterra and its consolidated subsidiaries, and (B) the unaudited balance sheet of Seller, in each case as at the end of such period, together with unaudited statements of earnings, stockholders' equity and cash flows for such period and the portion of the fiscal year through such period, each prepared in accordance with GAAP applied consistently throughout the periods reflected therein and certified by the chief financial officer, treasurer or chief accounting officer thereof (such officer being herein called the "Financial Officer"), and (ii) a letter from the Financial Officer certifying to the best knowledge of the Financial Officer, that neither a Liquidation Event nor an Unmatured Liquidation Event has occurred and is continuing; (b) Annual Financial Statements. As soon as available and in any event within 120 days after the end of each 36 42 fiscal year of each of Sunterra, and Seller, a copy of (A) the consolidated balance sheet of Sunterra and its consolidated subsidiaries, (B) consolidating balance sheet of Sunterra, and (C) the balance sheet of Sunterra and Seller, in each case as at the end of such fiscal year, together with the related statements of earnings, stockholders' equity and cash flows for such fiscal year, each prepared in accordance with GAAP applied consistently throughout the periods reflected therein, Sunterra's consolidated balance sheet and such related statements to be certified without any Impermissible Qualification by independent certified public accountants of internationally recognized standing, and Seller's balance sheet and such related statements to be certified by the Financial Officer thereof; (c) Reports to Holders and Exchanges. In addition to the reports required by subsections (a) and (b) next above, promptly upon the Agent's request, copies of any reports or registration statements that Sunterra or Seller files with the Securities and Exchange Commission or any national securities exchange other than registration statements relating to employee benefit plans; (d) ERISA. Promptly after receiving notice of any Reportable Event (as defined in Title IV of ERISA) with respect to Sunterra or any Affiliate thereof, a copy of such notice; (e) Liquidation Events. As soon as possible after the occurrence of each Liquidation Event and each Unmatured Liquidation Event, a written statement of the Financial Officer describing such event and the action that Sunterra and Seller propose to take with respect thereto, in each case in reasonable detail; (f) Proceedings. As soon as reasonably practicable written notice of (i) any litigation, investigation or proceeding of the type described in Section 6.01(f) not previously disclosed to Purchaser and the Agent and (ii) any material adverse development that has occurred with respect to any such previously disclosed litigation, proceedings and investigations, which in the case of (i) and (ii) would have a Material Adverse Effect; and (g) Other. Promptly, from time to time, such other information, documents, records or reports (to the extent such other documents, records or reports are in the possession of Sunterra or Seller, as applicable) respecting the Receivables or the condition or operations, financial or otherwise, of Sunterra or Seller as the Agent may from time 37 43 to time reasonably request in order to protect the interests of the Purchaser or the Agent under or as contemplated by this Agreement. 7.03 Negative Covenants of Seller. From the date hereof until the first day, following the Commitment Termination Date, on which (i) all Undivided Interests shall be reduced to zero and (ii) all Obligations that have ever been outstanding hereunder shall have been finally and fully paid and performed, Seller shall perform its Obligations under this Section 7.03 unless the Agent shall otherwise consent in writing. (a) Sales, Liens, Etc. Except as otherwise provided herein or in the Purchase and Sale Agreement, Seller shall not sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Adverse Claims upon or with respect to, any Receivable, any Related Security, any of the other assets, accounts or interests described in Section 9.01, or any related Timeshare Loan, or any interest in any of the foregoing (including any right to receive income from or in respect of any thereof); provided, however, that Seller may, upon at least 10 Business Days written notice to the Agent, sell and assign in a true sale, without recourse or representation or warranty of any kind (other than a representation or warranty that such Pool Receivables are free and clear of any security interest created by Seller), Pool Receivables, related Timeshare Loans and Related Security with respect thereto if (i) before and after giving effect to such sale and assignment, (a) there shall not exist any Liquidation Event or Unmatured Liquidation Event or (b) the sum of the Undivided Interests shall not exceed the Aggregate Undivided Interest Limit, (ii) the purchaser or assignee of such Pool Receivables agrees in writing that it will not institute against Seller, or join any Person in instituting against Seller, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding, or other proceeding under any federal or state bankruptcy or similar law, for one year and one day after the date following the Commitment Termination Date on which (x) all Undivided Interests shall be reduced to zero and (y) all amounts owing to the Purchaser, Agent, any Affected Party or Indemnified Party that have ever been outstanding hereunder have been finally and fully paid and performed, and (iii) prior to the completion of such transaction, an authorized officer of Seller and Servicer certifies to the Agent that the foregoing conditions described in clauses (i) and (ii) shall have been satisfied in connection therewith and Seller delivers a pro forma Periodic Report demonstrating satisfaction with the condition described in clause (i)(b) above. Upon the satisfaction of the foregoing conditions, 38 44 all right, title and interest of the Purchaser in, to and under such Receivables, related Timeshare Loans and Related Security shall terminate and revert to the Seller, its successors and assigns, and, upon the request of the Seller, its successors or assigns, and at the cost and expense of the Seller, the Purchaser shall execute such UCC-3 financing statements and releases and other evidence of transfer as are necessary or reasonably requested by Seller to terminate and remove of record any documents constituting public notice of the interest in such Pool Receivables, related Timeshare Loans and Related Security hereunder being sold, transferred and assigned. (b) Extension or Amendment of Receivables. Seller shall not extend, amend or otherwise modify the terms of any Timeshare Loan related to any Pool Receivable; provided, however, that so long as no Liquidation Event has occurred and is continuing, the Seller may, in accordance with the Credit and Collection Policy, extend or otherwise modify the terms of any Defaulted Receivable in order to maximize Collections thereon. (c) Change in Business or Credit and Collection Policy. Seller shall not make any material change in the character of its business or materially alter its Credit and Collection Policy, which change would, in either case, impair the collectibility of any Receivable. (d) Addition of Account Bank or Change in Payment Instructions to Obligors; Change in Account Banks. Seller shall not add or terminate any bank as a Account Bank from those listed in Schedule 6.01(n) or make any change in its instructions to Obligors regarding Collections, unless (i) the Agent shall have received notice of such addition, termination or change and duly executed counterparts of a Account Agreements with each new Account Bank and copies of such instructions (which shall be in form and substance acceptable to the Agent) and (ii) the Agent previously shall have consented in writing to such addition, termination or change. (e) Mergers, Acquisitions, Sales, etc. Seller shall not (A) be a party to any merger or consolidation, or directly or indirectly purchase or otherwise acquire, whether in one or a series of transactions, all or substantially all of the assets or any stock of any class of, or any partnership or joint venture interest in, any 39 45 other Person, or sell, transfer, assign, convey or lease any of its property and assets (including, without limitation, any Receivable or any interest therein) other than pursuant to this Agreement; (B) make, incur or suffer to exist an investment in, equity contribution to, loan, credit or advance to, or payment obligation in respect of the deferred purchase price of property from, any other Person, except for Permitted Investments; or (C) create any direct or indirect Subsidiary or otherwise acquire direct or indirect ownership of any equity interests in any other Person. (f) Restricted Payments. (i) General Restriction. Except in accordance with this Section 7.03(f), Seller shall not (A) purchase or redeem any shares of its capital stock, (B) declare or pay any Dividend or set aside any funds for any such purpose, (C) prepay, purchase or redeem any subordinated indebtedness of Seller, (D) lend or advance any funds or (E) repay any loans or advances to, for or from Sunterra or any Affiliate thereof. Actions of the type described in this clause (i) are herein collectively called "Restricted Payments". (ii) Types of Permitted Payments. Subject to the limitations set forth in clause (iii) below, Seller may make Restricted Payments so long as such Restricted Payments are made only to Sunterra and only in one or more of the following ways: (A) Seller may make cash payments (including prepayments) on the Company Note in accordance with its terms; and (B) if no amounts are then outstanding under the Company Note, Seller may declare and pay Dividends. (iii) Specific Restrictions. Seller may make Restricted Payments only out of funds in the Collection Account or the Lockbox Accounts that do not represent the Purchaser's Share of any Collections. Furthermore, Seller shall not pay, make or declare: 40 46 (A) any Dividend if, after giving effect thereto, Seller's Tangible Net Worth would be less than $5,000,000; (B) any Restricted Payment (including any Dividend) if, after giving effect thereto a Liquidation Event or Unmatured Liquidation Event shall have occurred and be continuing. (g) Amendments to Certain Documents. Seller shall not amend, supplement, amend and restate, or otherwise modify the Purchase and Sale Agreement, the Company Note, any Account Agreement, any agreement between a Lockbox Bank and Seller and/or Sunterra which is referred to in any Lockbox Agreement, the Custodial Agreement, or Seller's certificate of incorporation or by-laws, except (A) in accordance with the terms of such document, instrument or agreement and (B) with the advance written consent of the Agent. (h) Deposits to Special Accounts. Seller shall not deposit or otherwise credit, or cause or permit to be so deposited or credited to the Collection Account cash or cash proceeds other than Collections of Pool Receivables. (i) Incurrence of Indebtedness. Seller shall not (i) create, incur or permit to exist, any Indebtedness or liability or (ii) cause or permit to be issued for its account any letters of credit or bankers' acceptances, except Indebtedness incurred pursuant to the Company Note and liabilities incurred pursuant to or in connection with the Transaction Documents. ARTICLE VIII ADMINISTRATION AND COLLECTION 8.01 Designation of Servicer. (a) Sunterra as Initial Servicer. The servicing, administering and collection of Pool Receivables shall be conducted by the Person designated as Servicer hereunder ("Servicer") from time to time in accordance with this Section 8.01. Until the Agent gives notice to Sunterra of the designation of a new Servicer (the "Successor Notice"), which notice may only be given at any time after the occurrence and during the continuance of a Liquidation Event, Sunterra is hereby designated as, and hereby agrees to perform the duties and obligations of, Servicer pursuant to the terms hereof. 41 47 (b) Successor Notice. Upon Sunterra's receipt of a Successor Notice, Sunterra agrees that it will terminate its activities as Servicer hereunder, and will cause each Sub- Servicer designated by the Agent in such Successor Notice to terminate its activities in that capacity, in a manner that the Agent indicates will facilitate the transition of the performance of such activities to the new Servicer. The Agent, or such other Person as the Agent shall designate, shall assume each and all of the obligations of Sunterra (and each Sub-Servicer) to service, administer and collect such Pool Receivables, on the terms and subject to the conditions herein set forth, and Sunterra shall use its best efforts (and shall cause each Sub-Servicer to use its best efforts) to assist the Agent (or its designee) in assuming such obligations. (c) Subservicers. The Servicer shall, in accordance with a subservicing agreement (each a "Sub-Servicer Agreement") reasonably acceptable to the Agent, delegate its duties and obligations hereunder to the Sub-Servicers; provided, that, (i) the Servicer shall remain primarily liable for the performance of the duties and obligations so delegated, (ii) the Seller, the Agent and the Purchaser shall have the right to look solely to the Servicer for performance, and (iii) the terms of any Sub-Servicer Agreement with each Sub-Servicer shall provide that the Agent may terminate such agreement upon the termination of the Servicer hereunder by giving notice of its desire to terminate such agreement to the Servicer (and the Servicer shall provide appropriate notice to each such Sub-Servicer). (d) Servicer's Fee. Seller hereby agrees to pay to Servicer a fee (the "Servicer's Fee") for each month (or portion thereof in which such Person was acting as Servicer) from and including the date hereof to but excluding the date on which all amounts payable under or in connection with this Agreement and the Purchase and Sale Agreement have been finally paid in full (and this Agreement and the Purchase and Sale Agreement shall have terminated), in an amount calculated as follows: (i) at any time when Sunterra (or any Affiliate thereof) is Servicer, an amount equal to one-twelfth of 1.0% of aggregate Unpaid Balance of Pool Receivables as measured on the latest Month End Date referred to in the most recent Periodic Report (or, for the period from and including the initial closing date of the transactions contemplated hereby to (but excluding) the date on which the first Periodic Report is delivered hereunder, one-twelfth of 1.0% of the Aggregate 42 48 Investment as measured at Servicer's close of business on such closing date); or (ii) on and after Servicer's request made at any time when Sunterra (or any Affiliate thereof) is not Servicer, the greater of (A) an amount calculated pursuant to the foregoing clause (i) or (B) an alternative amount specified by Servicer not exceeding 110% of the aggregate costs and expenses incurred by Servicer during such month in connection with performing its obligations under this Agreement and the other Transaction Documents. Such Servicer's Fee shall be paid out of Collections at the times specified in Article III hereof. 8.02 Duties of Servicer and Seller. (a) Appointment; Duties in General. Each of Seller, Purchaser and the Agent hereby appoints Servicer, from time to time designated pursuant to Section 8.01, as its agent to enforce their respective rights and interests in and under the Pool Receivables, the Timeshare Loans and the Related Security. Servicer shall take or cause to be taken all such actions as may be necessary or advisable to collect each Pool Receivable (or shall cause each Sub-Servicer to take or cause to be taken all such actions as may be necessary or advisable to collect each Pool Receivable sold by it to Seller) from time to time, all in accordance with applicable laws, rules and regulations, with reasonable care and diligence, and in accordance with the Credit and Collection Policy. (b) Additional Duties. In addition to any other customary services which the Servicer may perform, the Servicer shall perform (or shall cause each Sub-Servicer to perform) the following servicing and collection activities: (i) perform standard accounting services and general record keeping services with respect to the Pool Receivables and the related Timeshare Loans; (ii) respond to any telephone or written inquiries of Obligors concerning to the Pool Receivables and the related Timeshare Loans; (iii) keep Obligors informed of the proper place and method of making payments with respect to the Pool Receivables and the related Timeshare Loans; 43 49 (iv) contact Obligors to effect collection and to discourage delinquencies in the payment of to the Pool Receivables and the related Timeshare Loans, doing so by any lawful means, including, but not limited to the following: (A) mailing of routine past due notices, (B) preparing and mailing collection letters, (C) contacting delinquent Obligors by telephone to encourage payment, (D) mailing of reminder notices to delinquent Obligors, and (E) initiating and pursuing termination or foreclosure actions deemed necessary by the Servicer (or applicable Sub-Servicer); (v) report tax information to Obligors as required by law; and (vi) take such other action as may be necessary or appropriate in the discretion of the Servicer (or applicable Sub-Servicer) for the purpose of collecting and transferring to the Collection Account all payments received in respect of the to the Pool Receivables and the related Timeshare Loans (except as otherwise expressly provided herein), and to carry out the duties and obligations imposed upon the Servicer pursuant to the terms of this Section 8.02. (c) Allocation of Collections. Servicer shall apply all Collections in accordance with Article III. (d) Documents and Records. Servicer shall hold in trust for Seller and Purchaser in accordance with their respective interests, all documents, instruments and records (including, without limitation, computer tapes or disks, and Timeshare Loans) that evidence or relate to the Pool Receivables (other than those held by the Custodian) sold by Sunterra to Seller. (e) Authorization to Act as Seller's Agent. Seller hereby appoints Servicer (but only for so long as Sunterra (or any Affiliate thereof) is Servicer, in the case of clauses (i) and (iv) below) as its agent for the following purposes: (i) selecting the amount of each requested Purchase, (ii) specifying accounts to which payments are to be made to Seller, (iii) making transfers among, deposits to and withdrawals from the Accounts and other deposit accounts of Seller for the purposes described in the Transaction Documents and (iv) arranging payment by Seller of all fees, expenses, other Obligations and other amounts payable under the Transaction Documents. Seller irrevocably agrees that (A) it shall be bound by all actions taken by Servicer pursuant to the preceding sentence, and (B) that Purchaser, the Agent, the Collection Account Bank, the Lockbox Banks, 44 50 the Reserve Account Bank and the banks holding all other deposit accounts of Seller are entitled to accept submissions, determinations, selections, specifications, transfers, deposits and withdrawal requests, and payments from Servicer on behalf of Seller. (f) Termination. The authorization of Servicer (and each Sub-Servicer) under this Agreement shall terminate upon receipt by the Agent, after the Commitment Termination Date, of an amount equal to (i) the Aggregate Investment plus (ii) accrued Earned Return for each Undivided Interest, plus (iii) all other amounts owed to Purchaser and the Agent and (unless otherwise agreed to by Servicer and the Agent) to Servicer under this Agreement. (g) Agreement Not to Resign. Sunterra acknowledges that Purchaser and the Agent have relied on Sunterra's agreement to act as Servicer hereunder in their respective decisions to execute and deliver the Transaction Documents. In recognition of the foregoing, Sunterra agrees not to resign as Servicer voluntarily or, to the extent permitted in the Sub-Servicing Agreements, permit any other Sub- Servicer to resign voluntarily, unless Sunterra or any such Sub-Servicer is not permitted by law to serve in such capacity, as evidenced by an opinion of counsel to such effect, which opinion shall be satisfactory in form and substance to the Agent. 8.03 Rights of the Account Agent. (a) Notice to Obligors. At any time after the occurrence of and during the continuation of a Liquidation Event, the Agent may notify the Obligors of Receivables, or any of them, of the Purchaser's ownership of Undivided Interests. (b) Notice to Account Banks. At any time following the occurrence of and during the continuation of a Liquidation Event the Agent is hereby authorized to give notice to the Account Banks, as provided in the Account Agreements, of the transfer to the Agent (for the benefit of Purchaser) of dominion and control over the Accounts. Seller hereby transfers to the Agent (for the benefit of Purchaser), effective when the Agent shall give notice to the Account Banks as provided in the Account Agreements, the exclusive dominion and control over such Accounts, and shall take any further action that the Agent may reasonably request to effect such transfer. 45 51 (c) Rights on Servicer Transfer. At any time following the designation of a Servicer other than Sunterra pursuant to Section 8.01: (i) The Agent may direct any Obligors of Receivables to pay all amounts payable under any Receivable directly to the Agent or its designee. (ii) The Agent may direct Sunterra to make payment of all amounts payable to Seller under any Transaction Document to which Sunterra is a party directly to the Agent or its designee. (iii) Seller shall, at the Agent's request and at Seller's expense, give notice of Purchaser's ownership of Undivided Interests to each Obligor and direct that payments be made directly to the Agent or its designee. (iv) Seller and Sunterra shall, at the Agent's request, (A) assemble all of the documents, instruments and other records (including, without limitation, computer programs, tapes and disks, and Timeshare Loans) which evidence the Pool Receivables, and the related Timeshare Loans and Related Security, or which are otherwise necessary or desirable to collect such Pool Receivables, and shall make the same available to the Agent at a place selected by the Agent or its designee, (B) segregate all cash, checks and other instruments received by it from time to time constituting Collections of Pool Receivables in a manner acceptable to the Agent and shall, promptly upon receipt, remit all such cash, checks and instruments, duly endorsed or with duly executed instruments of transfer, to the Agent or its designee and (C) permit any successor Servicer and its agents, employees and assignees access to its respective facilities and its books, records, documents and instruments (including, without limitation, computer programs, tapes and disks, and Timeshare Loans) related to Receivables. (v) Each of Seller, Sunterra and Purchaser hereby authorizes the Agent (to the extent necessary to enforce such party's rights or obligations, as applicable, hereunder or under any Transaction Document) to take any and all steps in Seller's name and on behalf of Seller, Sunterra or Purchaser which are necessary, in the reasonable determination of the Agent, to collect all amounts due under any and all Receivables, including, without limitation, indorsing Purchaser's, Seller's, Sunterra's or any Originator's name on checks and other instruments representing 46 52 Collections and enforcing such Receivables, the related Timeshare Loans, and the Related Security therefor. (vi) Seller hereby irrevocably appoints the Agent (to the extent necessary to enforce the Seller's obligations hereunder or under any Transaction Document) to act as Seller's attorney-in-fact, with full authority in the place and stead of Seller and in the name of Seller or otherwise, at any time following the delivery of a Successor Notice, to take any action and to execute any instrument that the Agent, in its reasonable determination, may deem necessary to accomplish the purposes of this Agreement, including, without limitation: (A) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any Receivable; (B) to receive, indorse, and collect any drafts or other instruments, documents and chattel paper related to the Receivables or the Related Security, or constituting Collections; (C) to file any claims or take any action or institute any proceedings which Agent, in its reasonable determination, may deem necessary for the collection of any of the Receivables or otherwise to enforce the rights of the Seller and Purchaser with respect to any of the Receivables; and (D) to perform the affirmative obligations of Seller under any Transaction Document. Seller hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this Section 8.03(c) is irrevocable and coupled with an interest. 8.04 Responsibilities of Seller. Anything herein to the contrary notwithstanding: (a) Seller shall perform and comply in all material respects with all of its obligations (i) pursuant to the provisions, covenants and other promises required to be observed by it under the Timeshare Loans related to the Receivables and under all purchase orders and other agreements and (ii) under the Purchase and Sale Agreement; and the Agent's exercise of its rights hereunder shall not relieve Seller from any such obligations. 47 53 (b) Neither Purchaser nor the Agent shall have any obligation or liability with respect to any Receivables, related Timeshare Loans or any other related agreements, nor shall any of them be obligated to perform any of the obligations thereunder. (c) Seller hereby grants to Servicer an irrevocable power of attorney, with full power of substitution, coupled with an interest, to take in the name of Seller all steps which are necessary or advisable to indorse, negotiate or otherwise realize on any writing or other right of any kind held or transmitted by Seller or transmitted or received by Purchaser or the Agent (whether or not from Seller) in connection with any Receivable. 8.05 Certain Responsibilities of Sunterra. If at any time Sunterra shall not be Servicer, Sunterra shall deliver all Collections received or deemed received by it to the Agent promptly upon receipt or deemed receipt thereof and the Agent shall distribute such Collections to the same extent as if such Collections had actually been received from the related Obligor on the applicable dates. So long as Sunterra shall hold any Collections required to be paid to the Agent, it shall hold such Collections in trust (and, if the Agent shall so request, separate and apart from its own funds) and shall clearly mark its records to reflect such trust. Sunterra hereby grants to the Agent an irrevocable power of attorney, with full power of substitution, coupled with an interest and exercisable at any time following the delivery of a Successor Notice, to take in the name of Sunterra all steps necessary or advisable to indorse, negotiate or otherwise realize on any writing or other right of any kind held or transmitted by Sunterra or transmitted and received by Purchaser or the Agent (whether or not from Sunterra) in connection with any Pool Receivable. 