UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. _____)
Filed by the Registrant S
Filed by a Party other than the Registrant ¨
Check the appropriate box:
☐ | Preliminary Proxy Statement. | |
☐ | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)). | |
☒ | Definitive Proxy Statement. | |
☐ | Definitive Additional Materials. | |
☐ | Soliciting Material Pursuant to §240.14a-12. | |
Hovnanian Enterprises, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
☒ | No fee required. | ||
☐ | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. | ||
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(2) | Aggregate number of securities to which transaction applies: | ||
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☐ | Fee paid previously with preliminary materials. | ||
☐ | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. | ||
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HOVNANIAN ENTERPRISES, INC. | |
110 West Front Street, P.O. Box 500, Red Bank, N.J. 07701 (732) 747-7800 | |
January 27, 2014
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders, which will be held on Tuesday, March 27, 2012,11, 2014, at the offices of Simpson Thacher & Bartlett LLP, 425 Lexington Avenue, New York, New York 10017. The meeting will start promptly at 10:30 a.m., Eastern Daylight Time.
In accordance with the Securities and Exchange CommissionCommission’s rule allowing companies to furnish proxy materials to their shareholders over the Internet, the Company is primarily furnishing proxy materials to our shareholders of Class A Common Stock and registered shareholders of Class B Common Stock on the Internet, rather than mailing paper copies of the materials (including our Annual Report to Shareholders for fiscal 2011)2013) to each of those shareholders. We believe that this e-proxy process will expedite our shareholders’ receipt of proxy materials, lower costs, and reduce the environmental impact of our annual meeting.Annual Meeting. If you received only a Notice Regarding the Availability of Proxy Materials (the “Notice”) by mail or electronic mail, you will not receive a paper copy of the proxy materials unless you request one. Instead, the Notice will instruct you as to how you may access and review the proxy materials on the Internet. The Notice will also instruct you as to how you may access your proxy card to vote over the Internet, by telephone or by mail. If you received a Notice by mail or electronic mail and would like to receive a paper copy of our proxy materials, free of charge, please follow the instructions included in the Notice.
We anticipate that the Notice will first be mailed to our shareholders on or about February 14, 2012,January 27, 2014, and will be sent by electronic mail to our shareholders who have opted for such means of delivery on or about February 14, 2012.
All shareholders of record of Class B Common Stock who hold in nominee name have been sent a full set of paper proxy materials, including a proxy card. As in the past, shareholders of record of Class B Common Stock held in nominee name will only be able to vote by returning the enclosed proxy card in the envelope provided for this purpose or by voting in person at the Company’s 20122014 Annual Meeting.
Attached to this letter is a Notice of Annual Meeting of Shareholders and Proxy Statement, which describesdescribe the business to be conducted at the meeting. We will also report on matters of current interest to our shareholders.
It is important that your shares be represented and voted at the meeting. Therefore, we urge you to complete, sign, date and return the enclosed proxy card or, if applicable, register your vote via the Internet or by telephone according to the instructions on the proxy card. If you attend the meeting, you may still choose to vote your shares personally even though you have previously designated a proxy.
We sincerely hope you will be able to attend and participate in the Company’s 20122014 Annual Meeting. We welcome the opportunity to meet with many of you and give you a firsthand report on the progress of your Company.
Sincerely yours, | |
Ara K. Hovnanian Chairman of the Board |
PROXY VOTING METHODS
If at the close of business on January 30, 2012,14, 2014, you were a shareholder of record or held shares through a broker or bank, you may vote your shares as described below or you may vote in person at the Annual Meeting. To reduce our administrative and postage costs, we would appreciate if shareholders of Class A Common Stock and registered shareholders of Class B Common Stock would please vote through the Internet or by telephone, both of which are available 24 hours a day. You may revoke your proxies at the times and in the manners described on page 1 of the Proxy Statement. If you are a shareholder of record or hold shares through a broker or bank and are voting by proxy, your vote must be received by 11:59 p.m. (Eastern Daylight Time) on March 26, 201210, 2014 to be counted unless otherwise noted below.