8.06 Further Action Evidencing Purchases. (a) Each of Seller and Servicer agrees that from time to time at Servicer's expense, it will promptly execute and deliver (or, cause the relevant Sub-Servicer to execute and deliver) all further instruments and documents, and take all further action, that the Agent may reasonably request in order to perfect, protect or more fully evidence the Purchases hereunder and the resulting Undivided Interests, or to enable Purchaser or the Agent to exercise or enforce any of their respective rights hereunder or under any other Transaction Document. Without limiting the generality of the foregoing, upon the Agent's request, Seller or Servicer will execute and file such financing or continuation statements, or amendments thereto or assignments thereof, 48 54 and such other instruments or notices, as may be necessary or appropriate. (b) Seller and Servicer hereby authorize the Agent to file one or more financing or continuation statements, and amendments thereto and assignments thereof, to maintain the perfection of its security or ownership interest in the Receivables or the Related Security now existing or hereafter arising in the name of Seller or Servicer. If Seller or Servicer fails to perform any of its agreements or obligations under any Transaction Document and does not remedy such failure within the applicable cure period, if any, in the applicable Transaction Document, the Agent may (but shall not be required to) itself perform, or cause performance of, such agreement or obligation, and the expenses of the Agent incurred in connection therewith shall be payable by Seller as provided in Section 13.01. ARTICLE IX SECURITY INTEREST 9.01 Grant of Security Interest. To secure the prompt payment and performance of all Obligations of Seller arising in connection with this Agreement, the Certificate and each other Transaction Document, whether now or hereafter existing, due or to become due, direct or indirect, or absolute or contingent, including, without limitation, all Indemnified Amounts, all Earned Returns, payments on account of Collections received or deemed to be received and fees, Seller hereby assigns and grants to Purchaser a first priority security interest in all of Seller's right, title and interest in, to and under all of the following, whether now or hereafter existing: (a) all Pool Receivables, all Related Security with respect to such Pool Receivables and all Collections related thereto, (b) all of Seller's rights, remedies, powers and privileges under, or in respect of, the Purchase and Sale Agreement and the Interest Rate Protection Agreement, (c) all Accounts, all funds on deposit in each of the Accounts and all certificates and instruments, if any, from time to time evidencing such Accounts and funds on deposit therein, all investments made with such funds, all claims thereunder or in connection therewith, and all interest, dividends, moneys, instruments, securities and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the foregoing, and (d) all proceeds and amounts received or receivable by Seller under any or all of the foregoing. This Agreement shall constitute a security agreement under applicable law with regard to the security interest granted pursuant to this Section 9.01. 49 55 9.02 Further Assurances. The provisions of Section 8.06 shall apply to the security interest granted under Section 9.01 as well as to the Purchases and all Undivided Interests hereunder. 9.03 Remedies. Upon the occurrence of and during the continuance of a Liquidation Event, Purchaser shall have, with respect to the collateral granted pursuant to Section 9.01, and in addition to all other rights and remedies available to Purchaser or the Agent under this Agreement or other applicable law, (a) the right to apply Collections to payment of the obligations referred to in Section 9.01 and (b) all the rights and remedies of a secured party upon default under the UCC. ARTICLE X LIQUIDATION EVENTS 10.01 Liquidation Events. The following events shall be "Liquidation Events" hereunder: (a) Servicer, any Originator or Seller shall fail to make when due any payment or deposit of any amount required to be paid or deposited by it hereunder or under the other Principal Documents, which failure shall remain unremedied for two Business Days after receipt by the Seller, Servicer or such Originator, as the case may be, of written or telephonic notice thereof from the Agent; or (b) Servicer shall fail to perform or observe in any material respect any term, covenant or agreement hereunder on its part to be performed or observed (other than as referred to in clause (a) above) and such failure shall remain unremedied for five days after it has knowledge thereof or has received written notice thereof from the Agent; or (c) Any representation or warranty made or deemed to be made by Servicer, any Originator or Seller (or any of their respective officers) under or in connection with any Principal Document (including any Periodic Report or other information or report delivered pursuant hereto) shall prove to have been false or incorrect in any material respect when made or deemed made and shall remain false or incorrect for thirty days after it has knowledge thereof or has received written notice thereof from the Agent; or (d) Seller, Sunterra or any Originator shall fail to perform or observe in any material respect any other term, covenant or agreement contained in this Agreement or any 50 56 other Principal Document on its part to be performed or observed and any such failure shall remain unremedied for thirty days after it has knowledge thereof or has received written notice thereof from the Agent; or (e) (i) A default shall have occurred in the payment when due (after giving effect to any applicable grace period and the giving of any required notice), whether by acceleration or otherwise, of any Indebtedness (other than any Obligation constituting Indebtedness) of Sunterra in excess of $500,000, or (ii) a default shall occur in the performance or observance of any material obligation or condition with respect to such Indebtedness if the effect of such default described in this clause (ii) is to accelerate the maturity of any such Indebtedness; or (f) An Event of Bankruptcy shall have occurred and remain continuing with respect to Seller, Sunterra or any Originator; or (g) (i) The sum of the Aggregate Investment and the aggregate Loss Reserves for all Undivided Interests shall at any time exceed the sum of the Net Pool Balance, plus the Principal Collections held in trust for the benefit of the Purchaser in the Collection Account pursuant to Article III, or (ii) the amount of funds in the Reserve Account are less than the Reserve Account Required Amount and such condition shall continue unremedied for five (5) Business Days; or (h) As of the last day of any calendar month, the rolling three month average of the Default Ratios shall exceed 3.0%; or (i) As of the last day of any calendar month, the Default Ratio shall exceed 4.5%; or (j) The Excess Yield for any two consecutive calendar months shall be less than 3.0%; or (k) As of the last day of any calendar month the Delinquency Ratio shall exceed 9.0%; or (l) (i) The Internal Revenue Service shall file notice of a lien pursuant to Section 6323 of the Internal Revenue Code with regard to any of the assets of Seller, any Originator or Sunterra or (ii) the Pension Benefit Guaranty Corporation shall file notice of a lien pursuant to Section 4068 of ERISA with regard to any of the assets of Seller, Sunterra or such Originator; or 51 57 (m) A Purchase and Sale Termination Event (as defined in the Purchase and Sale Agreement) shall have occurred; or (n) A Change in Control shall have occurred; or (o) (i) Any Principal Document, or any security interest granted thereunder, shall (except in accordance with its terms), in whole or in part, terminate, cease to be effective or cease to be the legally valid, binding and enforceable obligation of Seller, Servicer or any Originator, or (ii) Seller, Servicer or any Originator shall, directly or indirectly, contest in any manner such effectiveness, validity, binding nature or enforceability; or (iii) any security interest securing any Obligation shall not attach or shall, in whole or in part, cease to be a perfected first priority security interest, subject only to those exceptions expressly permitted herein; or (p) The cessation of, or failure to create, a valid first priority ownership interest of Purchaser, to the extent of the Aggregate Undivided Interest in the Receivables Pool, Related Security, Collections and other security contemplated hereby. 10.02 Remedies. (a) Optional Liquidation. Upon the occurrence of a Liquidation Event (other than a Liquidation Event described in subsection (f) of Section 10.01), the Agent may, by notice to Seller, declare the Commitment Termination Date to have occurred. (b) Automatic Liquidation. Upon the occurrence of a Liquidation Event described in subsection (f) of Section 10.01, the Commitment Termination Date shall be deemed to have occurred automatically upon the occurrence of such event; provided, however, that with respect to any proceeding instituted against Seller pursuant to 11 U.S.C. Section 303 (an "Involuntary Federal Proceeding"), the settlement procedures described in Section 3.02(a) shall become applicable upon the commencement of such Proceeding or event and no further Purchases or Reinvestments of Principal Collections shall be made. (c) Additional Remedies. Upon any termination of the Commitment pursuant to this Section 10.02, Purchaser and the Agent shall have, in addition to all other rights and remedies under this Agreement or otherwise, all other rights and remedies provided under the UCC of each applicable jurisdiction and other applicable laws, which rights shall be cumulative. Without limiting the foregoing or the 52 58 general applicability of Article XIII hereof, the occurrence of a Liquidation Event shall not deny to Purchaser or the Agent any remedy in addition to termination of the Commitment to which any such Person may be otherwise appropriately entitled, whether at law or in equity. ARTICLE XI THE AGENT 11.01 Authorization and Action. Purchaser hereby appoints SG as its Agent under and for purposes of each Transaction Document, and authorizes the Agent to act on its behalf under each Transaction Document and to exercise such powers hereunder and thereunder as are delegated to the Agent by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. 11.02 Exculpation. Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it under or in connection with this Agreement (including, without limitation, the servicing, administering or collecting Receivables pursuant to Section 8.01), except for its or their own gross negligence or willful misconduct. Without limiting the generality of the foregoing, the Agent: (a) may consult with legal counsel (including internal counsel and counsel for Seller and Servicer), independent certified public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (b) makes no warranty or representation to Purchaser or any other holder of any interest in Receivables and shall not be responsible to Purchaser or any such other holder for any statements, warranties or representations made in or in connection with any Transaction Document; (c) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of any Transaction Document on the part of Seller, Servicer or any Originator or to inspect the property (including the books and records) of Seller, Servicer or any Originator; (d) shall not be responsible to Purchaser or any other holder of any interest in Receivables for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of any Transaction Document; and (e) shall incur no liability under or in respect of any Transaction Document by acting upon any notice (including notice by telephone), consent, certificate or other instrument or writing (which may be by facsimile or telex) believed by it in good faith to be genuine and signed or sent by the proper party or parties. 53 59 11.03 Agent and Affiliates. SG and any of its Affiliates may accept deposits, lend money to and generally engage in any kind of business with Seller, Sunterra , any Originator or any Obligor, any of their respective Affiliates and any Person who may do business with or own securities of Seller, Sunterra any Originator or any Obligor or any of their respective Affiliates, all as if SG were not the Agent and without any duty to account therefor to Purchaser or any other holder of an interest in Receivables. ARTICLE XII ASSIGNMENT OF PURCHASER'S INTEREST 12.01 Restrictions on Assignments. (a) None of Sunterra, Seller or Purchaser may assign its rights hereunder or any interest herein without the prior written consent of the Agent, and Purchaser may not assign any Undivided Interest (or portion thereof) to any Person without the prior written consent of Seller (which consent shall not be unreasonably withheld); provided, however, that without the consent of Seller, Purchaser may (i) assign and grant a security interest in any interest in, to and under any Undivided Interest, this Agreement and any other Transaction Documents to the Collateral Agent, and any successor in such capacity, to secure Barton's obligations under or in connection with the Commercial Paper Notes, the Stand-by Purchase Agreement, the Enhancement Agreement and any letter of credit issued thereunder, and certain other obligations of Purchaser incurred in connection with the funding of the Purchases and Reinvestments hereunder or (ii) assign any interest in, to and under any Undivided Interest to the Banks pursuant to the Stand-by Purchase Agreement, in each case, which assignment and/or grant of a security interest shall not be considered an "assignment" for purposes of Section 12.01(b) or Section 12.03 or, prior to the enforcement of such security interest, for purposes of any other provision of this Agreement or (iii) after the occurrence of a Liquidation Event may assign its rights hereunder or any interest in any Undivided Interest to any Person. (b) Seller agrees to advise the Agent within five Business Days after notice to Seller of any proposed assignment by Purchaser of any Undivided Interest (or portion thereof), not otherwise permitted under subsection (a) of this Section 12.01, of Seller's consent or non- consent to such assignment. If Seller does not consent to such assignment, Purchaser may upon five days' notice to 54 60 Seller assign such Undivided Interest (or portion thereof) to SG, any Bank or any Affiliate of SG or any Bank. All of the aforementioned assignments shall be upon such terms and conditions as Purchaser and the assignee may mutually agree. 12.02 Rights of Assignee. Upon the assignment by Purchaser of any Undivided Interest (or portion thereof) in accordance with this Article XII, the assignee receiving such assignment shall have all of the rights of Purchaser hereunder with respect to such Undivided Interest (or such portion thereof). 12.03 Evidence of Assignment; Endorsement on Certificate. Any assignment of any Undivided Interest (or portion thereof) to any Person may be evidenced by an instrument of assignment satisfactory to Purchaser, the Agent and the assignee. Purchaser authorizes the Agent to, and the Agent agrees that it shall, endorse the Certificate to reflect any assignments made pursuant to this Article XII or otherwise. ARTICLE XIII INDEMNIFICATION 13.01 Indemnity by Seller. (a) General Indemnity. Without limiting any other rights which any such Person may have hereunder or under applicable law, Seller hereby agrees to indemnify each of Purchaser, the Agent, the Banks, Enhancement Bank, SG, and each of their respective Affiliates, successors, transferees, participants and assigns and all officers, directors, shareholders, controlling persons, employees and agents of any of the foregoing (each of the foregoing Persons being individually called an "Indemnified Party"), forthwith on demand, from and against any and all damages, losses, claims, liabilities and related costs and expenses, including reasonable attorneys' fees and disbursements (all of the foregoing being collectively called "Indemnified Amounts") awarded against or incurred by any of them arising out of or relating to any Transaction Document or the transactions contemplated thereby or the use of proceeds therefrom, including (without limitation) in respect of the ownership or funding of any Undivided Interest or in respect of any Receivable or any Timeshare Loan, excluding, however, (a) Indemnified Amounts that have resulted from gross negligence or willful misconduct on the part of such Indemnified Party, (b) non-payment by any Obligor of an amount due and payable with respect to a Receivable due to the credit of such Obligor (except as otherwise specifically provided in this Agreement), (c) any violation by any 55 61 Indemnified Party of any Requirement of Law, or (d) the operations or administration of any Indemnified Party generally. Without limiting the foregoing, Seller agrees to indemnify each Indemnified Party for Indemnified Amounts arising out of or relating to: (i) the failure of any Receivable included in the calculation of the Net Pool Balance as an Eligible Receivable to be an Eligible Receivable, the failure of any information contained in a Periodic Report to be true and correct, or the failure of any other information provided by Seller, Servicer or any Originator with respect to Receivables, Related Security, Collections or any Transaction Document to be true and correct; (ii) the failure of any representation or warranty or statement made or deemed made by Seller (or any officer thereof) under or in connection with any Transaction Document to have been true and correct in all respects when made; (iii) the failure by Seller to comply with any applicable law, rule or regulation with respect to any Receivable or the related Timeshare Loan, or the nonconformity of any Receivable or the related Timeshare Loan with any such applicable law, rule or regulation; (iv) the failure to vest and maintain vested in Purchaser an undivided fractional ownership interest, to the extent of each Undivided Interest owned by it hereunder, in the Pool Receivables and Related Security in, or purporting to be in, the Receivables Pool, free and clear of any Adverse Claim, other than an Adverse Claim arising solely as a result of an act of Purchaser or the Agent, any assignee from Purchaser or the Agent, whether existing at the time of any Purchase or Reinvestment of such Undivided Interest or at any time thereafter; (v) the failure to file, or any delay in filing, financing statements, Mortgages, assignments of Mortgage or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivables, Timeshare Loans or Related Security in the Receivables Pool, whether at the time of any Purchase or Reinvestment or at any time thereafter; 56 62 (vi) any dispute, claim, offset or defense (other than discharge in bankruptcy) of the Obligor to the payment of any Receivable or related Timeshare Loan in the Receivables Pool (including, without limitation, a defense based on such Receivable or the related Timeshare Loan, Mortgage or Right-to-Use Agreement not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms); except as such enforcement may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium or other similar laws affecting the enforcement of creditors' rights generally, and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); (vii) any failure of Sunterra, as Servicer or otherwise, to perform its duties or obligations in accordance with the provisions of Article VIII, or any failure of Seller to perform its duties or obligations in accordance with the applicable provisions of the Transaction Documents; (viii) any claim involving environmental liability that arises out of or relates to Vacation Interest Property that is the subject of any Receivable or the Related Security; (ix) any tax (other than income tax) or governmental fee or charge, and all interest and penalties thereon or with respect thereto, and all reasonable out-of-pocket costs and expenses, including the reasonable fees and expenses of counsel in defending against the same, which may arise by reason of the purchase or ownership of any Undivided Interest, or any other interest in the Receivables or in the related Vacation Interest; or (x) any commingling of funds to which the Agent or the Purchaser is entitled hereunder with any other funds. (b) Indemnity by Sunterra. Without limiting any other rights which any such person may have hereunder under applicable law, Sunterra hereby agrees to indemnify each Indemnified Party, forthwith on demand(to the extent such indemnification has not been provided by the Seller pursuant to clause(a) of this Section 13.01 or any Originator pursuant to a Sale Agreement), from and against any and all Indemnified Amounts awarded against or incurred by any of them arising out of or relating to: 57 63 (i) the failure of any Receivable included in the calculation of the Net Pool Balance as an Eligible Receivable to be an Eligible Receivable, the failure of any information contained in a Periodic Report to be true and correct, or the failure of any other information provided by Sunterra with respect to Receivables, Related Security, Collections or any Transaction Document to be true and correct; (ii) the failure of any representation or warranty or statement made or deemed made, pursuant to Section 5.02, by Sunterra (or any of its officers) under or in connection with any Transaction Document to have been true and correct in all respects when made; (iii) the failure by Sunterra, in its capacity as Servicer, to comply with any applicable law, rule or regulation (including truth in lending, fair credit billing, usury, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) with respect to any Pool Receivable or other related Mortgage Loan and Related Security; (iv) any failure of Sunterra to perform its duties, covenants and obligations in accordance with the applicable provisions of the Transaction Documents; (v) the failure to vest and maintain vested in Purchaser an undivided fractional ownership interest, to the extent of each Undivided Interest owned by it hereunder, in the Pool Receivables in the Receivables Pool, free and clear of any Adverse Claim, other than an Adverse Claim arising solely as a result of an act of Purchaser or the Agent, any assignee from Purchaser or the Agent, whether existing at the time of any Purchase or Reinvestment of such Undivided Interest or at any time thereafter; or (vi) the failure to file, or any delay in filing, financing statements, Mortgages, assignments of Mortgage or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivables, Timeshare Loans or Related Security in, or purporting to be in, the Receivables Pool, whether at the time of any Purchase or Reinvestment or at any time thereafter. (c) Contribution. If for any reason the indemnification provided above in this Section 13.01 is 58 64 unavailable to an Indemnified Party or is insufficient to hold an Indemnified Party harmless, then Seller or Sunterra or both, as applicable, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by such Indemnified Party, on the one hand, and Seller or Sunterra or both, as applicable, on the other hand, but also the relative fault of such Indemnified Party as well as any other relevant equitable considerations. ARTICLE XIV MISCELLANEOUS 14.01 Amendments, etc. No amendment or waiver of any provision of this Agreement nor consent to any departure by Seller or Servicer therefrom shall in any event be effective unless the same shall be in writing and signed by (a) Seller, Servicer, Purchaser and the Agent (with respect to an amendment) or (b) Purchaser and the Agent (with respect to a waiver or consent by them) or Seller or Servicer (as applicable) (with respect to a waiver or consent by it), as the case may be, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 14.02 Notices, etc. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including facsimile communication) and shall be personally delivered or sent by certified mail, postage prepaid, by overnight courier, or by facsimile, to the intended party at the address or facsimile number of such party set forth under its name on the signature pages of this Agreement (or the Purchase and Sale Agreement) or at such other address or facsimile number as shall be designated by such party in a written notice given to the other parties hereto in accordance with this Section 14.02. All such notices and communications shall be effective, (a) if personally delivered, when received, (b) if sent by certified mail, three Business Days after having been deposited in the mail, postage prepaid, (c) if sent by overnight courier, two Business Days after having been given to such courier unless sooner received by the addressee, (d) if transmitted by facsimile, when sent, receipt confirmed by telephone or electronic means, except that notices and communications pursuant to Article I shall not be effective until received. 14.03 No Waiver; Remedies. No failure on the part of the Agent, any Affected Party, any Indemnified Party, Purchaser or any other holder of any Undivided Interest to exercise, and no delay in exercising, any right hereunder shall operate as a 59 65 waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Without limiting the foregoing, SG is hereby authorized by Seller and Sunterra at any time and from time to time after the occurrence and during the continuance of a Liquidation Event, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, SG and such Bank to or for the credit or the account of Seller or Sunterra, against any Obligation (including, if a Liquidation Period has occurred and is continuing, all Obligations with respect to the then current Settlement Period that are not yet due and payable) now or hereafter existing under this Agreement, to the Agent, any Affected Party, any Indemnified Party or Purchaser, or their respective successors and assigns. 14.04 Binding Effect; Survival. This Agreement shall be binding upon and inure to the benefit of Seller, Servicer, Purchaser, the Agent and their respective successors and assigns, and the provisions of Section 4.02 and Article XIII shall inure to the benefit of the Affected Parties and the Indemnified Parties, respectively, and their respective successors and assigns; provided, however, that nothing in the foregoing shall be deemed to authorize any assignment not permitted by Section 12.01. This Agreement shall create and constitute the continuing obligations of the parties hereto in accordance with its terms, and shall remain in full force and effect until such time, after the Commitment Termination Date, as all Undivided Interests shall have been reduced to zero and all Obligations shall have been finally and fully paid and performed. The rights and remedies with respect to any breach of any representation and warranty made by Seller or Sunterra pursuant to Article VI and the indemnification and payment provisions of Article XIII and Sections 4.02, 14.05 and 14.06 shall be continuing and shall survive any termination of this Agreement. 14.05 Costs, Expenses and Taxes. In addition to its obligations under Article XIII, Seller agrees to pay on demand: (i) all costs and expenses (including, without limitation, the reasonable fees and expenses of counsel of Purchaser, the Agent, SG and their respective Affiliates in connection with (A) the preparation, execution and delivery of this Agreement, the other Transaction Documents and the Stand-by Purchase Agreement (and, in each case, all related certificates and other documents), (B) the preparation, execution 60 66 and delivery of any waiver, amendment or other modification to this Agreement, the Stand-by Purchase Agreement any of the Transaction Documents, and, in each case, all related certificates and other documents, and (C) the enforcement of this Agreement, the Certificate and the other Transaction Documents or any claim of breach of contract, breach of warranty or any other breach of this Agreement, the Certificate or any of the other Transaction Documents or any tort claim relating to any of the foregoing; and (ii) all stamp and other similar taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement, the Certificate or the other Transaction Documents, and agrees to indemnify each Indemnified Party against any liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. 14.06 No Proceedings. Each of Seller, Sunterra and SG (individually and as the Agent) hereby agrees that it will not institute against Purchaser, or join any other Person in instituting against Purchaser, any insolvency proceeding (namely, any proceeding of the type referred to in the definition of Event of Bankruptcy) so long as any Commercial Paper Notes issued by Purchaser shall be outstanding or there shall not have elapsed one year plus one day since the last day on which any such Commercial Paper Notes shall have been outstanding. 14.07 Captions and Cross References. The various captions (including, without limitation, the table of contents) in this Agreement are provided solely for convenience of reference and shall not affect the meaning or interpretation of any provision of this Agreement. Unless otherwise indicated, references in this Agreement to any Section, Appendix, Schedule or Exhibit are to such Section of or Appendix, Schedule or Exhibit to this Agreement, as the case may be, and references in any Section, subsection, or clause to any subsection, clause or subclause are to such subsection, clause or subclause of such Section, subsection or clause. 14.08 Integration. This Agreement and the other Transaction Documents contain a final and complete integration of all prior and contemporaneous expressions by the parties hereto with respect to the subject matter hereof and thereof and shall together constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof, superseding all prior and contemporaneous oral or written understandings. 