To vote by proxy:
Shareholders of Class A Common Stock and Registered Shareholders of Class B Common Stock:
BY INTERNET
● | Go to the website atwww.proxyvote.com and follow the instructions, 24 hours a day, seven days a week. |
● | You will need the 12-digit Control Number included on your Notice Regarding the Availability of Proxy Materials to obtain your records and to create an electronic voting instruction form. |
BY TELEPHONE
● | From a touch-tone telephone, dial (800) 690-6903 and follow the recorded instructions, 24 hours a day, seven days a week. |
● | You will need the 12-digit Control Number included on your Notice Regarding the Availability of Proxy Materials in order to vote by telephone. |
BY MAIL
● | Request a proxy card from us by following the instructions on your Notice Regarding the Availability of Proxy Materials. |
● | When you receive the proxy card, mark your selections on the proxy card. |
● | Date and sign your name exactly as it appears on your proxy card. |
● | Mail the proxy card in the postage-paid envelope that will be provided to you. |
● | Mailed proxy cards must be received no later than March |
Shareholders of Record of Class B Common Stock held in Nominee Name:
● | Nominees of shareholders of Class B Common Stock may only appoint proxies by signing, dating and returning the enclosed proxy card in the envelope provided. |
● | Shares of Class B Common Stock held in nominee name will be entitled to ten votes per share only if the beneficial owner voting instruction card and the nominee proxy card relating to such shares is properly completed, mailed and received not less than 3 nor more than 20 business days prior to March |
YOUR VOTE IS IMPORTANT—THANK YOU FOR VOTING
HOVNANIAN ENTERPRISES, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Hovnanian Enterprises, Inc. will be held on Tuesday, March 27, 2012,11, 2014, at the offices of Simpson Thacher & Bartlett LLP, 425 Lexington Avenue, New York, New York 10017 at 10:30 a.m. for the following matters:
1. | The election of directors of the Company for the ensuing year, to serve until the next Annual Meeting of Shareholders of the Company, and until their respective successors may be elected and qualified; |
2. | The ratification of the selection of Deloitte & Touche LLP, an independent registered public accounting firm, to examine the financial statements of the Company for the year ending October 31, |
3. | The approval of the 2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan; |
4. | The approval of the Amended and Restated Hovnanian Enterprises, Inc. Senior Executive Short-Term Incentive Plan; |
5. | To approve, in a non-binding advisory vote, the compensation of the Company’s named executive officers; and |
6. | The transaction of such other business as may properly come before the meeting and any adjournment thereof. |
The Board of Directors recommends that you vote FOR each of the nominees listed in proposal 1, FOR proposal 2, FOR proposal 3, FOR proposal 4 and FOR proposal 3.
Only shareholders of record at the close of business on January 30, 201214, 2014 are entitled to notice of, and to vote at, the Annual Meeting. Accompanying this Notice of Annual Meeting of Shareholders is a proxy statement, proxy card(s) and the Company’s Annual Report for the fiscal year ended October 31, 2011.2013.
To ensure your shares are voted, if you are a shareholder of Class A Common Stock or a registered shareholder of Class B Common Stock, you may vote your shares over the Internet, by telephone, or by requesting a paper proxy card to complete, sign and return by mail. These voting procedures are described on the preceding page and on the proxy card.
If you are a shareholder of record of Class B Common Stock held in nominee name, you may only appoint proxies to vote your shares by signing, dating and returning the enclosed proxy card in the envelope provided.
All shareholders are urged to attend the meeting in person or by proxy. Shareholders who do not expect to attend the meeting are requested to complete, sign and date the enclosed proxy card and return it promptly, or, if applicable, to register their vote via the Internet or by telephone according to the instructions on the preceding page and the proxy card.
By order of the Board of Directors, | |
MICHAEL DISCAFANI Secretary |
January 27, 2014
If you are a shareholder of record and you plan to attend the Annual Meeting, please mark the appropriate box on your proxy card or, if applicable, so indicate when designating a proxy via the Internet or by telephone. If your shares are held by a bank, broker or other intermediary and you plan to attend, please send written notice to Hovnanian Enterprises, Inc., 110 West Front Street, P.O. Box 500, Red Bank, New Jersey 07701, Attention: Michael Discafani, Secretary, and enclose evidence of your ownership (such as a letter from the bank, broker or other intermediary confirming your ownership or a bank or brokerage firm account statement). The names of all those planning to attend will be placed on an admission list held at the registration desk at the entrance to the meeting. In order to be admitted to the Annual Meeting, you will need a form of personal identification (such as a driver’s license) along with either your Notice, proxy card or proof of Common Stock ownership. If your shares are held beneficially in the name of a bank, broker or other holder of record and you wish to be admitted to the Annual Meeting of Shareholders, you must present proof of your ownership of our Common Stock, such as a bank or brokerage account statement. If you do not plan to attend the Annual Meeting, please designate a proxy by mail or, if applicable, via the Internet or by telephone. If you choose to vote by mail, please complete, sign and date the enclosed proxy card and return it promptly so that your shares will be voted. If you have received a hard copy of the proxy materials, the enclosed envelope requires no postage if mailed in the United States. |
TABLE OF CONTENTS
1 | |
VOTING RIGHTS AND SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 2 |
4 | |
5 | |
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD OF DIRECTORS | 8 |
(2) RATIFICATION OF THE SELECTION OF AN INDEPENDENT REGISTERED PUBIC ACCOUNTING FIRM | 10 |
(3) APPROVAL OF THE 2012 HOVNANIAN ENTERPRISES, INC. AMENDED AND RESTATED STOCK INCENTIVE PLAN | 11 |
19 | |
23 | |
25 | |
27 | |
27 | |
31 | |
34 | |
35 | |
47 | |
48 | |
48 | |
49 | |
50 | |
50 | |
54 | |
58 | |
61 | |
62 | |
Potential Payments Upon Termination or Change-in-Control Table | 64 |
66 | |
71 | |
72 | |
72 | |
73 | |
73 | |
74 | |
75 | |
75 | |
78 | |
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79 |
HOVNANIAN ENTERPRISES, INC.