61 67 14.09 Confidentiality. Unless otherwise required by applicable law, each of the Seller and Servicer agrees to maintain the confidentiality of this Agreement and the other Transaction Documents (including all drafts hereof and thereof and all exhibits, schedules, annexes and attachments hereto and thereto) in communications with third parties and otherwise; provided that this Agreement may be disclosed to: (a) third parties to the extent such disclosure is made pursuant to a written agreement of confidentiality in form and substance reasonably satisfactory to the Agent and (b) the Seller's legal counsel and auditors if they agree to hold it confidential. Unless otherwise required by applicable law, each of the Agent and the Purchaser agrees to maintain the confidentiality of all information regarding Sunterra and its Subsidiaries; provided that such information may be disclosed to: (i) third parties to the extent such disclosure is made pursuant to a written agreement of confidentiality in form and substance reasonably satisfactory to Sunterra, (ii) legal counsel and auditors of the Purchaser or the Agent if they agree to hold it confidential, (iii) the rating agencies rating the Commercial Paper Notes to the extent such information relates to the Receivables Pool or the transactions contemplated by this Agreement, or if not so related, upon obtaining the prior consent of Sunterra (such consent not to be unreasonably withheld), (iv) any Bank or Enhancement Bank or potential Bank or Enhancement Bank to the extent such information relates to the Receivables Pool or the transactions contemplated by this Agreement, or if not so related, upon obtaining the prior written consent of Sunterra (such consent not to be unreasonably withheld), (v) any placement agent placing the Commercial Paper Notes, and (vi) any regulatory authorities having jurisdiction over SG, the Purchaser, any Enhancement Bank or any Bank. 14.10 Governing Law. THIS AGREEMENT, INCLUDING THE RIGHTS AND DUTIES OF THE PARTIES HERETO, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. 14.11 Waiver of Jury Trial. EACH OF THE SELLER, SUNTERRA, THE AGENT AND THE PURCHASER HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, THE CERTIFICATE, ANY OTHER TRANSACTION DOCUMENT OR UNDER ANY AMENDMENT, INSTRUMENT OR DOCUMENT DELIVERED OR WHICH MAY BE IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM OR RELATING TO ANY BANKING OR OTHER RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, THE CERTIFICATE OR ANY OTHER TRANSACTION DOCUMENT AND AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT A JURY TRIAL. 62 68 14.12 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement. 63 69 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. BLUE BISON FUNDING CORP. By: /s/ DEWEY W. CHAMBERS ------------------------------------- Name: Dewey W. Chambers ----------------------------------- Title: Vice President ---------------------------------- 1781 Park Center Drive Orlando, Florida 32835 Telephone No.: 407/532-1000 Facsimile: 407/532-1075 Attention: General Counsel SUNTERRA CORPORATION, as initial Servicer By: /s/ DEWEY W. CHAMBERS ------------------------------------- Name: Dewey W. Chambers ----------------------------------- Title: Vice President ---------------------------------- 1781 Park Center Drive Orlando, Florida 32835 Telephone No.: 407/532-1000 Facsimile: 407/532-1075 Attention: General Counsel BARTON CAPITAL CORPORATION, as Purchaser By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- c/o AMACAR Group, L.L.C. 6707-D Fairview Road Charlotte, North Carolina 28210 Telephone No.: (704) 365-0569 Facsimile No.: (704) 365-1362 Attention: Douglas K. Johnson S-1 Receivables Purchase Agreement 70 SOCIETE GENERALE, as the Agent By: Avi R. Oster ------------------------------------- Name: ----------------------------------- Title: Director ---------------------------------- By: Larry Bowman ------------------------------------- Name: ----------------------------------- Title: Director ---------------------------------- 181 West Madison Street Suite 3400 Chicago, Illinois 60602 Telephone No.: (312) 578-5000 Facsimile No.: (312) 578-5099 Attention: Asset Securitization Group S-2 Receivables Purchase Agreement 71 APPENDIX A DEFINITIONS This is Appendix A to (i) the Purchase and Sale Agreement (as hereinafter defined) and (ii) the Receivables Purchase Agreement, dated as of December 17, 1998, among BLUE BISON FUNDING CORP., SUNTERRA CORPORATION, BARTON CAPITAL CORPORATION and SOCIETE GENERALE, as Agent (as amended, supplemented or otherwise modified from time to time, the "Receivables Purchase Agreement"). A. Defined Terms. As used in the Purchase and Sale Agreement or the Receivables Purchase Agreement, as the case may be (unless the context clearly requires a different meaning), the following terms have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof): "Account Agreements" means the Reserve Account Agreement and the Collection Account Agreement. "Account Banks" means the Lockbox Banks, the Collection Account Bank and the Reserve Account Bank. "Accounts" means the Lockbox Accounts, the Collection Account and the Reserve Account. "Adverse Claim" means a lien, security interest, charge, encumbrance, or similar claim of any Person. "Affected Party" means each of Purchaser, the Agent, each Bank, any permitted assignee of Purchaser or any Bank, Enhancement Bank, and any assignee of any of Enhancement Bank or SG. "Affiliate" when used with respect to a Person means any other Person controlling, controlled by, or under common control with, such Person. "Affiliated Obligor" means an Obligor that is an Affiliate of another Obligor. "Agent" has the meaning set forth in the preamble to the Receivables Purchase Agreement. "Agent's Account" means that certain account #0154644 maintained at Societe Generale, Chicago, Illinois which account shall be in the name and under the exclusive dominion and control of the Agent. A-1 72 "Aggregate Investment" at any time means the aggregate Dollar amount of all Investments outstanding at such time. "Aggregate Undivided Interest" means, at any time, the sum of all of the Undivided Interests owned by Purchaser at such time. "Aggregate Undivided Interest Limit" has the meaning set forth in Section 1.02(b) of the Receivables Purchase Agreement. "Agreement" means the Receivables Purchase Agreement, as amended, amended and restated, supplemented or otherwise modified from time to time. "Alternate Base Rate" means, on any date, a fluctuating rate of interest per annum equal to the higher of (a) the rate of interest most recently announced by SG at its branch office in New York, New York as its reference rate; and (b) the Federal Funds Rate most recently determined by SG plus 1.0% per annum. The Alternate Base Rate is not necessarily intended to be the lowest rate of interest determined by SG in connection with extensions of credit. "Bank" means any one of, and "Banks" means all of, SG and the other commercial lending institutions that are at any time parties to the Stand-by Purchase Agreement. "Bank Rate" for any Yield Period for the related Undivided Interest means an interest rate per annum equal to the greater of (i) the sum of (a) 1.75% per annum, plus (b) the LIBOR Rate (Reserve Adjusted) for such Yield Period and (ii) the sum of (a) 0.25% per annum, plus (b) Sunterra's maximum non-default borrowing rate under the Bank Revolver; provided, however, that if the Earned Return for any Undivided Interest shall have been calculated by reference to the Bank Rate for a period of three years as a result of non-availability of the Commercial Paper Rate, then the rate calculated pursuant to clauses (i) and (ii) above shall be increased by 0.50% at the end of such three year period and on each anniversary thereafter; provided, further, that (A) with respect to the rate described in clause (i) above if (x) it shall become unlawful for the Agent, any Bank or Enhancement Bank to obtain funds in the offshore interbank eurodollar market in order to fund any Purchase or to maintain any Undivided Interest, or if such funds shall not be reasonably available to the Agent, any Bank or Enhancement Bank, or (y) there shall not be time prior to commencement of an applicable A-2 73 Yield Period to determine a LIBOR Rate in accordance with its terms, or (B) if the Seller shall have so requested, then the "Bank Rate" for any Yield Period for such Undivided Interest shall be equal to the Alternate Base Rate. "Bank Revolver" means that certain Credit Agreement entered into on February 18, 1998, among Signature Resorts, Inc., certain lenders party thereto, NationsBank of Texas, N.A., as administrative lender and SG, as documentation agent, as amended from time to time. "Barton" means Barton Capital Corporation, a Delaware corporation. "Business Day" means a day on which both (a) the Agent is open for business at its principal office in Chicago, Illinois and (b) commercial banks in New York City are not authorized or required to be closed for business. "Capital Lease" means any lease that, in accordance with GAAP, would be deemed a capital lease. "Certificate" means a certificate of assignment, by Seller to the Agent, in the form of Exhibit 5.01(a) to the Receivables Purchase Agreement, evidencing each Undivided Interest owned by Purchaser or an assignee thereof, as the same may be amended, supplemented, amended and restated or otherwise modified from time to time in accordance with the Receivables Purchase Agreement. "Change in Control" means (a) Sunterra or any Affiliate thereof shall fail to own one hundred percent (100%) of the issued and outstanding shares of capital stock (including all warrants, options, conversion rights, and other rights to purchase or convert into such stock) of Seller or (b) the occurrence of any of the following events after the Closing Date: (A) any Person or Persons acting together which would constitute a group (a "Group") for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provision thereto, other than the Group whose nominees constitute a majority of the board of directors of Sunterra as of the close of business on the Closing Date, together with any Affiliates or thereof, shall beneficially own (as defined in Rule 13d-3 of the Securities and Exchange Commission under the Exchange Act or any successor provision thereto) at least 30% of the aggregate voting power of all classes of capital stock of Sunterra entitled to vote generally in the election of directors of Sunterra; or (B) any Person or Group, other than any Person whose nominees constitute a majority of the board of directors of Sunterra as of the close of business on the Closing Date, together with any Affiliates thereof, shall A-3 74 succeed in having sufficient of its or their nominees elected to the board of directors of Sunterra, such that such nominees, when added to any existing director remaining on the board of directors of Sunterra after such election which is an Affiliate of such Group shall constitute a majority of the board of directors of Sunterra. "Closing Date" means the date of the initial Purchase under the Receivables Purchase Agreement. "Collateral Agent" means SG in its capacity as collateral agent under the Security Agreement, dated as of December 6, 1991, as amended as of August 1, 1993, as the same may be further amended, supplemented, amended and restated or otherwise modified from time to time between SG and Barton. "Collection Account" means that certain bank account with the number, and maintained at the location, set forth on Schedule 6.01(n) to the Receivables Purchase Agreement, which is (i) in Seller's name, and (ii) pledged on a first-priority basis to Purchaser pursuant to Section 9.01 of the Receivables Purchase Agreement. "Collections" means, with respect to any Pool Receivable and the related Timeshare Loan, all funds that either are (a) received by Sunterra, Servicer or Seller, from or on behalf of the related Obligors in payment of any amounts owed (including, without limitation, principal, finance charges, late fees, interest and all other amounts and charges) in respect of such Pool Receivable and the related Timeshare Loan, (b) applied to such amounts owed by such Obligors (including, without limitation, insurance payments (including any payments in respect of a title insurance policy) or proceeds on account of any casualty loss with respect to the related Vacation Interest and net proceeds of sale, liquidation or other compulsory disposition of the related Vacation Interest or other collateral or property of the Obligor or any other party directly or indirectly liable for payment of such Receivable and the related Timeshare Loan, (c) received from the counterparty pursuant to the Interest Rate Protection Agreement or (d) received from the purchaser of any sale of any Receivable and the related Timeshare Loan, including pursuant to Section 7.03(a). "Collection Account Agreement" means an agreement, substantially in the form of Exhibit 5.01(h)(ii) to the Receivables Purchase Agreement, among Seller, Sunterra, the Agent and the Collection Account Bank, as the same may be amended, supplemented, amended and restated, or otherwise modified from time to time in accordance with the Receivables Purchase Agreement. A-4 75 "Collection Account Bank" means the bank holding the Collection Account. "Commercial Paper Notes" means short-term promissory notes issued or to be issued by Purchaser to fund its investments in accounts receivable or other financial assets. "Commercial Paper Rate" for any Yield Period for the related Undivided Interest means a rate per annum equal to the sum of (i) the rate or, if more than one rate, the weighted average of the rates per annum (determined by converting to an interest-bearing equivalent rate per annum the discount rate (or rates)) at which Commercial Paper Notes having a term equal to such Yield Period and to be issued to fund the Purchase of or to maintain such Undivided Interest (or portion thereof) by Barton (including, without limitation, the Investment and accrued and unpaid Earned Return) may be sold by any placement agent or commercial paper dealer selected by the Agent, as agreed between each such agent or dealer and the Agent, plus (ii) the commissions and other charges charged by such placement agent or commercial paper dealer with respect to such Commercial Paper Notes expressed as a percentage of the face amount of such Commercial Paper Notes and converted to an interest-bearing equivalent rate per annum. "Commitment" has the meaning set forth in Section 1.01 of the Receivables Purchase Agreement. "Commitment Termination Date" has the meaning set forth in Section 1.05 of the Receivables Purchase Agreement. "Company Note" has the meaning set forth in Section 3.2 of the Purchase and Sale Agreement. "Conditions Precedent" and "Condition Precedent" have the meanings set forth in Section 5.02 of the Receivables Purchase Agreement. "Credit and Collection Policy" means those credit and collection policies and practices relating to Timeshare Loans and Receivables of Sunterra and the Originators described in Schedule 7.01(f) to the Receivables Purchase Agreement, as modified without violating Section 7.03(c) of the Receivables Purchase Agreement. "Custodial Agreement" means the Custody Agreement, dated as of December 17, 1998, among Seller, Purchaser and the Custodian, as the same may be amended, amended and restated, supplemented or otherwise modified from time to time. A-5 76 "Custodian" means LaSalle National Bank, a national bank, acting in its capacity as Custodian under the Custodial Agreement, and any successor thereto thereunder. "Default Rate" means the Alternate Base Rate, plus 2.5% per annum. "Default Ratio" means twelve times the ratio (expressed as a percentage) computed as of the last day of each calendar month by dividing (x) the aggregate Unpaid Balance of all Principal Receivables that became Defaulted Receivables during such calendar month by (y) the Net Pool Balance on such day. "Defaulted Receivable" means without duplication, a Receivable: (a) as to which payment (other than any late payment fee), or any part thereof remains unpaid for more than 120 days after the original due date for such payment, (b) with regard to the Obligor of which a matured or unmatured Event of Bankruptcy has occurred, (c) which has been written off as uncollectible by Servicer or which, consistent with the Credit and Collection Policy, should be written off as uncollectible by Servicer or, (d) which has been accelerated and with respect to which foreclosure or sale proceedings have been instituted and are continuing. "Delinquency Ratio" means the ratio (expressed as a percentage) computed as of the last day of each calendar month, by dividing (a) the aggregate Unpaid Balance of all Principal Receivables that were Delinquent Receivables on such day, by (b) the Net Pool Balance on such day. "Delinquent Receivable" means a Receivable, other than a Defaulted Receivable, (a) as to which any payment (other than any late payment fee) or part thereof remains unpaid for at least 60 days from the original due date for such payment or (b) which, consistent with the Credit and Collection Policy, should be classified as a Delinquent Receivable. "Dividend" means any dividend or distribution (in cash, property or obligations) on any shares of any class of Seller's capital stock or any warrants, options or other rights with respect to shares of any class of Seller's capital stock. "Dollars" means dollars in lawful money of the United States of America. "Earned Return" for any Undivided Interest for each day in a particular Yield Period means an amount determined as follows: ER = I x PR x 1/360; A-6 77 provided, however, that if, pursuant to the definition of "Purchaser Rate", different Purchaser Rates would apply to different portions of an Undivided Interest, then Earned Return shall be calculated separately with respect to each such portion, and the Earned Return shall be the sum of the Earned Return so calculated for such portions; where: ER = Earned Return for such Undivided Interest (or such portion) accrued on such day; I = the Investment in such Undivided Interest (or such portion) on such day, as determined pursuant to Section 2.02; and PR = the Purchaser Rate for such Undivided Interest (or such portion) on such day. No provision of this Agreement shall require the payment or permit the collection of Earned Return in excess of the maximum permitted by applicable law. If at any time a distribution of any portion of Collections is rescinded or must otherwise be returned for any reason, Earned Return for any Undivided Interest shall not be considered paid to the extent of such rescission or return. "Eligible Receivable" means, at any time, a Pool Receivable: (a) the Obligor of which (i) is a United States resident; (provided, that up to 10% of the Net Pool Balance may, at any time, consist of otherwise Eligible Receivables the Obligors' of which are not United States residents); (ii) is not a government or a governmental subdivision, Affiliate or agency; and (iii) is not an Affiliate of Sunterra, Seller or any Affiliate thereof; (b) that is denominated and payable only in U.S. dollars in the United States; (c) the maturity of which is not greater than 121 months from the date that the first payment on such Receivable is due; (d) that arises as a result of a duly authorized Timeshare Loan made by Sunterra or any Originator to an Obligor for the purchase of a Vacation Interest in the ordinary course of Sunterra's or such Originator's business, and that is, together with the related Mortgage Note or Right-to-Use Agreement, as applicable, in full force and effect and a legal, valid and binding obligation of the A-7 78 related Obligor, enforceable against such Obligor in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium or other similar laws affecting the enforcement of creditors' rights generally, and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law), and is not subject to any dispute, right of setoff, recoupment, counterclaim, or defense of any kind, whether arising out of transactions concerning such Receivable or otherwise, and no such right has been asserted with respect thereto; (e) that has not been satisfied, cancelled, rescinded or subordinated, in whole or in part, and no instrument has been executed that would effect any such satisfaction, release, cancellation, subordination or rescission; (f) as to which all of the related Loan Documents are in the possession of the Custodian; (g) that satisfies all applicable requirements of the Credit and Collection Policy; (h) that, together with the Timeshare Loan related thereto, does not contravene any laws, rules or regulations applicable thereto (including, without limitation, laws, rules and regulations relating to sales of timeshare estates, usury, truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) and with respect to which no party to the Timeshare Loan related thereto is in violation of any such law, rule or regulation if such violation would impair the collectibility of such Receivable; (i) that is required to be paid in level monthly installments, designed to fully amortize the principal amount of the related Timeshare Loan over the scheduled term of such Timeshare Loan and bears simple interest at a fixed rate for the life of such Timeshare Loan at least equal to 12%; (j) as to which the Seller owns full legal and equitable title to such Receivable and the related Timeshare Loan, free and clear of any Adverse Claims, and that together with the related Note and Related Security therefor is freely assignable (including without any consent of the related Obligor); A-8 79 (k) (A) if such Pool Receivable is related to a Mortgage Loan, such Mortgage Loan is secured by a first mortgage or deed of trust on the related Vacation Interest and such Mortgage has been duly filed and recorded with all appropriate government authorities in all jurisdictions in which such Mortgage is required to be filed and recorded to create a valid, binding and enforceable first lien on the related Vacation Interest and such Mortgage creates a valid, binding and enforceable first lien on the related Vacation Interest, subject only to Permitted Encumbrances, and (B) if such Pool Receivable is related to a Membership Loan, such Membership Loan is secured, pursuant to a Right-to-Use Agreement, by a membership interest in a Vacation Club and a UCC financing statement in connection with such Right-to-Use Agreement has been duly filed and recorded with all appropriate government authorities in all jurisdictions in which such financing statement is required to be filed and recorded to create a valid, binding and enforceable first priority perfected security interest on the related Vacation Interest and such financing statement together with such Right-to-Use Agreement creates a valid, binding and enforceable first priority perfected security interest on the related Vacation Interest, subject only to Permitted Encumbrances; (l) as to which the Purchaser shall have a valid and enforceable undivided ownership or security interest therein and in the Related Security and Collections with respect thereto, in each case free and clear of any Adverse Claims except, in the case of Related Security constituting a Mortgage on the related Vacation Interest, for Permitted Encumbrances; (m) that is not a Defaulted Receivable or a Delinquent Receivable; (n) the related Obligor of which has timely made at least one payment due thereon (or, in the case of a Receivable related to an Upgraded Loan, on the original Timeshare Loan being upgraded); (o) the Unpaid Balance of which when combined with the Unpaid Balance of all other Eligible Receivables included in the Receivables Pool related to the Timeshare Loans made to finance the purchase of Vacation Interests at any one Vacation Ownership Resort does not exceed 25% of the Net Pool Balance; (p) with respect to which (i) if related to a Mortgage Loan, the related Mortgage Notes, contracts, documents and other agreements (including, subject to the proviso to A-9 80 paragraph (r) below, the related title insurance policy) and (ii) if related to a Membership Loan, the related Note and Right-to-Use Agreement have been duly executed and delivered or issued in accordance with the terms thereof; (q) the Unpaid Balance of which, when added to the aggregate Unpaid Balance of all Pool Receivables payable by the related Obligor does not exceed $50,000; (r) if related to a Mortgage Loan the related Mortgage of which, is covered by a form of lender's title insurance policy issued by a title insurer qualified to do business in the jurisdiction where the related Vacation Interest is located, insuring the related Originator and its successors and assigns, as to the first priority Lien of the related Mortgage in an amount equal to the original principal balance of the related Mortgage Loan and (i) such lender's title insurance policy is in full force and effect, (ii) no claims have been made under such lender's title insurance policy and (iii) no prior holder of such Mortgage Loan, including the Seller or any Originator, has done or omitted to do anything which would impair the coverage of such lender's title insurance policy; provided, however, that up to 5% of the Net Pool Balance may consist of otherwise Eligible Receivables for which title insurance policies covering the related Mortgage have not yet been issued, so long as a commitment to issue such title insurance policies exists at the time such Receivables are generated and such title insurance policies are issued within 60 days from the date thereof; (s) with respect to any Membership Loan, the Unpaid Balance of which, when added to the aggregate Unpaid Balance of all Pool Receivables related to Membership Loans does not exceed an amount to be determined at the sole discretion of the Agent; (t) which with respect to any Membership Loan, the Purchaser shall have approved in writing, in its sole and absolute discretion, the inclusion of such Membership Loan and the Purchaser shall have received such additional certificates, opinions and forms of Loan Documents related to such Membership Loan, as the Purchasers may reasonably request; and (u) the Unpaid Balance of which, when combined with the Unpaid Balance of all other Eligible Receivables included in the Receivables Pool that are part of the same Market Area, does not exceed (i) in the case of each of the Williamsburg Market Area and the Orlando Market Area, 40% of A-10 81 the Net Pool Balance; and (ii) in the case of the Greater Phoenix Market Area, 30% of the Net Pool Balance. "Enhancement Agreement" means and includes (a) the Enhancement Agreement, dated as of December 6, 1991, as amended as of August 1, 1993, between Barton and SG and (b) any other agreement (other than the Stand-by Purchase Agreement) hereafter entered into by Barton providing for the issuance of one or more letters of credit for the account of Barton, the making of loans to Barton or any other extensions of credit to or for the account of Barton to support all or any part of Barton's payment obligations under its Commercial Paper Notes or to provide an alternate means of funding Barton's investments in accounts receivable or other financial assets, in each case as amended, supplemented or otherwise modified from time to time. "Enhancement Bank" means and includes SG, as lender to Barton and as issuer of a letter of credit for Barton's account, under the Enhancement Agreement, and any other or additional bank or other financial institution now or hereafter extending credit or having a commitment to extend credit to or for the account of Barton under the Enhancement Agreement. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, together with any regulations thereunder, in each case as in effect from time to time. References to sections of ERISA also refer to any successor sections. "Eurodollar Reserve Percentage" means, with respect to any Yield Period, the then applicable percentage (expressed as a decimal) prescribed by the Federal Reserve Board for determining reserve requirements applicable to "Eurocurrency Liabilities" pursuant to Regulation D. "Event of Bankruptcy" shall be deemed to have occurred with respect to a Person if either: (a) a case or other proceeding shall be commenced, without the application or consent of such Person, in any court, seeking the liquidation, reorganization, debt arrangement, dissolution, winding up, or composition or readjustment of debts of such Person, the appointment of a trustee, receiver, custodian, liquidator, assignee, sequestrator or the like for such Person or all or any substantial part of its assets, or any similar action with respect to such Person under any law relating to bankruptcy, insolvency, reorganization, winding up or composition or adjustment of debts, and such case or proceeding shall continue undismissed, or unstayed and in effect, for a period of 60 consecutive days; or an order for relief in A-11 82 respect of such Person shall be entered in an involuntary case under the federal bankruptcy laws or other similar laws now or hereafter in effect; or (b) such Person shall commence a voluntary case or other proceeding under any applicable bankruptcy, insolvency, reorganization, debt arrangement, dissolution or other similar law now or hereafter in effect, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) for, such Person or for any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail to, or admit in writing its inability to, pay its debts generally as they become due, or, if a corporation or similar entity, its board of directors shall vote to implement any of the foregoing. "Excess Yield" means the annualized percentage equivalent of a fraction (computed as of the last day of each calendar month), the numerator of which is the excess of (x) all Finance Charge Collections received and applied during such calendar month over (y) the sum of the Servicing Fee, the Earned Returns for all Undivided Interests, all Fees accrued during such calendar month and the aggregate Unpaid Balance of all Principal Receivables that became Defaulted Receivables during such calendar month, and the denominator of which is the average aggregate Unpaid Balance of the Principal Receivables during such calendar month. "Facility Limit" has the meaning set forth in Section 1.02(a) of the Receivables Purchase Agreement. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal (for each day during such period) to (i) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York; or (ii) if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by SG from three federal funds brokers of recognized standing selected by it. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System, or any successor thereto or to the functions thereof. A-12 83 "Fee Letter" has the meaning set forth in Section 4.01 of the Receivables Purchaser Agreement. "Fees" means all fees payable pursuant to the Fee Letter. "Finance Charge Collection" means, at any time, any Collections in respect of a Finance Charge Receivable. "Finance Charge Receivable" means, with respect to any Receivable and the related Timeshare Loan, at any time, the amount of accrued and unpaid interest, finance charges, late charges and other fees and charges with respect to such Timeshare Loan. "Financial Officer" has the meaning set forth in Section 7.02(a) of the Receivables Purchase Agreement. "Funding Date" means each date the Seller purchases Receivables from Sunterra pursuant to the Purchase and Sale Agreement. "GAAP" means generally accepted accounting principles in the United States. "Greater Phoenix Market Area" has the meaning set forth on Schedule B to the Receivables Purchase Agreement. "Guaranty" means any agreement, undertaking or arrangement by which any Person guarantees, endorses, agrees to purchase or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the indebtedness, obligation or any other liability of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. "Impermissible Qualification" means, relative to the opinion or certification of any independent public accountant as to any financial statement, any qualification or exception to such opinion or certification: (i) which is of a "going concern" or similar nature; or (ii) which relates to the limited scope of examination of matters relevant to such financial statement (other than any standard qualification of such nature). A-13 84 "Indebtedness" means, with respect to any Person, at the time any determination is to be made, without duplication (i) all Indebtedness for Money Borrowed of that Person, (ii) that portion of obligations with respect to Capital Leases which is properly classified as a liability on a balance sheet of that Person in conformity with GAAP, (iii) notes payable of that Person and drafts accepted by that Person representing extensions of credit whether or not representing obligations for borrowed money, (iv) all indebtedness secured by any Adverse Claim on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person, (v) all Guaranties of that Person and (vi) the deferred purchase price of assets or services which in accordance with GAAP would be shown as a liability on the balance sheet of such Person. "Indebtedness for Money Borrowed" means, with respect to any Person, at the time any determination is to be made (i) all Indebtedness of such Person, current or funded, secured or unsecured, incurred in connection with borrowings (including the sale of debt securities) or the making available of credit or funds to or on behalf of another Person, (ii) all Indebtedness of such Person issued, incurred or assumed in respect of the purchase price of property and (iii) all Capital Leases of such Person. "Indemnified Amounts" has the meaning set forth in Section 13.01 of the Receivables Purchase Agreement. "Indemnified Party" has the meaning set forth in Section 13.01 of the Receivables Purchase Agreement. "Independent Director" has the meaning set forth in Section 7.01(h)(ii) of the Receivables Purchase Agreement. "Initial Closing Date" means the date on which the first purchases under the Purchase and Sale Agreement shall occur. "Interest Rate Protection Agreement" means the Rate Cap Transaction letter agreement dated as of December 17, 1998, between the Seller and SG, as amended, amended and restated or otherwise modified from time to time. "Investment" has the meaning set forth in Section 2.02 of the Receivables Purchase Agreement. "Involuntary Federal Proceeding" has the meaning set forth in Section 10.02(b) of the Receivables Purchase Agreement. A-14 85 "LIBOR Rate (Reserve Adjusted)" means, with respect to any Yield Period for any related Undivided Interest (or portion thereof), a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined pursuant to the following formula: LIBOR Rate = LIBOR Rate ------------ (Reserve Adjusted) 1-Eurodollar Reserve Percentage where: "LIBOR Rate" means, with respect to any Yield Period for any related Undivided Interest (or portion thereof), the rate per annum at which Dollar deposits in immediately available funds are offered to the LIBOR Office of the Agent two LIBOR Business Days prior to the beginning of such period by prime banks in the interbank eurodollar market at or about 10:00 a.m., London time for delivery on the first day of such Yield Period, for the number of days comprised therein and in an amount equal or comparable to the amount of the related Investment in such Undivided Interest (or such portion) for such Yield Period. "LIBOR Business Day" means a day (i) on which dealings in Dollars are carried on in the eurodollar interbank market of the Agent's LIBOR Office and (ii) which is neither a Saturday or Sunday nor a legal holiday on which banks are required or authorized to be closed in New York. "LIBOR Office" shall mean such office or offices through which the Agent determines the LIBOR Rate. A LIBOR Office of the Agent may be, at the option of the Agent, either a domestic or foreign office. "Liquidation Commencement Date" means, in the event a Condition Precedent is not satisfied, the date designated by notice from the Agent to Seller. "Liquidation Day" for any Undivided Interest means any of (a) each day which occurs on or after the Liquidation Commencement Date and on or before the Liquidation Termination Date, if any, (b) each day which occurs on or after the Commitment Termination Date, or (c) each day which occurs on or after the day Seller shall have given written notice to the Agent that it no longer wishes to sell Undivided Interests to Purchaser. "Liquidation Event" has the meaning set forth in Section 10.01 of the Receivables Purchase Agreement. A-15 86 "Liquidation Period" means one or more successive Liquidation Days. "Liquidation Termination Date" means the date, if any, that occurs after a Liquidation Commencement Date and is designated as the "Liquidation Termination Date" by the Agent (in its sole discretion) on at least one Business Day's notice to Seller. "Loan Documents" means with respect to each Timeshare Loan: (i) an original Note, executed by the Obligor for such Timeshare Loan, endorsed in blank (either directly on the Note or on an allonge affixed thereto), by an authorized officer of Seller and showing a complete chain of endorsements from the original payee of the Note to the Purchaser. "Pay to the order of ______________, without recourse", or if an original Note is not available, a copy thereof endorsed as described above and accompanied by an original executed lost note affidavit; (ii) (A) in the case of a Mortgage Loan an original Mortgage (or a copy thereof) certified (which may be a blanket certification) by (x) the public recording office, if available on the date of creation or (y) by an authorized officer of the Seller or applicable Originator) with evidence that such Mortgage has been recorded in the appropriate recording office and (B) in the case of a Membership Loan, an original Right-to-Use Agreement (or copy thereof) certified by an authorized officer of the Seller with evidence that the appropriate financing statements have been file in the appropriate filing offices; (iii) (A) in the case of a Mortgage Loan an original assignment of the Mortgage (which may be a part of a blanket assignment of more than one Mortgage Loan), from the Seller to the Purchaser, in recordable form but unrecorded, signed by an authorized officer of Seller and (B) in the case of a Membership Loan, an original assignment of the UCC financing Statement (which may be a part of a blanket assignment of more than one Membership Loan) from the seller to the Purchaser, in recordable form but unrecorded, signed by an authorized officer of the Seller; (iv) in the case of a Mortgage Loan, an original lender's title insurance policy or master policy referencing such Mortgage Loan; A-16 87 (v) an original of each guarantee, assumption, modification or substitution agreement, if any, which relates to the related Timeshare Loan (or a copy thereof certified by an authorized officer of the Seller to be a true and correct copy of such guarantee, assumption, modification or substitution agreement); and (vi) any amendments or modifications to any of the documents referred to in clauses (i) through (v) above. "Lockbox Accounts" means those certain bank accounts with the numbers, and maintained at those certain locations, set forth on Schedule 6.01(n) to the Receivables Purchase Agreement, each of which is pledged on a first-priority basis to Purchaser pursuant to Section 9.01 of the Receivables Purchase Agreement; and any bank account that is hereafter created in accordance with, and to perform the function contemplated for "Lockbox Accounts" in, the Receivables Purchase Agreement. "Lockbox Bank" means any of the banks holding one or more Lockbox Accounts for receiving Collections from Receivables. "Loss Reserve" has the meaning set forth in Section 2.04 of the Receivables Purchase Agreement. "Loss Reserve Percentage" has the meaning set forth in Section 2.04 of the Receivables Purchase Agreement. "Market Area" means each of the groups of Vacation Ownership Resorts listed on Schedule B to the Receivables Purchase Agreement and designated as either the Williamsburg Market Area, the Orlando Market Area or the Greater Phoenix Market Area. "Material Adverse Effect" means, with respect to any event or circumstance, a material adverse effect on: (i) the assets, operations, business or financial condition of Seller, Servicer or any Originator, as applicable; or (ii) the ability of Servicer, Seller or any Originator, as applicable, to perform its obligations under the Receivables Purchase Agreement or any other Transaction Document or the performance of any such obligations; or (iii) the validity or enforceability of, or collectibility of amounts payable under, the Receivables Purchase Agreement or any other Transaction Document; or A-17 88 (iv) the status, existence, perfection or priority of Purchaser's interest in the Receivables, including Purchaser's unencumbered first priority interest therein. "Membership Loan" means a loan evidenced by a Note and secured, pursuant to a Right-to-Use Agreement, by a membership interest in a Vacation Club which hold unencumbered fee title (or a long-term lease) to the related Vacation Ownership Resorts. "Month End Date" means the last day of each calendar month. "Moody's" means Moody's Investors Service, Inc. "Mortgage" means a mortgage, deed of trust, deed to secured debt or other similar instrument securing a Mortgage Note. "Mortgage Loan" means a loan that is secured by a Mortgage on a timeshare fee estate in real property at any Vacation Ownership Resort. "Mortgage Note" means, with respect to a Mortgage Loan, a promissory note evidencing the indebtedness in respect of such Mortgage Loan. "Net Pool Balance" has the meaning set forth in Section 2.03 of the Receivables Purchase Agreement. "Note" means (a) with respect to a Mortgage Loan, the Mortgage Note and (b) with respect to a Membership Loan, the original note or other instrument of indebtedness evidencing such Membership Loan. "Obligations" means (i) all obligations of Seller, Servicer and each Originator to Purchaser, the Agent, and their respective successors, permitted transferees and assigns, arising in connection with the Transaction Documents, and (ii) all obligations of Seller, Servicer and each Originator to any Indemnified Party arising out of Section 13.01 of the Receivables Purchase Agreement, in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due. "Obligor" means with respect to any Receivable, the Person obligated to make payments pursuant to the Timeshare Loan relating to such Receivable. "Officer's Certificate" means a certificate from a Person signed by an authorized officer of such Person. "Originator" has the meaning set forth in each Sale Agreement. A-18 89 "Originator Note Assignment" means, the Note assignment, by Sunterra to Seller, in the form of Exhibit A to the Purchase and Sale Agreement, as the same may be amended, supplemented, amended and restated or otherwise modified from time to time in accordance with the Purchase and Sale Agreement. "Orlando Market Area" has the meaning set forth on Schedule B to the Receivables Purchase Agreement. "Periodic Report" means a report in substantially the form of Exhibit 3.05(a) to the Receivables Purchase Agreement. "Permitted Encumbrances" means, with respect to a Mortgage Loan as to any Vacation Interest subject to a Mortgage, (i) those liens and encumbrances set forth in the related title insurance policy and (ii) those liens and encumbrances arising subsequent to the date of such insurance policy which are typically acceptable to institutional lenders making timeshare loans and which do not materially interfere with the benefits of the security intended to be provided by the applicable Mortgage. "Permitted Investments" means: (i) marketable obligations issued or directly and fully guaranteed or insured as to full and timely payment by the United States government or any agency or instrumentality thereof when such marketable obligations are backed by the full faith and credit of the United States government, but excluding any securities which are derivatives of such obligations or any such obligations that are subject to a call or prepayment prior to their maturity; (ii) time deposits, bankers' acceptances and certificates of deposit of any domestic commercial bank or any United States branch or agency of a foreign commercial bank which (x) has capital, surplus and undivided profits in excess of $100,000,000 and which has a commercial paper or certificate of deposit rating meeting the requirements specified in clause (iii) below (or equivalent long-term rating) or (y) is set forth in a list (which may be updated from time to time) (A) approved by the Agent and (B) with respect to which a written statement has been obtained from each of Moody's and S&P to the effect that the rating of the Commercial Paper Notes will not be downgraded or withdrawn solely as a result of the acquisition of such investments; (iii) commercial paper which is (x) rated at least as high as the Commercial Paper Notes by Moody's and S&P, or (y) set forth in a list (which may be updated from time to time) (A) approved by the Agent and (B) with respect to which a written statement has been obtained from each of A-19 90 Moody's and S&P to the effect that the rating of the Commercial Paper Notes will not be downgraded or withdrawn solely as a result of the acquisition of such investments; (iv) secured repurchase obligations for underlying securities of the types described in clauses (i) and (ii) above entered into with any bank of the type described in clause (ii) above; and (v) freely redeemable shares in money market funds which invest solely in obligations, bankers' acceptances, time deposits, certificates of deposit, repurchase agreements and commercial paper of the types described in clause (i) through (iv) above, without regard to the limitations as to the maturity of such obligations, bankers' acceptances, time deposits, certificates of deposit, repurchase agreements or commercial paper set forth, which money market funds are rated "AAA" by Moody's and "AAAm" or "AAAm-g" by S&P. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture, government or any agency or political subdivision thereof or any other entity. "Pool Receivable" means a Receivable in the Receivables Pool. If, with respect to any Undivided Interest, a Receivable is a Pool Receivable on or prior to the Commitment Termination Date, such Receivable shall continue to be considered a Pool Receivable with respect to such Undivided Interest at all times thereafter. "Principal Collections" means all Collections (other than Finance Charge Collections). "Principal Receivable" means, at any time, each Receivable then in the Receivables Pool other than any Finance Charge Receivables therein. "Principal Documents" the Receivables Purchase Agreement, the Fee Letter, the Purchase and Sale Agreement, the Sale Agreements and the Company Notes or any report (including any Periodic Report) delivered in connection with the Receivables Purchase Agreement or the Purchase and Sale Agreement as any of the foregoing may be amended, supplemented, amended and restated or otherwise modified from time to time in accordance with the terms thereof. "Program Fee" has the meaning set forth in the Fee Letter. A-20 91 "Purchase" has the meaning set forth in Section 1.01(a) of the Receivables Purchase Agreement. "Purchase and Sale Agreement" means that certain Purchase and Sale Agreement, dated as of December 17, 1998, between the Seller and Sunterra, as the same may be amended, supplemented, amended and restated or otherwise modified from time to time in accordance with the terms thereof and with the Receivables Purchase Agreement. "Purchase and Sale Indemnified Party" has the meaning set forth in Section 9.1 of the Purchase and Sale Agreement. "Purchase and Sale Indemnified Amounts" has the meaning set forth in Section 9.1 of the Purchase and Sale Agreement. "Purchase and Sale Termination Date" has the meaning set forth in Section 1.4 of the Purchase and Sale Agreement. "Purchase and Sale Termination Event" has the meaning set forth in Section 8.1 of the Purchase and Sale Agreement. "Purchase Facility" has the meaning set forth in Section 1.1 of the Purchase and Sale Agreement. "Purchase Price" has the meaning set forth in Section 2.1 of the Purchase and Sale Agreement. "Purchaser" has the meaning set forth in the preamble to the Receivables Purchase Agreement. "Purchaser Rate" for any Yield Period for any related Undivided Interest (or portion thereof) means: (a) in the case of an Undivided Interest (or portion thereof) other than one referred to in clause (b) or (c) of this definition, the Commercial Paper Rate for such Undivided Interest (or such portion) for such Yield Period; (b) in the case of an Undivided Interest (or portion thereof) funded pursuant to the Stand-by Purchase Agreement, the Bank Rate for such Undivided Interest; and (c) in the case of any Undivided Interest funded during the continuance of a Liquidation Event, the Default Rate. "Purchaser's Share" on any day with respect to each Undivided Interest means an amount equal to the product of: A-21 92 (a) the amount of all such Collections received by Seller or Servicer on such day, times (b) (i) if such day is not a Liquidation Day, such Undivided Interest (expressed as a decimal) on such day, or (ii) if such day is a Liquidation Day, such Undivided Interest (expressed as a decimal) on the day immediately preceding the first Liquidation Day to have occurred during the then current Liquidation Period, or, if higher such Undivided Interest (expressed as a decimal) on such Liquidation Day; provided that after such time as an Undivided Interest shall have been reduced to zero, the Purchaser's Share of such Collections therefor shall also equal zero. "Receivable" means any right to payment from an Obligor, whether constituting an account, chattel paper, instrument or a general intangible, in respect of a Timeshare Loan, and includes the right to payment of any principal, interest or finance charges and other obligations of such Obligor with respect thereto. "Receivables Pool" means at any time all outstanding Receivables that have been transferred to Seller by Sunterra pursuant to the Purchase and Sale Agreement on and after the Initial Closing Date to and including the Commitment Termination Date. "Regulation D" means Regulation D of the Federal Reserve Board, or any other regulation of the Federal Reserve Board that prescribes reserve requirements applicable to nonpersonal time deposits or "Eurocurrency Liabilities" as presently defined in Regulation D, as in effect from time to time. "Regulatory Change" means, relative to any Affected Party (a) any change in (or the adoption, implementation, change in, phase-in or commencement of effectiveness of) any (i) United States federal or state law or foreign law applicable to such Affected Party; (ii) regulation, interpretation, directive, requirement or request (whether or not having the force of law) applicable to such Affected Party of (A) any court, government authority charged with the interpretation or administration of any law referred to in clause (a)(i) or of (B) any fiscal, monetary or A-22 93 other authority having jurisdiction over such Affected Party; or (iii) GAAP or regulatory accounting principles applicable to such Affected Party and affecting the application to such Affected Party of any law, regulation, interpretation, directive, requirement or request referred to in clause (a)(i) or (a)(ii) above; or (b) any change in the application to such Affected Party of any existing law, regulation, interpretation, directive, requirement, request or accounting principles referred to in clause (a)(i), (a)(ii) or (a)(iii) above. "Reinvestment" has the meaning set forth in Section 1.01(b) of the Receivables Purchase Agreement. "Related Rights" has the meaning set forth in Section 1.1 of the Purchase and Sale Agreement. "Related Security" means, with respect to any Timeshare Loan and the related Receivable: (a) all of the interests in the Vacation Interest arising under or in connection with the related Mortgage, Right-to-Use Agreement and all other security interests or liens and property subject thereto from time to time securing payment of such Timeshare Loan, together with all mortgages, guarantees, financing statements, assignments, instruments, leases and other agreements from time to time supporting or securing such Timeshare Loan; (b) the related Timeshare Note and other Timeshare Loan Documents; (c) all documents, books, records and other information maintained with respect to such Receivable and the related Timeshare Loan (including any payment report, environmental assessments and appraisals); (d) with respect to any Mortgage Loan any insurance policy, including any primary mortgage insurance policy relating to such Receivable and the related title insurance policy; and (e) all proceeds, products, profits and rents of the foregoing. "Report Date" means (i) the Initial Closing Date and (ii) the fifteenth day of each calendar month following thereafter. A-23 94 "Reserve Account" means that certain bank account with the number, and maintained at the location, set forth on Schedule 6.01(n) to the Receivables Purchase Agreement, which is (i) in Seller's and Agent's name, and (ii) pledged on a first priority basis to Purchaser pursuant to Section 9.01 of the Receivables Purchase Agreement. "Reserve Account Agreement" means a agreement, substantially in the form of Exhibit 5.01 (h) (iii) to the Receivables Purchase Agreement, among Seller, Sunterra, the Agent and the Reserve Account Bank, as the same may be amended, supplemented, amended and restated, or otherwise modified from time to time in accordance with the Receivables Purchase Agreement. "Reserve Account Required Amount" means at any time, an amount (not to exceed the Aggregate Investment) equal to the greater of (i) 5.0% of the Net Pool Balance at such time, and (ii) $750,000; it being understood that the Reserve Account shall be initially funded with proceeds from the initial Purchase under the Receivables Purchase Agreement in an amount equal to $750,000 and thereafter, so long as the amount described in clause (i) above is greater than the amount described in clause (ii) above, funds shall be deposited into such Reserve Account pursuant to Section 3.02 of the Receivables Purchase Agreement up to the amount described in clause (i) above. "Reserve Account Bank" means the Bank holding the Reserve Account. "Restricted Payment" has the meaning set forth in Section 7.03(f) of the Receivables Purchase Agreement. "Right-to-Use Agreement" means with respect to a Timeshare Loan not secured by a Mortgage, the security agreement securing such Timeshare Loan. "S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc. "Sale Agreement" means the Sale Agreement dated as of December 17, 1998 between Sunterra and the Originators named therein, as amended, supplemented, amended and restated or otherwise modified from time to time. "Scheduled Commitment Termination Date" has the meaning set forth in Section 1.05 of the Receivables Purchase Agreement. "Seller" has the meaning set forth in the preamble to the Receivables Purchase Agreement. A-24 95 "Seller Common Stock" has the meaning set forth in Section 6.01(o) of the Receivables Purchase Agreement. "Servicer" has the meaning set forth in Section 8.01(a) of the Receivables Purchase Agreement. "Servicer's Fee" has the meaning set forth in Section 8.01(d) of the Receivables Purchase Agreement. "Settlement" means the payments and other actions provided for on the last day of each Settlement Period. "Settlement Date" means the last day of each Settlement Period. "Settlement Period" for any Undivided Interest means (a) each period commencing on the first day of each Yield Period for such Undivided Interest and ending on the last day of such Yield Period; and (b) on and after the Commitment Termination Date for such Undivided Interest, such period (including, without limitation, a daily period) as shall be selected from time to time by the Agent or, in the absence of any such selection, each period of 30 days from the next preceding Settlement Date; provided, however, that (i) with respect to any Yield Period of one day (as described in clause (ii) of the proviso of the definition of "Yield Period"), the related Settlement Period shall be the first day following such Yield Period; (ii) any Settlement Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day; and (iii) the last Settlement Period shall end on the date on which all Undivided Interests have been reduced to zero. "SG" has the meaning set forth in the preamble of the Receivables Purchase Agreement. "Solvent" means, with respect to any Person at any time, a condition under which: (i) the fair value and present fair saleable value of such Person's total assets is, on the date of determination, A-25 96 greater than such Person's total liabilities (including contingent and unliquidated liabilities) at such time; (ii) the fair value and present fair saleable value of such Person's assets is greater than the amount that will be required to pay such Person's probable liability on its existing debts as they become absolute and matured ("debts", for this purpose, includes all legal liabilities, whether matured or unmatured, liquidated or unliquidated, absolute, fixed, or contingent); and (iii) such Person does not have unreasonably small capital with which to engage in its current and in its anticipated business. For purposes of this definition: (A) the amount of a Person's contingent or unliquidated liabilities at any time shall be that amount which, in light of all the facts and circumstances then existing, represents the amount which can reasonably be expected to become an actual or matured liability; (B) the "fair value" of an asset shall be the amount which may be realized within a reasonable time either through collection or sale of such asset at its regular market value; (C) the "regular market value" of an asset shall be the amount which a capable and diligent business person could obtain for such asset from an interested buyer who is willing to purchase such asset under ordinary selling conditions; and (D) the "present fair saleable value" of an asset means the amount which can be obtained if such asset is sold with reasonable promptness in an arm's length transaction in an existing and not theoretical market. "Stand-by Purchase Agreement" means and includes (a) the Stand-by Purchase Agreement among Barton, as borrower, SG, as Servicing Agent for Barton and as Liquidity Agent, and the Banks supporting Barton's payment obligations with respect to the Commercial Paper Notes issued to fund the purchase of Undivided Interests hereunder, and (b) any other agreement hereafter entered into by Barton providing for the sale by Barton of Undivided Interests (or portions thereof), or the making of loans or other extensions of credit to Barton secured by a security interest in specified Undivided Interests (or portions thereof), to support all or part of Barton's payment obligations under the Commercial Paper Notes or to provide an alternate means of A-26 97 funding Barton's investments in accounts receivable or other financial assets, and under which the amount available from such sale or such extension of credit is limited to an amount calculated by reference to the value or eligible unpaid balance of such accounts receivable or other financial assets or any portion thereof or the level of credit enhancement available with respect thereto, in each case as amended, supplemented or otherwise modified from time to time. "Sub-Servicer" means each of Concord Servicing Corporation, Finova Portfolio Services, Inc. and ES Financial Corporation and any other Sub-Servicer approved by the Agent and permitted under the terms of the Receivables Purchase Agreement. "Sub-Servicer Agreement" has the meaning set forth in Section 8.01(c) of the Receivables Purchase Agreement. "Subsidiary" means, with respect to any Person, any corporation of which more than 50% of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person, by such Person and one or more other Subsidiaries of such Person, or by one or more other Subsidiaries of such Person. "Successor Notice" has the meaning set forth in Section 8.01(a) of the Receivables Purchase Agreement. "Sunterra" has the meaning set forth in the preamble to the Receivables Purchase Agreement. "Tangible Net Worth" means, with respect to any Person, the net worth of such Person after subtracting therefrom the aggregate amount of such Person's intangible assets (other than Receivables), including, without limitation, good will, franchises, licenses, patents, trademarks, trade names, copyrights, service marks and brand names. "Timeshare Loan" means either a Membership Loan or a Mortgage Loan. "Total Revenues" means, with respect to any calendar month, the aggregate gross amounts payable by the Obligors with respect to the Pool Receivables generated during such calendar month. "Transaction Documents" means the Receivables Purchase Agreement, the Fee Letter, the Certificate, the Originator Note Assignment, the Purchase and Sale Agreement, the Sale Agreements, A-27 98 the Company Note, the Collection Account Agreement, the Reserve Account Agreement, the Lockbox Agreements, the Custodial Agreement, and all other instruments, certificates, agreements, reports or documents delivered under or in connection with the Receivables Purchase Agreement or the Purchase and Sale Agreement as any of the foregoing may be amended, supplemented, amended and restated, or otherwise modified from time to time in accordance with the terms of the Purchase and Sale Agreement and the Receivables Purchase Agreement. "UCC" means the Uniform Commercial Code as from time to time in effect in the applicable jurisdiction or jurisdictions. "Undivided Interest" has the meaning set forth in Section 2.01 of the Receivables Purchase Agreement. "Unmatured Liquidation Event" means any event which, with the giving of notice or lapse of time, or both, would become a Liquidation Event. "Unpaid Balance" means (i) with respect to any Receivable or the related Timeshare Loan at any time the unpaid principal amount thereof and (ii) with respect to the Receivables Pool means at any time the aggregate unpaid principal amount of all Receivables. "Upgraded Loan" means the Timeshare Loan that results when an existing Timeshare Loan with respect to an existing Obligor is prepaid in connection with the creating of a new Timeshare Loan to such Obligor to finance the purchase by such Obligor of (i) an additional Vacation Interest or (ii) a Vacation Interest of greater value than the original Vacation Interest of such Obligor. "Vacation Club" means a corporation which holds unencumbered title to (or a long-term lease on) a Vacation Ownership Resort and issues membership certificates evidencing ownership interests in the corporation, which permits the owner of such membership certificates use an enjoyment of such Vacation Ownership Resort. "Vacation Interest" means (i) a timeshare fee estate in real property at any Vacation Ownership Resort and (ii) a Membership Interest in a Vacation Club which holds fee title or a long-term lease to the related Vacation Ownership Resort. "Vacation Ownership Resort" shall mean each of the vacation resorts listed on Schedule A to the Receivables Purchase Agreement, as amended from time to time in the sole discretion of the Agent. A-28 99 "Williamsburg Market Area" has the meaning set forth on Schedule B to the Receivables Purchase Agreement. "Year 2000 Problem" has the meaning set forth in Section 6.02(m) of the Receivables Purchase Agreement. "Yield Period" means with respect to any Undivided Interest (or portion thereof): (a) the period from (and including) the date of the initial Purchase of such Undivided Interest (or such portion) to (but excluding) the number of days (not to exceed 90 days) thereafter as the Agent shall approve, pursuant to Section 1.03 or of the Receivables Purchase Agreement; and (b) thereafter, each period from (and including) the last day of the immediately preceding Yield Period for such Undivided Interest (or such portion) to (but excluding) the day falling such number of days (not to exceed 90 days) thereafter as the Agent shall approve pursuant to Section 1.03 of the Receivables Purchase Agreement. provided, however, that (i) any such Yield Period (other than a Yield Period consisting of one day) which would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day (unless the related Undivided Interest shall be accruing Earned Return at a rate determined by reference to the LIBOR Rate (Reserve Adjusted), in which case if such succeeding Business Day is in a different calendar month, such Yield Period shall instead be shortened to the next preceding Business Day); (ii) in the case of Yield Periods of one day for any Undivided Interest, (A) the initial Yield Period shall be the day of the related Purchase; and (B) any subsequently occurring Yield Period which is one day shall, if the immediately preceding Yield Period is more than one day, be the last day of such immediately preceding Yield Period, and if the immediately preceding Yield Period is one day, shall be the next day following such immediately preceding Yield Period; and (iii) any Yield Period for any Undivided Interest which commences before the Commitment Termination Date for such Undivided Interest and would otherwise end on a date occurring after such Commitment Termination Date, such Yield Period shall end on such Commitment Termination Date and the duration of each such Yield Period which commences on or A-29 100 after the Commitment Termination Date for such Undivided Interest shall be of such duration as shall be selected by the Agent. The "related" Yield Period for any Undivided Interest at any time means the Yield Period pursuant to which Earned Return is then accruing for such Undivided Interest. B. Other Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. All terms used in Article 9 of the UCC in the State of Illinois, and not specifically defined herein, are used herein as defined in such Article 9. C. Computation of Time Periods. Unless otherwise stated in the Purchase and Sale Agreement or the Receivables Purchase Agreement, as the case may be, in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". A-30 101 SCHEDULE A LIST OF VACATION OWNERSHIP RESORTS 102 SCHEDULE B LIST OF MARKET AREAS EX-10.14 5 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.14 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of December 16, 1998, between Sunterra Corporation, a Maryland corporation (the "Company"), and Richard Goodman (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 December 31, 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 October 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 Executive Vice President and Chief Financial Officer of the Company and shall report directly to the Chief Executive Officer. 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 Chief Executive Officer or 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 shall have: 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. 1 2 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. 8. To oversee the Company's insurance and risk management program, with the assistance of appropriate personnel. 9. To oversee 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. 10. To oversee the information technology and human resource functions of the company. 11. To carry out such other customary duties and responsibilities of an executive vice president and chief financial officer of a public company. 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. 2 3 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 $300,000 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. 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"). 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 3 4 right to participate at Company expense in industry related trade groups, conventions, etc. in furtherance of enhancing the Executive's visibility on Wall Street 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 a target cash bonus to the Executive of sixty percent (60%) of the Executive's then fiscal year Base Salary if certain performance objectives established by the CEO and Compensation Committee for the Executive are achieved during the applicable fiscal year (the "Merit Bonus"). 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 other 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 commencing in the 1999 fiscal year of the Company, the CEO will review the Executive's job performance and will provide the Executive a written review of the Executive's job performance during such fiscal 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 the provisions set forth in this Agreement with respect to the Executive's compensation, the Option Agreement and the general 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 Irvine, California 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 through July 31, 1999. Moreover, the Company will reimburse the Executive and his spouse for all travel and living expenses incurred by them in Orlando, Florida for the seven 4 5 month period following the Effective Date. Such reimbursement will include the normal and customary closing costs incurred by the Executive in purchasing a new residence. The Company will provide to the Executive a gross up for non deductible moving expenses. The Company will reimburse the Executive up to 6% for brokerage costs incurred in selling his current residence. Also, the Company will pay to the Executive $25,000 as a relocation allowance. 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 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 5 6 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. 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. 6 7 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 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. j. Notwithstanding anything to the contrary in this Agreement, if the Date of Termination occurs within two years after the date of this Agreement and the Date of Termination does not involve an event described in either the first clause of clause (iii) of the definition of the Date of Termination or in clause (iv) of the definition of the Date of Termination, then the Executive shall become a consultant to the Company effective upon the Date of Termination. The Executive shall serve as a consultant to the Company until the second anniversary of the date hereof. During such consulting term, the Executive shall be available to provide financial consulting services to the Company and Executive shall not be entitled to any compensation for rendering such consulting services other than that which he would otherwise be entitled to receive under this Agreement during such period. 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. For a period of two years following the Date of Termination, the Executive and his dependents shall be entitled to health insurance coverage rights as if the Executive was currently employed. 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. For a period of two years following the Date of Termination, the Executive and his dependents shall be entitled to health insurance coverage rights as if the Executive was currently employed. 7 8 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. For a period of two years following the Date of Termination, the Executive and his dependents shall be entitled to health insurance coverage rights as if the Executive was currently employed. 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. A material breach by the Company of any provision of this Agreement; and ii. 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 8 9 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. Beginning with the thirteenth (13th) monthly payment and each monthly payment thereafter 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 (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. 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 9 10 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 for a one year period following Termination 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 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 10 11 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. 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 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 11 12 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: Richard Goodman 5 Chester Irvine, California 92612 If to the Company: Sunterra Corporation 1781 Park Center Drive Orlando, Florida 32835 Attention: Thomas A. Bell With a copy to: Latham & Watkins 633 West Fifth Street, Suite 4000 Los Angeles, California 90071-2007 Attention: Michael Sturrock, 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 12 13 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 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 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 13 14 (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. 14 15 IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the date and year first above written. SUNTERRA CORPORATION /s/ L. STEVEN MILLER ------------------------------------ By: L. Steven Miller Its: President and CEO EXECUTIVE /s/ RICHARD GOODMAN ------------------------------------ By: Richard Goodman S-1 16 Exhibit "A" Form of Option Agreement A-1 17 Exhibit "B" Form of Option Plan B-1 EX-10.16 6 AMENDED & RESTATED 1996 EQUITY PARTICIPATION PLAN 1 EXHIBIT 10.16 THE AMENDED AND RESTATED 1996 EQUITY PARTICIPATION PLAN OF SUNTERRA CORPORATION Sunterra Corporation (formerly known as Signature Resorts, Inc.), a Maryland corporation, has adopted The Amended and Restated 1996 Equity Participation Plan of Sunterra Corporation (the "Plan"), effective March 29, 1999, for the benefit of its eligible employees, consultants and directors. The Plan consists of two plans, one for the benefit of key Employees (as such term is defined below), Independent Directors (as such term is defined below) and consultants and another solely for the benefit of Independent Directors. The Plan is an amendment and restatement of The 1996 Equity Participation Plan of Signature Resorts, Inc., which was adopted by Signature Resorts, Inc. on June 13, 1996. The purposes of this Plan are as follows: (1) To provide an additional incentive for directors, key Employees and consultants to further the growth, development and financial success of the Company by personally benefiting through the ownership of Company stock and/or rights which recognize such growth, development and financial success. (2) To enable the Company to obtain and retain the services of directors, key Employees and consultants considered essential to the long range success of the Company by offering them an opportunity to own stock in the Company and/or rights which will reflect the growth, development and financial success of the Company. ARTICLE I. DEFINITIONS 1.1. General. Wherever the following terms are used in this Plan they shall have the meaning specified below, unless the context clearly indicates otherwise. 1.2. Award Limit. "Award Limit" shall mean six hundred seventy-five thousand (675,000) shares of Common Stock. 1.3. Board. "Board" shall mean the Board of Directors of the Company. 1.4. Change in Control. "Change in Control" shall mean a change in ownership or control of the Company effected through either of the following transactions: (a) any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding 2 securities pursuant to a tender or exchange offer made directly to the Company's stockholders which the Board does not recommend such stockholders to accept; or (b) there is a change in the composition of the Board over a period of twenty-four (24) consecutive months (or less) such that a majority of the Board members (rounded up to the nearest whole number) ceases, by reason of one or more proxy contests for the election of Board members, to be comprised of individuals who either (i) have been Board members continuously since the beginning of such period or (ii) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board. 1.5. Code. "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.6. Committee. "Committee" shall mean the Compensation Committee of the Board, or another committee, or a subcommittee of the Board, appointed as provided in Section 9.1. 1.7. 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 preferred stock and 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. 1.8. Company. "Company" shall mean Sunterra Corporation (formerly known as Signature Resorts, Inc.), a Maryland corporation. 1.9. Corporate Transaction. "Corporate Transaction" shall mean any of the following stockholder-approved transactions to which the Company is a party: (a) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the State in which the Company is incorporated, form a holding company or effect a similar reorganization as to form whereupon this Plan and all Options are assumed by the successor entity; (b) the sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company, in complete liquidation or dissolution of the Company in a transaction not covered by the exceptions to clause (a), above; or (c) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger. 1.10. Deferred Stock. "Deferred Stock" shall mean Common Stock awarded under Article VII of this Plan. 2 3 1.11. Director. "Director" shall mean a member of the Board. 1.12. Dividend Equivalent. "Dividend Equivalent" shall mean a right to receive the equivalent value (in cash or Common Stock) of dividends paid on Common Stock, awarded under Article VII of this Plan. 1.13. 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. 1.14. Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 1.15. Fair Market Value. "Fair Market Value" of a share of Common Stock as of a given date shall be (i) the closing price of a share of Common Stock on the principal exchange on which shares of Common Stock are then trading, if any (or as reported on any composite index which includes such principal exchange), on the trading day previous to such date, or if shares were not traded on the trading day previous to such date, then on the next preceding date on which a trade occurred, or (ii) if Common Stock is not traded on an exchange but is quoted on NASDAQ or a successor quotation system, the mean between the closing representative bid and asked prices for the Common Stock on the trading day previous to such date as reported by NASDAQ or such successor quotation system; or (iii) if Common Stock is not publicly traded on an exchange and not quoted on NASDAQ or a successor quotation system, the Fair Market Value of a share of Common Stock as established by the Committee (or the Board, in the case of grants to Independent Directors) acting in good faith. 1.16. Grantee. "Grantee" shall mean an Employee, Independent Director or consultant granted a Performance Award, Dividend Equivalent, Stock Payment or Stock Appreciation Right, or an award of Deferred Stock, under this Plan. 1.17. Incentive Stock Option. "Incentive Stock Option" shall mean an option which conforms to the applicable provisions of Section 422 of the Code and which is designated as an Incentive Stock Option by the Committee. 1.18. Independent Director. "Independent Director" shall mean a member of the Board who is not an Employee of the Company. 1.19. Non-Qualified Stock Option. "Non-Qualified Stock Option" shall mean an Option which is not designated as an Incentive Stock Option by the Committee. 1.20. Option. "Option" shall mean a stock option granted under Article III of this Plan. An Option granted under this Plan shall, as determined by the Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option; provided, however, that Options granted to Independent Directors and consultants shall be Non-Qualified Stock Options. 3 4 1.21. Optionee. "Optionee" shall mean an Employee, consultant or Independent Director granted an Option under this Plan. 1.22. Performance Award. "Performance Award" shall mean a cash bonus, stock bonus or other performance or incentive award that is paid in cash, Common Stock or a combination of both, awarded under Article VII of this Plan. 1.23. Plan. "Plan" shall mean The Amended and Restated 1996 Equity Participation Plan of Sunterra Corporation. 1.24. QDRO. "QDRO" shall mean a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. 1.25. Restricted Stock. "Restricted Stock" shall mean Common Stock awarded under Article VI of this Plan. 1.26. Restricted Stockholder. "Restricted Stockholder" shall mean an Employee, Independent Director or consultant granted an award of Restricted Stock under Article VI of this Plan. 1.27. 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. 1.28. Stock Appreciation Right. "Stock Appreciation Right" shall mean a stock appreciation right granted under Article VIII of this Plan. 1.29. Stock Payment. "Stock Payment" shall mean (i) a payment in the form of shares of Common Stock, or (ii) an option or other right to purchase shares of Common Stock, as part of a deferred compensation arrangement, made in lieu of all or any portion of the compensation, including without limitation, salary, bonuses and commissions, that would otherwise become payable to a key Employee, Independent Director or consultant in cash, awarded under Article VII of this Plan. 1.30. Subsidiary. "Subsidiary" shall mean (i) 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 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain and (ii) any partnership or limited liability company in which the Company (A) directly or indirectly holds a managing partner or managing member interest or (B) is entitled to 50 percent or more of the profits or assets upon dissolution. 1.31. Termination of Consultancy. "Termination of Consultancy" shall mean the time when the engagement of an Optionee, Grantee or Restricted Stockholder as a consultant to the Company or a Subsidiary is terminated for any reason, with or without cause, including, but not by way of limitation, by resignation, discharge, death or retirement; but excluding terminations 4 5 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 Consultancy. 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. 1.32. Termination of Directorship. "Termination of Directorship" shall mean the time when an Optionee who is an Independent Director ceases to be a Director for any reason, including, but not by way of limitation, a termination by resignation, failure to be elected, death or retirement. The Board, in its sole and absolute discretion, shall determine the effect of all matters and questions relating to Termination of Directorship with respect to Independent Directors. 1.33. Termination of Employment. "Termination of Employment" shall mean the time when the employee-employer relationship between an Optionee, Grantee or Restricted Stockholder and the Company or any Subsidiary is terminated for any reason, with or without cause, 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 reemployment or continuing employment of an Optionee, Grantee or Restricted Stockholder 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; provided, however, that, with respect to Incentive Stock Options, a leave of absence, change in status from an employee to an independent contractor or other change in the employee-employer relationship shall constitute a Termination of Employment if, and to the extent that, such leave of absence, change in status or other change interrupts employment for the purposes of Section 422(a)(2) of the Code and the then applicable regulations and revenue rulings under said Section. 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. SHARES SUBJECT TO PLAN 2.1. Shares Subject to Plan. 5 6 (a) The shares of stock subject to Options, awards of Restricted Stock, Performance Awards, Dividend Equivalents, awards of Deferred Stock, Stock Payments or Stock Appreciation Rights shall be Common Stock, initially shares of the Company's Common Stock, par value $.01 per share. The aggregate number of such shares which may be issued upon exercise of such options or rights or upon any such awards under the Plan shall not exceed five million three hundred eighty thousand (5,380,000) shares of Common Stock. The shares of Common Stock issuable upon exercise of such options or rights or upon any such awards may be either previously authorized but unissued shares or treasury shares. (b) The maximum number of shares which may be subject to options or Stock Appreciation Rights granted under the Plan to any individual in any fiscal year shall not exceed the Award Limit. 2.2. Add-back of Options and Other Rights. If any Option, or other right to acquire shares of Common Stock under any other award under this Plan, expires or is canceled without having been fully exercised, or is exercised in whole or in part for cash as permitted by this Plan, the number of shares subject to such Option or other right but as to which such Option or other right was not exercised prior to its expiration, cancellation or exercise may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Furthermore, any shares subject to Options or other awards which are adjusted pursuant to Section 10.3 and become exercisable with respect to shares of stock of another corporation shall be considered cancelled and may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Shares of Common Stock which are delivered by the Optionee or Grantee or withheld by the Company upon the exercise of any Option or other award under this Plan, in payment of the exercise price thereof, may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. If any share of Restricted Stock is forfeited by the Grantee or repurchased by the Company pursuant to Section 6.6 hereof, such share may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Notwithstanding the provisions of this Section 2.2, no shares of Common Stock may again be optioned, granted or awarded if such action would cause an Incentive Stock Option to fail to qualify as an incentive stock option under Section 422 of the Code. ARTICLE III. GRANTING OF OPTIONS 3.1. Eligibility. Any Employee, Independent Director or consultant selected by the Committee pursuant to Section 3.4(a)(i) shall be eligible to be granted an Option. In addition, each Independent Director of the Company shall be eligible to be granted Options at the times and in the manner set forth in Section 3.4(d). 3.2. Disqualification for Stock Ownership. No person may be granted an Incentive Stock Option under this Plan if such person, at the time the Incentive Stock Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any then existing Subsidiary or parent corporation (within the 6 7 meaning of Section 422 of the Code) unless such Incentive Stock Option conforms to the applicable provisions of Section 422 of the Code. 3.3. Qualification of Incentive Stock Options. No Incentive Stock Option shall be granted unless such Option, when granted, qualifies as an "incentive stock option" under Section 422 of the Code. No Incentive Stock Option shall be granted to any person who is not an Employee. 3.4. Granting of Options (a) The Committee shall from time to time, in its absolute discretion, and subject to applicable limitations of this Plan: (i) Determine which Employees are key Employees and select from among the key Employees, Independent Directors or consultants (including Employees, Independent Directors or consultants who have previously received Options or other awards under this Plan) such of them as in its opinion should be granted Options; (ii) Subject to the Award Limit, determine the number of shares to be subject to such Options granted to the selected key Employees, Independent Directors or consultants; (iii) Determine whether such Options are to be Incentive Stock Options or Non-Qualified Stock Options and whether such Options are to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code; and (iv) Determine the terms and conditions of such Options, consistent with this Plan; provided, however, that the terms and conditions of Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall include, but not be limited to, such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. (b) Upon the selection of a key Employee, Independent Director or consultant to be granted an Option, the Committee shall instruct the Secretary of the Company to issue the Option and may impose such conditions on the grant of the Option as it deems appropriate. (c) Any Incentive Stock Option granted under this Plan may be modified by the Committee to disqualify such option from treatment as an "incentive stock option" under Section 422 of the Code. (d) During the term of the Plan, each person who is an Independent Director as of the date of the consummation of the initial public offering of Common Stock automatically shall be granted (i) an Option to purchase fifteen thousand (15,000) shares of Common Stock (subject to adjustment as provided in Section 10.3) on the date of such initial public offering and (ii) an Option to purchase fifteen thousand (15,000) shares of Common Stock (subject to adjustment as provided in Section 10.3) on the third anniversary of such grant; provided that 7 8 such Independent Director serves as a member of the Board on such third anniversary. During the term of the Plan, a person who is initially elected to the Board after the consummation of the initial public offering of Common Stock and who is an Independent Director at the time of such initial election automatically shall be granted (i) an Option to purchase fifteen thousand (15,000) shares of Common Stock (subject to adjustment as provided in Section 10.3) on the date of such initial election and (ii) an Option to purchase fifteen thousand (15,000) shares of Common Stock (subject to adjustment as provided in Section 10.3) on the third anniversary of such grant; provided that such Independent Director serves as a member of the Board on such third anniversary. Members of the Board who are employees of the Company and who subsequently retire from the Company but remain on the Board, to the extent that they are eligible, will receive Options as described in clause (i) of the preceding sentence upon retirement from the Company and shall be eligible to receive additional Options as described in and pursuant to the terms of clause (ii) of the preceding sentence. All the foregoing Option grants authorized by this Section 3.4(d) are subject to stockholder approval of the Plan. ARTICLE IV. TERMS OF OPTIONS 4.1. Option Agreement. Each Option shall be evidenced by a written Stock Option Agreement, which shall be executed by the Optionee and an authorized officer of the Company and which shall contain such terms and conditions as the Committee (or the Board, in the case of grants to Independent Directors) shall determine, consistent with this Plan. Stock Option Agreements evidencing Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. Stock Option Agreements evidencing Incentive Stock Options shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 422 of the Code. 4.2. Option Price. The price per share of the shares subject to each Option shall be set by the Committee; provided, however, that such price shall be no less than 85% of the Fair Market Value of a share of Common Stock on the date the Option is granted, and (i) in the case of Incentive Stock Options and Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code, such price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted; (ii) in the case of Incentive Stock Options granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation thereof (within the meaning of Section 422 of the Code) such price shall not be less than 110% of the Fair Market Value of a share of Common Stock on the date the Option is granted; and (iii) in the case of grants to Independent Directors, such price shall equal 100% of the Fair Market Value of a share of Common Stock pursuant to Section 3.4(d) on the date the Option is granted; provided, however, that the price of each share subject to each Option granted to Independent Directors on the date of the initial public offering of Common Stock shall equal the initial public offering price per share of Common Stock. 8 9 4.3. Option Term. The term of an Option shall be set by the Committee in its discretion; provided, however, that such term shall not be more than ten (10) years from the date the Option is granted, and (i) in the case of grants to Independent Directors pursuant to Section 3.4(d), the term shall be ten (10) years from the date the Option is granted, without variation or acceleration hereunder, but subject to Section 5.6, and (ii) in the case of Incentive Stock Options, the term shall not be more than five (5) years from the date the Incentive Stock Option is granted if the Incentive Stock Option is granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation thereof (within the meaning of Section 422 of the Code). Except as limited by requirements of Section 422 of the Code and regulations and rulings thereunder applicable to Incentive Stock Options, the Committee may, subject to the terms hereof, extend the term of any outstanding Option in connection with any Termination of Employment or Termination of Consultancy of the Optionee, or amend any other term or condition of such Option relating to such a termination. 4.4. Option Vesting (a) The period during which the right to exercise an Option in whole or in part vests in the Optionee shall be set by the Committee and the Committee may determine that an Option may not be exercised in whole or in part for a specified period after it is granted; provided, however, that Options granted to Independent Directors pursuant to Section 3.4(d) shall become exercisable in cumulative annual installments of 33 1/3% on each of the first, second and third anniversaries of the date of Option grant, without variation or acceleration hereunder except as provided in Section 10.3(b). At any time after grant of an Option, the Committee may, in its sole and absolute discretion and subject to whatever terms and conditions it selects, accelerate the period during which an Option (except an Option granted to an Independent Director pursuant to Section 3.4(d)) vests. (b) No portion of an Option which is unexercisable at Termination of Employment, Termination of Directorship or Termination of Consultancy, as applicable, shall thereafter become exercisable, except as may be otherwise provided by the Committee in the case of Options granted to Employees, Independent Directors or consultants either in the Stock Option Agreement or by action of the Committee following the grant of the Option. (c) To the extent that the aggregate Fair Market Value of stock with respect to which "incentive stock options" (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code) are exercisable for the first time by an Optionee during any calendar year (under the Plan and all other incentive stock option plans of the Company and any Subsidiary) exceeds $100,000, such Options shall be treated as Non-Qualified Options to the extent required by Section 422 of the Code. The rule set forth in the preceding sentence shall be applied by taking Options into account in the order in which they were granted. For purposes of this Section 4.4(c), the Fair Market Value of stock shall be determined as of the time the Option with respect to such stock is granted. 9 10 4.5. Consideration. In consideration of the granting of an Option, the Optionee shall agree, in the written Stock Option Agreement, to remain in the employ of (or to consult for or to serve as an Independent Director of, as applicable) the Company or any Subsidiary for a period of at least one year after the Option is granted or, in the case of an Independent Director, to the end of such Independent Director's current Board term (or such shorter period as may be fixed in the Stock Option Agreement or by action of the Committee or the Board following grant of the Option). Nothing in this Plan or in any Stock Option Agreement hereunder 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 any Optionee at any time for any reason whatsoever, with or without good cause. ARTICLE V. EXERCISE OF OPTIONS 5.1. Partial Exercise. An exercisable Option may be exercised in whole or in part. However, an Option shall not be exercisable with respect to fractional shares and the Committee (or the Board, in the case of Options granted to Independent Directors) may require that, by the terms of the Option, a partial exercise be with respect to a minimum number of shares. 5.2. Manner of Exercise. All or a portion of an exercisable Option shall be deemed exercised upon delivery of all of the following to the Secretary of the Company or his office: (a) A written notice complying with the applicable rules established by the Committee (or the Board, in the case of Options granted to Independent Directors pursuant to Section 3.4(d)) stating that the Option, or a portion thereof, is exercised. The notice shall be signed by the Optionee or other person then entitled to exercise the Option or such portion; (b) Such representations and documents as the Committee (or the Board, in the case of Options granted to Independent Directors pursuant to Section 3.4(d)), in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act of 1933, as amended, and any other federal or state securities laws or regulations. The Committee or Board may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer notices to agents and registrars; (c) In the event that the Option shall be exercised pursuant to Section 10.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option; and (d) Full cash payment to the Secretary of the Company for the shares with respect to which the Option, or portion thereof, is exercised. However, the Committee (or the Board, in the case of Options granted to Independent Directors pursuant to Section 3.4(d)), may in its discretion (i) allow a delay in payment up to thirty (30) days from the date the Option, or portion thereof, is exercised; (ii) allow payment, in whole or in part, through the delivery of 10 11 shares of Common Stock owned by the Optionee, duly endorsed for transfer to the Company with a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof; (iii) allow payment, in whole or in part, through the delivery of property of any kind which constitutes good and valuable consideration; (iv) allow payment, in whole or in part, through the delivery of a full recourse promissory note bearing interest (at no less than such rate as shall then preclude the imputation of interest under the Code) and payable upon such terms as may be prescribed by the Committee or the Board, or (v) allow payment through any combination of the consideration provided in the foregoing subparagraphs (ii), (iii) and (iv). In the case of a promissory note, the Committee (or the Board, in the case of Options granted to Independent Directors pursuant to Section 3.4(d)) 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. 5.3. Conditions to Issuance of Stock Certificates. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of any 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; (b) The completion of any registration or other qualification of such shares under any state or federal law, or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body which the Committee or Board shall, in its absolute discretion, deem necessary or advisable; (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee (or Board, in the case of Options granted to Independent Directors pursuant to Section 3.4(d)) shall, in its absolute discretion, determine to be necessary or advisable; (d) The lapse of such reasonable period of time following the exercise of the Option as the Committee (or Board, in the case of Options granted to Independent Directors pursuant to Section 3.4(d)) may establish from time to time for reasons of administrative convenience; and (e) The receipt by the Company of full payment for such shares, including payment of any applicable withholding tax. 5.4. Rights as Stockholders. The holders of Options shall not be, nor have any of the rights or privileges of, stockholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such shares have been issued by the Company to such holders. 5.5. Ownership and Transfer Restrictions. The Committee (or Board, in the case of Options granted to Independent Directors pursuant to Section 3.4(d)), in its absolute discretion, 11 12 may impose such restrictions on the ownership and transferability of the shares purchasable upon the exercise of an Option as it deems appropriate. Any such restriction shall be set forth in the respective Stock Option Agreement and may be referred to on the certificates evidencing such shares. The Committee may require the Employee to give the Company prompt notice of any disposition of shares of Common Stock acquired by exercise of an Incentive Stock Option within (i) two years from the date of granting such Option to such Employee or (ii) one year after the transfer of such shares to such Employee. The Committee may direct that the certificates evidencing shares acquired by exercise of an Option refer to such requirement to give prompt notice of disposition. 5.6. Limitations on Exercise of Options Granted to Independent Directors Pursuant to Section 3.4(d). No Option granted to an Independent Director pursuant to Section 3.4(d) may be exercised to any extent by anyone after the first to occur of the following events: (a) The expiration of twelve (12) months from the date of the Optionee's death; (b) the expiration of twelve (12) months from the date of the Optionee's Termination of Directorship by reason of his permanent and total disability (within the meaning of Section 22(e)(3) of the Code); (c) the expiration of three (3) months from the date of the Optionee's Termination of Directorship for any reason other than such Optionee's death or his permanent and total disability, unless the Optionee dies within said three-month period; or (d) The expiration of ten years from the date the Option was granted. ARTICLE VI. AWARD OF RESTRICTED STOCK 6.1. Award of Restricted Stock. (a) The Committee may from time to time, in its absolute discretion: (i) Select from among the key Employees, Independent Directors or consultants (including Employees, Independent Directors or consultants who have previously received other awards under this Plan) such of them as in its opinion should be awarded Restricted Stock; and (ii) Determine the purchase price, if any, and other terms and conditions applicable to such Restricted Stock, consistent with this Plan. (b) The Committee shall establish the purchase price, if any, and form of payment for Restricted Stock; provided, however, that such purchase price shall be no less than 12 13 the par value of the Common Stock to be purchased, unless otherwise permitted by applicable state law. In all cases, legal consideration shall be required for each issuance of Restricted Stock. (c) Upon the selection of a key Employee, Independent Director or consultant to be awarded Restricted Stock, the Committee shall instruct the Secretary of the Company to issue such Restricted Stock and may impose such conditions on the issuance of such Restricted Stock as it deems appropriate. 6.2. Restricted Stock Agreement. Restricted Stock shall be issued only pursuant to a written Restricted Stock Agreement, which shall be executed by the selected key Employee, Independent Director or consultant and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. 6.3. Consideration. As consideration for the issuance of Restricted Stock, in addition to payment of any purchase price, the Restricted Stockholder shall agree, in the written Restricted Stock Agreement, to remain in the employ of (or to consult for or serve as an Independent Director of, as applicable) the Company or any Subsidiary for a period of at least one year after the Restricted Stock is issued or, in the case of an Independent Director, to the end of such Independent Director's current Board term (or such shorter period as may be fixed in the Restricted Stock Agreement or by action of the Committee or the Board following grant of the Restricted Stock). Nothing in this Plan or in any Restricted Stock Agreement hereunder shall confer on any Restricted Stockholder 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 any Restricted Stockholder at any time for any reason whatsoever, with or without good cause. 6.4. Rights as Stockholders. Upon delivery of the shares of Restricted Stock to the escrow holder pursuant to Section 6.7, the Restricted Stockholder shall have, unless otherwise provided by the Committee, all the rights of a stockholder with respect to said shares, subject to the restrictions in his Restricted Stock Agreement, including the right to receive all dividends and other distributions paid or made with respect to the shares; provided, however, that in the discretion of the Committee, any extraordinary distributions with respect to the Common Stock shall be subject to the restrictions set forth in Section 6.5. 6.5. Restriction. All shares of Restricted Stock issued under this Plan (including any shares received by holders thereof with respect to shares of Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization) shall, in the terms of each individual Restricted Stock Agreement, be subject to such restrictions as the Committee shall provide, which restrictions may include, without limitation, restrictions concerning voting rights and transferability and restrictions based on duration of employment with the Company, Company performance and individual performance; provided, however, that by action taken after the Restricted Stock is issued, the Committee may, on such terms and conditions as it may determine to be appropriate, remove any or all of the restrictions imposed by the terms of the Restricted Stock Agreement. Restricted Stock may not be sold or encumbered until all restrictions are 13 14 terminated or expire. Unless provided otherwise by the Committee, if no consideration was paid by the Restricted Stockholder upon issuance, a Restricted Stockholder's rights in unvested Restricted Stock shall lapse upon Termination of Employment or, if applicable, upon Termination of Consultancy or Termination of Directorship with the Company. 6.6. Repurchase of Restricted Stock. The Committee shall provide in the terms of each individual Restricted Stock Agreement that the Company shall have the right to repurchase from the Restricted Stockholder the Restricted Stock then subject to restrictions under the Restricted Stock Agreement immediately upon a Termination of Employment or, if applicable, upon a Termination of Consultancy or Termination of Directorship between the Restricted Stockholder and the Company, at a cash price per share equal to the price paid by the Restricted Stockholder for such Restricted Stock; provided, however, that provision may be made that no such right of repurchase shall exist in the event of a Termination of Employment or Termination of Consultancy without cause, or following a change in control of the Company or because of the Restricted Stockholder's retirement, death or disability, or otherwise. 6.7. Escrow. The Secretary of the Company or such other escrow holder as the Committee may appoint shall retain physical custody of each certificate representing Restricted Stock until all of the restrictions imposed under the Restricted Stock Agreement with respect to the shares evidenced by such certificate expire or shall have been removed. 6.8. Legend. In order to enforce the restrictions imposed upon shares of Restricted Stock hereunder, the Committee shall cause a legend or legends to be placed on certificates representing all shares of Restricted Stock that are still subject to restrictions under Restricted Stock Agreements, which legend or legends shall make appropriate reference to the conditions imposed thereby. ARTICLE VII. PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS, DEFERRED STOCK, STOCK PAYMENTS 7.1. Performance Awards. Any key Employee, Independent Director or consultant selected by the Committee may be granted one or more Performance Awards. The value of such Performance Awards may be linked to the market value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee, or may be based upon the appreciation in the market value, book value, net profits or other measure of the value of a specified number of shares of Common Stock over a fixed period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of award) the contributions, responsibilities and other compensation of the particular key Employee, Independent Director or consultant. 7.2. Dividend Equivalents. Any key Employee, Independent Director or consultant selected by the Committee may be granted Dividend Equivalents based on the dividends declared 14 15 on Common Stock, to be credited as of dividend payment dates, during the period between the date an Option, Stock Appreciation Right, Deferred Stock or Performance Award is granted, and the date such Option, Stock Appreciation Right, Deferred Stock or Performance Award is exercised, vests or expires, as determined by the Committee. Such Dividend Equivalents shall be converted to cash or additional shares of Common Stock by such formula and at such time and subject to such limitations as may be determined by the Committee. With respect to Dividend Equivalents granted with respect to Options intended to be qualified performance-based compensation for purposes of Section 162(m), such Dividend Equivalents shall be payable regardless of whether such Option is exercised. 7.3. Stock Payments. Any key Employee, Independent Director or consultant selected by the Committee may receive Stock Payments in the manner determined from time to time by the Committee. The number of shares shall be determined by the Committee and may be based upon the Fair Market Value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined appropriate by the Committee, determined on the date such Stock Payment is made or on any date thereafter. 7.4. Deferred Stock. Any key Employee, Independent Director or consultant selected by the Committee may be granted an award of Deferred Stock in the manner determined from time to time by the Committee. The number of shares of Deferred Stock shall be determined by the Committee and may be linked to the market value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined to be appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. Common Stock underlying a Deferred Stock award will not be issued until the Deferred Stock award has vested, pursuant to a vesting schedule or performance criteria set by the Committee. Unless otherwise provided by the Committee, a Grantee of Deferred Stock shall have no rights as a Company stockholder with respect to such Deferred Stock until such time as the award has vested and the Common Stock underlying the award has been issued. 7.5. Performance Award Agreement, Dividend Equivalent Agreement, Deferred Stock Agreement, Stock Payment Agreement. Each Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall be evidenced by a written agreement, which shall be executed by the Grantee and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. 7.6. Term. The term of a Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall be set by the Committee in its discretion. 7.7. Exercise Upon Termination of Employment. A Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment is exercisable or payable only while the Grantee is an Employee, Independent Director or consultant; provided that the Committee may determine that the Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment may be exercised or paid subsequent to Termination of Employment or 15 16 Termination of Consultancy without cause, or following a change in control of the Company, or because of the Grantee's retirement, death or disability, or otherwise. 7.8. Payment on Exercise. Payment of the amount determined under Section 7.1 or 7.2 above shall be in cash, in Common Stock or a combination of both, as determined by the Committee. To the extent any payment under this Article VII is effected in Common Stock, it shall be made subject to satisfaction of all provisions of Section 5.3. 7.9. Consideration. In consideration of the granting of a Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment, the Grantee shall agree, in a written agreement, to remain in the employ of, or to consult for, the Company or any Subsidiary for a period of at least one year after such Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment is granted (or such shorter period as may be fixed in such agreement or by action of the Committee following such grant). Nothing in this Plan or in any agreement hereunder shall confer on any Grantee any right to continue in the employ of, or as a consultant for, the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any time for any reason whatsoever, with or without good cause. ARTICLE VIII. STOCK APPRECIATION RIGHTS 8.1. Grant of Stock Appreciation Rights. A Stock Appreciation Right may be granted to any key Employee, Independent Director or consultant selected by the Committee. A Stock Appreciation Right may be granted (i) in connection and simultaneously with the grant of an Option, (ii) with respect to a previously granted Option, or (iii) independent of an Option. A Stock Appreciation Right shall be subject to such terms and conditions not inconsistent with this Plan as the Committee shall impose and shall be evidenced by a written Stock Appreciation Right Agreement, which shall be executed by the Grantee and an authorized officer of the Company. The Committee, in its discretion, may determine whether a Stock Appreciation Right is to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code and Stock Appreciation Right Agreements evidencing Stock Appreciation Rights intended to so qualify shall contain such terms and conditions as may be necessary to meet the applicable provisions of section 162(m) of the Code. 8.2. Coupled Stock Appreciation Rights (a) A Coupled Stock Appreciation Right ("CSAR") shall be related to a particular Option and shall be exercisable only when and to the extent the related Option is exercisable. (b) A CSAR may be granted to the Grantee for no more than the number of shares subject to the simultaneously or previously granted Option to which it is coupled. 16 17 (c) A CSAR shall entitle the Grantee (or other person entitled to exercise the Option pursuant to this Plan) to surrender to the Company unexercised a portion of the Option to which the CSAR relates (to the extent then exercisable pursuant to its terms) and to receive from the Company in exchange therefor an amount determined by multiplying the difference obtained by subtracting the Option exercise price from the Fair Market Value of a share of Common Stock on the date of exercise of the CSAR by the number of shares of Common Stock with respect to which the CSAR shall have been exercised, subject to any limitations the Committee may impose. 8.3. Independent Stock Appreciation Rights (a) An Independent Stock Appreciation Right ("ISAR") shall be unrelated to any Option and shall have a term set by the Committee. An ISAR shall be exercisable in such installments as the Committee may determine. An ISAR shall cover such number of shares of Common Stock as the Committee may determine. The exercise price per share of Common Stock subject to each ISAR shall be set by the Committee. An ISAR is exercisable only while the Grantee is an Employee, Independent Director or consultant; provided that the Committee may determine that the ISAR may be exercised subsequent to Termination of Employment or Termination of Consultancy without cause, or following a change in control of the Company, or because of the Grantee's retirement, death or disability, or otherwise. (b) An ISAR shall entitle the Grantee (or other person entitled to exercise the ISAR pursuant to this Plan) to exercise all or a specified portion of the ISAR (to the extent then exercisable pursuant to its terms) and to receive from the Company an amount determined by multiplying the difference obtained by subtracting the exercise price per share of the ISAR from the Fair Market Value of a share of Common Stock on the date of exercise of the ISAR by the number of shares of Common Stock with respect to which the ISAR shall have been exercised, subject to any limitations the Committee may impose. 8.4. Payment and Limitations on Exercise (a) Payment of the amount determined under Section 8.2(c) and 8.3(b) above shall be in cash, in Common Stock (based on its Fair Market Value as of the date the Stock Appreciation Right is exercised) or a combination of both, as determined by the Committee. To the extent such payment is effected in Common Stock it shall be made subject to satisfaction of all provisions of Section 5.3 hereinabove pertaining to Options. (b) Grantees of Stock Appreciation Rights may, in the discretion of the Board or Committee, be required to comply with any timing or other restrictions including a window-period requirement deemed advisable or prudent by the Board or Committee or otherwise with respect to the settlement or exercise of a Stock Appreciation Right. 8.5. Consideration. In consideration of the granting of a Stock Appreciation Right, the Grantee shall agree, in the written Stock Appreciation Right Agreement, to remain in the employ of (or to consult for or serve as an Independent Director of, as applicable) the Company or any Subsidiary for a period of at least one year after the Stock Appreciation Right is granted or, in the 17 18 case of an Independent Director, to the end of such Independent Director's current Board term (or such shorter period as may be fixed in the Stock Appreciation Right Agreement or by action of the Committee or the Board following grant of the Restricted Stock). Nothing in this Plan or in any Stock Appreciation Right Agreement hereunder shall confer on any Grantee any right to continue in the employ of, or as a consultant for, the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any time for any reason whatsoever, with or without good cause. ARTICLE IX. ADMINISTRATION 9.1. Compensation Committee. Prior to the closing of the Company's initial public offering of equity securities (the "Offering"), the Compensation Committee shall consist of the entire Board. Following the closing of the Offering, the Compensation Committee (or another committee or a subcommittee of the Board assuming the functions of the Committee under this Plan) shall consist solely of two or more Independent Directors appointed by and holding office at the pleasure of the Board, each of whom is (i) a "non-employee director" (as defined by Rule 16b-3), (ii) to the extent required by the applicable provisions of Rule 16b-3, a "disinterested person" (as defined by Rule 16b-3) and (iii) an "outside director" for purposes of Section 162(m) of the Code. Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee may be filled by the Board. 9.2. Duties and Powers of Committee. It shall be the duty of the Committee to conduct the general administration of this Plan in accordance with its provisions. The Committee shall have the power to interpret this Plan and the agreements pursuant to which Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments are granted or awarded, and to adopt such rules for the administration, interpretation, and application of this Plan as are consistent therewith and to interpret, amend or revoke any such rules. Notwithstanding the foregoing, the full Board, acting by a majority of its members in office, shall conduct the general administration of the Plan with respect to grants to Independent Directors. Any such grant or award under this Plan need not be the same with respect to each Optionee, Grantee or Restricted Stockholder. Any such interpretations and rules with respect to Incentive Stock Options shall be consistent with the provisions of Section 422 of the Code. 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. 9.3. Majority Rule; Unanimous Written Consent. The Committee shall act by a majority of its members in attendance at a meeting at which a quorum is present or by a memorandum or other written instrument signed by all members of the Committee. 18 19 9.4. Compensation; Professional Assistance; Good Faith Actions. Members of the Committee shall receive such compensation for their services as members as may be determined by the Board. All expenses and liabilities which members of the Committee incur in connection with the administration of this Plan shall be borne by the Company. The Committee may, with the approval of the Board, employ attorneys, consultants, accountants, appraisers, brokers, or other persons. The Committee, the Company and the Company's officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee or the Board in good faith shall be final and binding upon all Optionees, Grantees, Restricted Stockholders, the Company and all other interested persons. No members of the Committee or Board shall be personally liable for any action, determination or interpretation made in good faith with respect to this Plan, Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments, and all members of the Committee and the Board shall be fully protected by the Company in respect of any such action, determination or interpretation. ARTICLE X. MISCELLANEOUS PROVISIONS 10.1. Not Transferable. Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments under this Plan may not be sold, pledged, assigned, or transferred in any manner other than by will or the laws of descent and distribution or pursuant to a QDRO, unless and until such rights or awards have been exercised, or the shares underlying such rights or awards have been issued, and all restrictions applicable to such shares have lapsed. No Option, Restricted Stock award, Deferred Stock award, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment or interest or right therein shall be liable for the debts, contracts or engagements of the Optionee, Grantee or Restricted Stockholder 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, except to the extent that such disposition is permitted by the preceding sentence. During the lifetime of the Optionee or Grantee, only he may exercise an Option or other right or award (or any portion thereof) granted to him under the Plan, unless it has been disposed of pursuant to a QDRO. After the death of the Optionee or Grantee, any exercisable portion of an Option or other right or award may, prior to the time when such portion becomes unexercisable under the Plan or the applicable Stock Option Agreement or other agreement, be exercised by his personal representative or by any person empowered to do so under the deceased Optionee's or Grantee's will or under the then applicable laws of descent and distribution. 10.2. Amendment, Suspension or Termination of this Plan. Except as otherwise provided in this Section 9.2, this Plan may be wholly or partially amended or otherwise 19 20 modified, suspended or terminated at any time or from time to time by the Board or the Committee. However, without approval of the Company's stockholders given within twelve months before or after the action by the Board or the Committee, no action of the Board or the Committee may, except as provided in Section 10.3, increase the limits imposed in Section 2.1 on the maximum number of shares which may be issued under this Plan or modify the Award Limit, and no action of the Committee may be taken that would otherwise require stockholder approval as a matter of applicable law, regulation or rule. No amendment, suspension or termination of this Plan shall, without the consent of the holder of Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments, alter or impair any rights or obligations under any Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments theretofore granted or awarded, unless the award itself otherwise expressly so provides. No Options, Restricted Stock, Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be granted or awarded during any period of suspension or after termination of this Plan, and in no event may any Incentive Stock Option be granted under this Plan after the first to occur of the following events: (a) The expiration of ten years from the date the Plan is adopted by the Board; or (b) The expiration of ten years from the date the Plan is approved by the Company's stockholders under Section 10.4. 10.3. Changes in Common Stock or Assets of the Company, Acquisition or Liquidation of the Company and Other Corporate Events. (a) Subject to Section 10.3(d), in the event that the Committee (or the Board, in the case of grants to Independent Directors) determines that any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, liquidation, dissolution, or sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company (including, but not limited to a Corporate Transaction), or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate transaction or event, in the Committee's sole discretion (or in the case of grants to Independent Directors, the Board's sole discretion), affects the Common Stock such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to an Option, Restricted Stock award, Performance Award, Stock Appreciation Right, Dividend Equivalent, Deferred Stock award or Stock Payment, then the Committee (or the Board, in the case of grants to Independent Directors) shall, in such manner as it may deem equitable, adjust any or all of 20 21 (i) the number and kind of shares of Common Stock (or other securities or property) with respect to which Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be granted under the Plan, or which may be granted as Restricted Stock or Deferred Stock (including, but not limited to, adjustments of the limitations in Section 2.1 on the maximum number and kind of shares which may be issued and adjustments of the Award Limit), (ii) the number and kind of shares of Common Stock (or other securities or property) subject to outstanding Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents, or Stock Payments, and in the number and kind of shares of outstanding Restricted Stock or Deferred Stock, and (iii) the grant or exercise price with respect to any Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment. (b) Subject to Sections 10.3(b)(vii) and 10.3(d), in the event of any Corporate Transaction or other transaction or event described in Section 10.3(a) or any unusual or nonrecurring transactions or events affecting the Company, any affiliate of the Company, or the financial statements of the Company or any affiliate, or of changes in applicable laws, regulations, or accounting principles, the Committee (or the Board, in the case of grants to Independent Directors) in its discretion is hereby authorized to take any one or more of the following actions whenever the Committee (or the Board, in the case of grants to Independent Directors) determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any option, right or other award under this Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles: (i) In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee (or the Board, in the case of grants to Independent Directors) may provide, either by the terms of the agreement or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Optionee's request, for either the purchase of any such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or any Restricted Stock or Deferred Stock for an amount of cash equal to the amount that could have been attained upon the exercise of such option, right or award or realization of the Optionee's rights had such option, right or award been currently exercisable or payable or fully vested or the replacement of such option, right or award with other rights or property selected by the Committee (or the Board, in the case of grants to Independent Directors) in its sole discretion; (ii) In its sole and absolute discretion, the Committee (or the Board, in the case of grants to Independent Directors) may provide, either by the terms of such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock or by action taken prior to the occurrence of such transaction or event that it cannot be exercised after such event; 21 22 (iii) In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee (or the Board, in the case of grants to Independent Directors) may provide, either by the terms of such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock or by action taken prior to the occurrence of such transaction or event, that for a specified period of time prior to such transaction or event, such option, right or award shall be exercisable as to all shares covered thereby, notwithstanding anything to the contrary in (i) Section 4.4 or (ii) the provisions of such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock; (iv) In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee (or the Board, in the case of grant to Independent Directors) may provide, either by the terms of such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock or by action taken prior to the occurrence of such transaction or event, that upon such event, such option, right or award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; and (v) In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee (or the Board, in the case of grants to Independent Directors) may make adjustments in the number and type of shares of Common Stock (or other securities or property) subject to outstanding Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents, or Stock Payments, and in the number and kind of outstanding Restricted Stock or Deferred Stock and/or in the terms and conditions of, and the criteria included in, outstanding options, rights and awards and options, rights and awards which may be granted in the future. (vi) In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee may provide either by the terms of a Restricted Stock award or Deferred Stock award or by action taken prior to the occurrence of such event that, for a specified period of time prior to such event, the restrictions imposed under a Restricted Stock Agreement or a Deferred Stock Agreement upon some or all shares of Restricted Stock or Deferred Stock may be terminated, and, in the case of Restricted Stock, some or all shares of such Restricted Stock may cease to be subject to repurchase under Section 6.6 or forfeiture under Section 6.5 after such event. (vii) None of the foregoing discretionary terms of this Section 10.3(b) shall be permitted with respect to Options granted under Section 3.4(d) to Independent Directors to the extent that such discretion would be inconsistent with the applicable exemptive conditions of Rule 16b-3. In the event of a Change in Control or a Corporate Transaction, to the extent that the Board does not have the ability under Rule 16b-3 to 22 23 take or to refrain from taking the discretionary actions set forth in Section 10.3(b)(iii) above, each Option granted to an Independent Director shall be exercisable as to all shares covered thereby upon such Change in Control or during the five days immediately preceding the consummation of such Corporate Transaction and subject to such consummation, notwithstanding anything to the contrary in Section 4.4 or the vesting schedule of such Options. In the event of a Corporate Transaction, to the extent that the Board does not have the ability under Rule 16b-3 to take or to refrain from taking the discretionary actions set forth in Section 10.3(b)(ii) above, no Option granted to an Independent Director may be exercised following such Corporate Transaction unless such Option is, in connection with such Corporate Transaction, either assumed by the successor or survivor corporation (or parent or subsidiary thereof) or replaced with a comparable right with respect to shares of the capital stock of the successor or survivor corporation (or parent or subsidiary thereof). (c) Subject to Section 10.3(d) and 10.8, the Committee (or the Board, in the case of grants to Independent Directors) may, in its discretion, include such further provisions and limitations in any Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock agreement or certificate, as it may deem equitable and in the best interests of the Company. (d) With respect to Incentive Stock Options and Options and Stock Appreciation Rights intended to qualify as performance-based compensation under Section 162(m), no adjustment or action described in this Section 10.3 or in any other provision of the Plan shall be authorized to the extent that such adjustment or action would cause the Plan to violate Section 422(b)(1) of the Code or would cause such option or stock appreciation right to fail to so qualify under Section 162(m), as the case may be, or any successor provisions thereto. Furthermore, no such adjustment or action shall be authorized to the extent such adjustment or action would result in short-swing profits liability under Section 16 or violate the exemptive conditions of Rule 16b-3 unless the Committee (or the Board, in the case of grants to Independent Directors) determines that the option or other award is not to comply with such exemptive conditions. The number of shares of Common Stock subject to any option, right or award shall always be rounded to the next whole number. (e) In the event of any Corporate Transaction or Change in Control, each outstanding Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, Stock Payment, Restricted Stock or Deferred Stock award shall, immediately prior to the effective date of the Corporate Transaction or Change in Control, automatically become fully exercisable for all of the shares of Common Stock underlying such right, as applicable, and may be exercised for any or all of those shares as fully-vested shares of Common Stock. 10.4. Approval of Plan by Stockholders. This Plan will be submitted for the approval of the Company's stockholders within twelve months after the date of the Board's initial adoption of this Plan. Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be granted and Restricted Stock or Deferred Stock may be awarded prior to such stockholder approval, provided that such Options, Performance Awards, 23 24 Stock Appreciation Rights, Dividend Equivalents or Stock Payments shall not be exercisable and such Restricted Stock or Deferred Stock shall not vest prior to the time when this Plan is approved by the stockholders, and provided further that if such approval has not been obtained at the end of said twelve-month period, all Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments previously granted and all Restricted Stock or Deferred Stock previously awarded under this Plan shall thereupon be canceled and become null and void. 10.5. Tax Withholding. The Company shall be entitled to require payment in cash or deduction from other compensation payable to each Optionee, Grantee or Restricted Stockholder of any sums required by federal, state or local tax law to be withheld with respect to the issuance, vesting or exercise of any Option, Restricted Stock, Deferred Stock, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment. The Committee (or the Board, in the case of grants to Independent Directors) may in its discretion and in satisfaction of the foregoing requirement allow such Optionee, Grantee or Restricted Stockholder to elect to have the Company withhold shares of Common Stock otherwise issuable under such Option or other award (or allow the return of shares of Common Stock) having a Fair Market Value equal to the sums required to be withheld. 10.6. Loans. The Committee may, in its discretion, extend one or more loans to key Employees in connection with the exercise or receipt of an Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment granted under this Plan, or the issuance of Restricted Stock or Deferred Stock awarded under this Plan. The terms and conditions of any such loan shall be set by the Committee. 10.7. Forfeiture Provisions. Pursuant to its general authority to determine the terms and conditions applicable to awards under the Plan, the Committee (or the Board, in the case of grants to Independent Directors) shall have the right (to the extent consistent with the applicable exemptive conditions of Rule 16b-3) to provide, in the terms of Options or other awards made under the Plan, or to require the recipient to agree by separate written instrument, that (i) any proceeds, gains or other economic benefit actually or constructively received by the recipient upon any receipt or exercise of the award, or upon the receipt or resale of any Common Stock underlying such award, must be paid to the Company, and (ii) the award shall terminate and any unexercised portion of such award (whether or not vested) shall be forfeited, if (a) a Termination of Employment, Termination of Consultancy or Termination of Directorship occurs prior to a specified date, or within a specified time period following receipt or exercise of the award, or (b) the recipient at any time, or during a specified time period, engages in any activity in competition with the Company, or which is inimical, contrary or harmful to the interests of the Company, as further defined by the Committee (or the Board, as applicable). 10.8. Limitations Applicable to Section 16 Persons and Performance-Based Compensation. Notwithstanding any other provision of this Plan, this Plan, and any Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment granted, or Restricted Stock or Deferred Stock awarded, to any individual who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable 24 25 exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, the Plan, Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents, Stock Payments, Restricted Stock and Deferred Stock granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule. Furthermore, notwithstanding any other provision of this Plan, any Option or Stock Appreciation Right intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as performance-based compensation as described in Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the extent necessary to conform to such requirements. 10.9. Effect of Plan Upon Options and Compensation Plans. The adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company or any Subsidiary. Nothing in this Plan shall be construed to limit the right of the Company (i) to establish any other forms of incentives or compensation for Employees, Independent Directors or consultants of the Company or any Subsidiary or (ii) to grant or assume options or other rights otherwise than under this Plan in connection with any proper corporate purpose including but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, partnership, firm or association. 10.10. Compliance with Laws. This Plan, the granting and vesting of Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments under this Plan and the issuance and delivery of shares of Common Stock and the payment of money under this Plan or under Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments granted or Restricted Stock or Deferred Stock awarded hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. To the extent permitted by applicable law, the Plan, Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. 10.11. Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Plan. 25 26 10.12. Governing Law. This Plan and any agreements hereunder shall be administered, interpreted and enforced under the internal laws of the State of Maryland without regard to conflicts of laws thereof. 26 27 FORM OF 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. 1 28 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. 2 29 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 3 30 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 4 31 (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: 5 32 (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 33 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 34 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 35 (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 9 36 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 37 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 38 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 EX-10.19 7 1998 NEW-HIRE STOCK OPTION PLAN OF SUNTERRA CORP. 1 EXHIBIT 10.19 THE 1998 NEW-HIRE STOCK OPTION PLAN OF SUNTERRA CORPORATION Sunterra Corporation, a Maryland corporation, has adopted The 1998 New-Hire Stock Option Plan of Sunterra Corporation (the "Plan"), effective August 27, 1998, for the benefit of its eligible employees. The purposes of this Plan are as follows: (1) To provide an additional incentive for eligible key Employees (as defined below) to further the growth, development and financial success of the Company by personally benefiting through the ownership of Company stock. (2) To enable the Company to obtain the services of eligible key Employees considered essential to the long range success of the Company by offering them an opportunity to own stock in the Company. (3) To provide a material inducement to eligible key Employees to enter into employment contracts with the Company. ARTICLE I. DEFINITIONS 1.1. General. Wherever the following terms are used in this Plan they shall have the meaning specified below, unless the context clearly indicates otherwise. 1.2. Award Limit. "Award Limit" shall mean two hundred fifty thousand (250,000) shares of Common Stock. 1.3. Board. "Board" shall mean the Board of Directors of the Company. 1.4. Change in Control. "Change in Control" shall mean a change in ownership or control of the Company effected through either of the following transactions: (a) any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities pursuant to a tender or exchange offer made directly to the Company's stockholders which the Board does not recommend such stockholders to accept; or (b) there is a change in the composition of the Board over a period of twenty-four (24) consecutive months (or less) such that a majority of the Board members (rounded up to the nearest whole number) ceases, by reason of one or more proxy 2 contests for the election of Board members, to be comprised of individuals who either (i) have been Board members continuously since the beginning of such period or (ii) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board. 1.5. Code. "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.6. Committee. "Committee" shall mean the Compensation Committee of the Board, or another committee, or a subcommittee of the Board, appointed as provided in Section 6.1. 1.7. 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 preferred stock and 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. 1.8. Company. "Company" shall mean Sunterra Corporation, a Maryland corporation. 1.9. Corporate Transaction. "Corporate Transaction" shall mean any of the following stockholder-approved transactions to which the Company is a party: (a) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the State in which the Company is incorporated, form a holding company or effect a similar reorganization as to form whereupon this Plan and all Options are assumed by the successor entity; (b) the sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company, in complete liquidation or dissolution of the Company in a transaction not covered by the exceptions to clause (a), above; or (c) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger. 1.10. Director. "Director" shall mean a member of the Board. 1.11. 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. 2 3 1.12. Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 1.13. Fair Market Value. "Fair Market Value" of a share of Common Stock as of a given date shall be (i) the closing price of a share of Common Stock on the principal exchange on which shares of Common Stock are then trading, if any (or as reported on any composite index which includes such principal exchange), on the trading day previous to such date, or if shares were not traded on the trading day previous to such date, then on the next preceding date on which a trade occurred, or (ii) if Common Stock is not traded on an exchange but is quoted on NASDAQ or a successor quotation system, the mean between the closing representative bid and asked prices for the Common Stock on the trading day previous to such date as reported by NASDAQ or such successor quotation system; or (iii) if Common Stock is not publicly traded on an exchange and not quoted on NASDAQ or a successor quotation system, the Fair Market Value of a share of Common Stock as established by the Committee (or the Board, in the case of grants to Independent Directors) acting in good faith. 1.14. Independent Director. "Independent Director" shall mean a member of the Board who is not an Employee of the Company. 1.15. Non-Qualified Stock Option. "Non-Qualified Stock Option" shall mean a stock option which does not constitute an "incentive stock option" under Section 422 of the Code. 1.16. Option. "Option" shall mean a Non-Qualified Stock Option granted under Article III of this Plan. All Options granted under this Plan shall be Non-Qualified Stock Options. 1.17. Optionee. "Optionee" shall mean an Employee granted an Option under this Plan. 1.18. Plan. "Plan" shall mean The 1998 New-Hire Stock Option Plan of Sunterra Corporation. 1.19. QDRO. "QDRO" shall mean a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. 1.20. 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. 1.21. Subsidiary. "Subsidiary" shall mean (i) 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 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain and (ii) any partnership or limited liability company in which the Company (A) directly or indirectly 3 4 holds a managing partner or managing member interest or (B) is entitled to 50 percent or more of the profits or assets upon dissolution. 1.22. Termination of Employment. "Termination of Employment" shall mean the time when the employee-employer relationship between an Optionee and the Company or any Subsidiary is terminated for any reason, with or without cause, 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 reemployment or 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. SHARES SUBJECT TO PLAN 2.1. Shares Subject to Plan. (a) The shares of stock subject to Options granted under the Plan shall be Common Stock, initially shares of the Company's Common Stock, par value $.01 per share. The aggregate number of such shares which may be issued upon exercise of such Options shall not exceed two hundred fifty thousand (250,000) shares of Common Stock. The shares of Common Stock issuable upon exercise of such Options may be either previously authorized but unissued shares or treasury shares. (b) The maximum number of shares which may be subject to Options granted under the Plan to any individual in any fiscal year shall not exceed the Award Limit. 2.2. Add-back of Options and Other Rights. If any Option expires or is canceled without having been fully exercised, or is purchased by the Company in whole or in part for cash as permitted by this Plan, the number of shares subject to such Option but as to which such Option was not exercised prior to its expiration, cancellation or exercise may again be optioned or granted hereunder, subject to the limitations of Section 2.1. Furthermore, any shares subject to Options which are adjusted pursuant to Section 7.3 and become exercisable with respect to shares of stock of another corporation shall be considered cancelled and may again be optioned or granted hereunder, subject to the limitations of Section 2.1. Shares of 4 5 Common Stock which are delivered by the Optionee or withheld by the Company upon the exercise of any Option under this Plan, in payment of the exercise price thereof, may again be optioned or granted hereunder, subject to the limitations of Section 2.1. ARTICLE III. GRANTING OF OPTIONS 3.1. Eligibility. Any newly hired Employee not previously employed by the Company and with respect to whom Options are to be granted as a material inducement to such Employee's entering into an employment contract with the Company shall be eligible to be granted Options hereunder. 3.2. Non-Qualified Options. No Option granted under this Plan shall constitute an "incentive stock option" under Section 422 of the Code. 3.3. Granting of Options (a) The Committee shall from time to time, in its absolute discretion, and subject to applicable limitations of this Plan: (i) Determine which eligible Employees are key Employees and select from among the key Employees such of them as in its opinion should be granted Options; (ii) Subject to the Award Limit, determine the number of shares to be subject to such Options granted to the selected key Employees; (iii) Determine the terms and conditions of such Options, consistent with this Plan. (b) Upon the selection of a key Employee to be granted an Option, the Committee shall instruct the Secretary of the Company to issue the Option and may impose such conditions on the grant of the Option as it deems appropriate. Without limiting the generality of the preceding sentence, the Committee may, in its discretion and on such terms as it deems appropriate, require as a condition on the grant of an Option to an Employee that the Employee surrender for cancellation some or all of the unexercised Options which have been previously granted to him under this Plan or otherwise. An Option, the grant of which is conditioned upon such surrender, may have an option price lower (or higher) than the exercise price of such surrendered Option, may cover the same (or a lesser or greater) number of shares as such surrendered Option, may contain such other terms as the Committee deems appropriate, and shall be exercisable in accordance with its terms, without regard to the number of shares, price, exercise period or any other term or condition of such surrendered Option. 3.4. Employment Agreement. Options shall be granted only in connection with and as a material inducement to the execution of an employment agreement by and between 5 6 the Optionee and the Company which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. ARTICLE IV. TERMS OF OPTIONS 4.1. Option Agreement. Each Option shall be evidenced by a written Stock Option Agreement, which shall be executed by the Optionee and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. 4.2. Option Price. The price per share of the shares subject to each Option shall be set by the Committee; provided, however, that such price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted. 4.3. Option Term. The term of each Option shall be set by the Committee in its discretion; provided, however, that such term shall not be more than ten (10) years from the date the Option is granted. Notwithstanding anything contained herein, unless the Committee provides otherwise pursuant to the terms of the Option, if an Option (or portion thereof) is not exercisable solely by reason of Section 4.4(c) on the date on which such Option would otherwise terminate pursuant to the terms of such Option, such Option (or portion thereof) shall not terminate until three (3) months after such Option (or portion thereof) thereafter ceases to be subject to Section 4.4(c). The Committee may extend the term of any outstanding Option in connection with any Termination of Employment of the Optionee, or amend any other term or condition of such Option relating to such a termination. 4.4. Option Vesting (a) The period during which the right to exercise an Option in whole or in part vests in the Optionee shall be set by the Committee and the Committee may determine that an Option may not be exercised in whole or in part for a specified period after it is granted. At any time after grant of an Option, the Committee may, in its sole and absolute discretion and subject to whatever terms and conditions it selects, accelerate the period during which an Option vests. (b) No portion of an Option which is unexercisable at Termination of Employment shall thereafter become exercisable, except as may be otherwise provided by the Committee either in the Stock Option Agreement or by action of the Committee following the grant of the Option. (c) Notwithstanding anything contained herein, no Option (or portion thereof) shall be exercisable by any person to the extent that the Company's federal income tax deduction 6 7 with respect to the exercise of such Option (or portion thereof) would be subject to disallowance pursuant to Section 162(m) of the Code, or any successor thereto. 4.5. Consideration. In consideration of the granting of an Option, the Optionee shall agree, in the written Stock Option Agreement, to remain in the employ of the Company or any Subsidiary for a period of at least one year after the Option is granted (or such shorter period as may be fixed in the Stock Option Agreement or by action of the Committee or the Board following grant of the Option). Nothing in this Plan or in any Stock Option Agreement hereunder shall confer upon any Optionee any right to continue in the employ of the Company or any Subsidiary, or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Optionee at any time for any reason whatsoever, with or without good cause. ARTICLE V. EXERCISE OF OPTIONS 5.1. Partial Exercise. An exercisable Option may be exercised in whole or in part. However, an Option shall not be exercisable with respect to fractional shares and the Committee may require that, by the terms of the Option, a partial exercise be with respect to a minimum number of shares. 5.2. Manner of Exercise. All or a portion of an exercisable Option shall be deemed exercised upon delivery of all of the following to the Secretary of the Company or his office: (a) A written notice complying with the applicable rules established by the Committee stating that the Option, or a portion thereof, is exercised. The notice shall be signed by the Optionee or other person then entitled to exercise the Option or such portion; (b) Such representations and documents as the Committee, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act of 1933, as amended, and any other federal or state securities laws or regulations. The Committee or Board may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer notices to agents and registrars; (c) In the event that the Option shall be exercised pursuant to Section 7.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option; and (d) Full cash payment to the Secretary of the Company for the shares with respect to which the Option, or portion thereof, is exercised. However, the Committee may in its discretion (i) allow a delay in payment up to thirty (30) days from the date the Option, or portion thereof, is exercised; (ii) allow payment, in whole or in part, through the delivery of shares of 7 8 Common Stock owned by the Optionee, duly endorsed for transfer to the Company with a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof; (iii) allow payment, in whole or in part, through the delivery of property of any kind which constitutes good and valuable consideration; (iv) allow payment, in whole or in part, through the delivery of a full recourse promissory note bearing interest (at no less than such rate as shall then preclude the imputation of interest under the Code) and payable upon such terms as may be prescribed by the Committee or the Board, or (v) allow payment through any combination of the consideration provided in the foregoing subparagraphs (ii), (iii) and (iv). In the case of a promissory note, 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. 5.3. Conditions to Issuance of Stock Certificates. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of any 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; (b) The completion of any registration or other qualification of such shares under any state or federal law, or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body which the Committee or Board shall, in its absolute discretion, deem necessary or advisable; (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; (d) The lapse of such reasonable period of time following the exercise of the Option as the Committee may establish from time to time for reasons of administrative convenience; and (e) The receipt by the Company of full payment for such shares, including payment of any applicable withholding tax. 5.4. Rights as Stockholders. The holders of Options shall not be, nor have any of the rights or privileges of, stockholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such shares have been issued by the Company to such holders. 5.5. Ownership and Transfer Restrictions. The Committee, in its absolute discretion, may impose such restrictions on the ownership and transferability of the shares purchasable upon the exercise of an Option as it deems appropriate. Any such restriction shall be 8 9 set forth in the respective Stock Option Agreement and may be referred to on the certificates evidencing such shares. ARTICLE VI. ADMINISTRATION 6.1. Compensation Committee. The Compensation Committee (or another committee or a subcommittee of the Board assuming the functions of the Committee under this Plan) shall consist solely of two or more Independent Directors appointed by and holding office at the pleasure of the Board, each of whom is a "non-employee director" (as defined by Rule 16b-3). Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee may be filled by the Board. 6.2. Duties and Powers of Committee. It shall be the duty of the Committee to conduct the general administration of this Plan in accordance with its provisions. The Committee shall have the power to interpret this Plan and the agreements pursuant to which Options are granted, and to adopt such rules for the administration, interpretation, and application of this Plan as are consistent therewith and to interpret, amend or revoke any such rules. Any such grant under this Plan need not be the same with respect to each Optionee. 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 any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee. 6.3. Majority Rule; Unanimous Written Consent. The Committee shall act by a majority of its members in attendance at a meeting at which a quorum is present or by a memorandum or other written instrument signed by all members of the Committee. 6.4. Compensation; Professional Assistance; Good Faith Actions. Members of the Committee shall receive such compensation for their services as members as may be determined by the Board. All expenses and liabilities which members of the Committee incur in connection with the administration of this Plan shall be borne by the Company. The Committee may, with the approval of the Board, employ attorneys, consultants, accountants, appraisers, brokers, or other persons. The Committee, the Company and the Company's officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee or the Board in good faith shall be final and binding upon all Optionees, the Company and all other interested persons. No member of the Committee or the Board shall be personally liable for any action, determination or interpretation made in good faith with respect to this Plan or Options, and all members of the Committee and the Board shall be fully protected by the Company in respect of any such action, determination or interpretation. 9 10 ARTICLE VII. MISCELLANEOUS PROVISIONS 7.1. Not Transferable. No Option under this Plan may be sold, pledged, assigned, or transferred in any manner other than by will or the laws of descent and distribution or pursuant to a QDRO, unless and until such Option has been exercised, the shares underlying such Option have been issued, and all restrictions applicable to such shares have lapsed. No Option or interest or right therein 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, except to the extent that such disposition is permitted by the preceding sentence. During the lifetime of the Optionee, only he may exercise an Option (or any portion thereof) granted to him under the Plan, unless it has been disposed of pursuant to a QDRO. After the death of the Optionee, any exercisable portion of an Option may, prior to the time when such portion becomes unexercisable under the Plan or the applicable Stock Option Agreement, be exercised by his personal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. 7.2. Amendment, Suspension or Termination of this Plan. Except as otherwise provided in this Section 7.2, this Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board or the Committee. No amendment, suspension or termination of this Plan shall, without the consent of the Optionee, alter or impair any rights or obligations under any Options theretofore granted, unless the Option itself otherwise expressly so provides. No Options may be granted during any period of suspension or after termination of this Plan. 7.3. Changes in Common Stock or Assets of the Company, Acquisition or Liquidation of the Company and Other Corporate Events. (a) Subject to Section 7.3(d), in the event that the Committee determines that any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, liquidation, dissolution, or sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company (including, but not limited to a Corporate Transaction), or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate transaction or event, in the Committee's sole discretion, affects the Common Stock such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the 10 11 benefits or potential benefits intended to be made available under the Plan or with respect to an Option, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of shares of Common Stock (or other securities or property) with respect to which Options may be granted under the Plan (including, but not limited to, adjustments of the limitations in Section 2.1 on the maximum number and kind of shares which may be issued and adjustments of the Award Limit), (ii) the number and kind of shares of Common Stock (or other securities or property) subject to outstanding Options, and (iii) the grant or exercise price with respect to any Option. (b) Subject to Section 7.3(d), in the event of any Corporate Transaction or other transaction or event described in Section 7.3(a) or any unusual or nonrecurring transactions or events affecting the Company, any affiliate of the Company, or the financial statements of the Company or any affiliate, or of changes in applicable laws, regulations, or accounting principles, the Committee in its discretion is hereby authorized to take any one or more of the following actions whenever the Committee determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any Option under this Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles: (i) In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of the applicable Stock Option Agreement or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Optionee's request, for either the purchase of any such Option for an amount of cash equal to the amount that could have been attained upon the exercise of such Option had such Option been currently exercisable or fully vested or the replacement of such Option with other rights or property selected by the Committee in its sole discretion; (ii) In its sole and absolute discretion, the Committee may provide, either by the terms of such Option or by action taken prior to the occurrence of such transaction or event that it cannot be exercised after such event; (iii) In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of such Option or by action taken prior to the occurrence of such transaction or event, that for a specified period of time prior to such transaction or event, such Option shall be exercisable as to all shares covered thereby, notwithstanding anything to the contrary in (i) Section 4.4 or (ii) the provisions of such Option; 11 12 (iv) In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of such Option or by action taken prior to the occurrence of such transaction or event, that upon such event, such Option be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; and (v) In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee may make adjustments in the number and type of shares of Common Stock (or other securities or property) subject to outstanding Options and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding Options and Options which may be granted in the future. (c) Subject to Section 7.3(d) and 7.8, the Committee may, in its discretion, include such further provisions and limitations in any Stock Option Agreement, as it may deem equitable and in the best interests of the Company. (d) No such adjustment or action shall be authorized to the extent such adjustment or action would result in short-swing profits liability under Section 16 or violate the exemptive conditions of Rule 16b-3 unless the Committee determines that the Option is not to comply with such exemptive conditions. The number of shares of Common Stock subject to any Option shall always be rounded to the next whole number. (e) In the event of any Corporate Transaction or Change in Control, each outstanding Option shall, immediately prior to the effective date of the Corporate Transaction or Change in Control, automatically become fully exercisable for all of the shares of Common Stock underlying such Option, and may be exercised for any or all of those shares as fully-vested shares of Common Stock. 7.4. Tax Withholding. The Company shall be entitled to require payment in cash or deduction from other compensation payable to each Optionee of any sums required by federal, state or local tax law to be withheld with respect to the issuance, vesting or exercise of any Option. The Committee may in its discretion and in satisfaction of the foregoing requirement allow such Optionee to elect to have the Company withhold shares of Common Stock otherwise issuable under such Option (or allow the return of shares of Common Stock) having a Fair Market Value equal to the sums required to be withheld. 7.5. Loans. The Committee may, in its discretion, extend one or more loans to key Employees in connection with the exercise or receipt of an Option granted under this Plan. The terms and conditions of any such loan shall be set by the Committee. 12 13 7.6. Forfeiture Provisions. Pursuant to its general authority to determine the terms and conditions applicable to Options under the Plan, the Committee shall have the right (to the extent consistent with the applicable exemptive conditions of Rule 16b-3) to provide, in the terms of any Option granted under the Plan, or to require the recipient to agree by separate written instrument, that (i) any proceeds, gains or other economic benefit actually or constructively received by the recipient upon any receipt or exercise of the Option, or upon the receipt or resale of any Common Stock underlying such Option, must be paid to the Company, and (ii) the Option shall terminate and any unexercised portion of such Option (whether or not vested) shall be forfeited, if (a) a Termination of Employment occurs prior to a specified date, or within a specified time period following receipt or exercise of the Option, or (b) the recipient at any time, or during a specified time period, engages in any activity in competition with the Company, or which is inimical, contrary or harmful to the interests of the Company, as further defined by the Committee (or the Board, as applicable). 7.7. Limitations Applicable to Section 16 Persons and Performance-Based Compensation. Notwithstanding any other provision of this Plan, this Plan, and any Option granted to any individual who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, the Plan and Options granted hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule. 7.8. Effect of Plan Upon Options and Compensation Plans. The adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company or any Subsidiary. Nothing in this Plan shall be construed to limit the right of the Company (i) to establish any other forms of incentives or compensation for Employees, Independent Directors or consultants of the Company or any Subsidiary or (ii) to grant or assume options or other rights otherwise than under this Plan in connection with any proper corporate purpose including but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, partnership, firm or association. 7.9. Compliance with Laws. This Plan, the granting and vesting of Options under this Plan and the issuance and delivery of shares of Common Stock and the payment of money under this Plan or under Options granted hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. To the 13 14 extent permitted by applicable law, the Plan and Options granted hereunder shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. 7.10. Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Plan. 7.11. Governing Law. This Plan and any agreements hereunder shall be administered, interpreted and enforced under the internal laws of the State of Maryland without regard to conflicts of laws thereof. 14 EX-21 8 SUBSIDIARIES OF SUNTERRA CORPORATION 1 EXHIBIT 21 SUBSIDIARIES OF SIGNATURE RESORTS, INC.
NAME JURISDICTION OF ORGANIZATION AKGI - St. Maarten, N.V...................... Delaware and Netherlands Antilles All Seasons Resorts, Inc..................... Arizona All Seasons Resorts, Inc..................... Texas Grand Beach Resort, Limited Partnership...... Georgia (limited partnership) Greensprings Associates...................... Virginia (joint venture) Herich Tahoe Development..................... Nevada (general partnership) Lake Tahoe Resort Partners, LLC.............. California (limited liability company) MMG Development Corp. ....................... Florida Poipu Resort Partners, L.P. ................. Hawaii (limited partnership) Port Royal Resort, L.P. ..................... South Carolina (limited partnership) Powhatan Associates ......................... Virginia (joint venture) Signature Grand Villas, Inc. ................ U.S. Virgin Islands Sunterra Pacific, Inc. ...................... Washington Torres Mazatlan S.A. de C.V. ................ Mexico Torres Vallarta S.A. de C.V. ................ Mexico West Maui Resort Partners, L.P. ............. Delaware (limited partnership)
EX-23.1 9 CONSENT OF ARTHUR ANDERSEN LLP 1 [ARTHUR ANDERSEN LLP LOGO] Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into Sunterra Corporation's (formerly Signature Resorts, Inc.) previously filed Registration Statement File Nos. 333-63621, 333-47215, 333-46511, 333-15361, 333-30285 and 333-09096. March 29, 1999, Orlando, Florida EX-23.2 10 CONSENT OF KPMG 1 EXHIBIT 23.2 [KPMG LETTERHEAD] The Board of Directors and Shareholders LSI Group Holdings Plc Pine Lake Resort CARNFORTH Lancashire LA6 IJZ 29 March 1999 Dear Sirs: CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the registration statements Nos. 333-15361, 333-30285, 333-46511, 333-47215, 333-63621 and 333-09096 of Sunterra Corporation (formerly Signature Resorts Inc.) of our report dated March 27, 1997 (copy attached), with respect to the consolidated financial statements of LSI Group Holdings Plc at December 31, 1996, which report appears in the December 31, 1998 annual report on form 10-K of Sunterra Corporation. Yours sincerely, KPMG Chartered Accountants EX-23.3 11 CONSENT OF SCHREEDER, WHEELER & FLINT, LLP 1 EXHIBIT 23.3 CONSENT OF EXPERT We hereby consent to the reference to our firm in Signature Resorts, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, under the caption "Applicability of Federal Securities Laws to the Sale of Vacation Interests" in the section entitled "Business and Properties." SCHREEDER, WHEELER & FLINT, LLP Dated: March 29, 1999 EX-27 12 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 DEC-31-1998 54,201 0 358,851 22,869 336,620 0 81,125 0 1,021,132 0 478,000 0 0 359 251,354 1,021,132 359,426 449,954 85,649 249,477 71,349 12,616 43,767 72,745 28,371 44,374 0 129 1,466 42,779 1.19 1.16 FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
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