110 WEST FRONT STREET
P.O. BOX 500
RED BANK, NEW JERSEY 07701
PROXY STATEMENT
The accompanying proxy is solicited on behalf of the Board of Directors of Hovnanian Enterprises, Inc. (the “Company”, “we”, “us”, or “our”) for use at the Annual Meeting of Shareholders referred to in the foregoing noticeNotice and at any adjournment thereof.
Shares represented by properly executed proxies that are received or executed in time and not revoked will be voted in accordance with the specifications thereon. If no specifications are made in an executed proxy, the persons named in the accompanying proxy card(s) will vote the shares represented by such proxies for the Board of Directors’ slate of directors;directors, for the ratification of the selection of Deloitte & Touche LLP, an independent registered public accounting firm, to examine the financial statements of the Company for the fiscal year ending October 31, 2012, and2014, for the approval of the 2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan, (the “2012 Plan”),for approval of the Amended and Restated Hovnanian Enterprises, Inc. Senior Executive Short-Term Incentive Plan and for the approval, in a non-binding advisory vote, of the compensation of the Company's named executive officers and on any other matters as recommended by the Board of Directors, unless contrary instructions are given.
Any person may revoke a previously designated proxy before it is exercised. If you voted by Internet, telephone or mail and are a shareholder of record, you may change your vote and revoke your proxy by (i) delivering written notice of revocation to Michael Discafani, Secretary, provided such statement is received no later than March 26, 2012,10, 2014, (ii) voting again by Internet or telephone at a later time before the closing of voting facilities at 11:59 p.m. (Eastern Daylight Time) on March 26, 2012,10, 2014, (iii) submitting a properly signed proxy card with a later date that is received no later than March 26, 201210, 2014 or (iv) revoking your proxy and voting in person at the 20122014 Annual Meeting. If you hold your shares in street name, you may submit new voting instructions by contacting your bank, broker or other nominee. You may also change your vote or revoke your proxy in person at the 20122014 Annual Meeting if you obtain a signed proxy from the record holder (broker or other nominee) giving you the right to vote the shares. Please note that attendance at the 20122014 Annual Meeting will not by itself revoke a proxy.
We will bear the costs of soliciting proxies from the holders of our Class A Common Stock and Class B Common Stock (collectively, “Common Stock”). We are initially soliciting these proxies by mail and e-mail, but solicitation may be made by our directors, officers and selected other employees telephonically, electronically or by other means of communication. Directors, officers and employees who help us in the solicitation will not be specially compensated for those services, but they may be reimbursed for their out-of-pocket expenses incurred in connection with the solicitation. Brokerage houses, nominees, fiduciaries and other custodians will be requested to forward soliciting materials to beneficial owners and will be reimbursed for their reasonable out-of-pocket expenses incurred in sending proxy materials to beneficial owners.
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Board of Directors has set January 14, 2014 as the record date for the determination2014 Annual Meeting of shareholders entitled to vote at the meeting wasShareholders. As of the close of business on January 30, 2012. As of thatthe record date, the outstanding voting securities of the Company consisted of 81,851,185124,899,460 shares of Class A Common Stock, each share entitling the holder thereof to one vote, and 14,661,37814,805,405 shares of Class B Common Stock, each share entitling the holder thereof to ten votes, provided that specified ownership criteria have been met. Other than as set forth in the table below, there are no persons known to the Company to be the beneficial owners of shares representing more than 5% of either the Company’s Class A Common Stock or Class B Common Stock, which represent the classes of the Company’s voting stock.
The following table sets forth as of January 30, 201214, 2014, (1) the Class A Common Stock and Class B Common Stock of the Company beneficially owned by holders of more than 5% of either the Class A Common Stock or the Class B Common Stock of the Company and (2) the Class A Common Stock, Class B Common Stock and Depositary Shares of the Company beneficially owned by each Director, each nominee for Director, each executive officer named in the tables set forth under “Executive Compensation” below and all Directors and executive officers as a group. The table does not include ownership with respect to our 7.25% Tangible Equity Units because none of the individuals or groups listed below has any beneficial ownership of such securities.
Class A Common Stock (1) | Class B Common Stock (1) | Depositary Shares(1) (3) | ||||||||||||||||||||||
Amount and Nature of Beneficial Ownership | Percent of Class (2) | Amount and Nature of Beneficial Ownership | Percent of Class (2) | Amount and Nature of Beneficial Ownership | Percent of Class (2) | |||||||||||||||||||
Directors, Nominees for Director, Named Executive Officers and Directors and Executive Officers as a Group | ||||||||||||||||||||||||
Ara K. Hovnanian (4) | 3,786,237 | 3.03 | % | 2,466,227 | 15.40 | % | — | — | ||||||||||||||||
Robert B. Coutts | 142,199 | 0.11 | % | — | — | — | — | |||||||||||||||||
Edward A. Kangas | 239,217 | 0.19 | % | — | — | — | — | |||||||||||||||||
Joseph A. Marengi | 131,112 | 0.10 | % | — | — | — | — | |||||||||||||||||
Brad G. O’Connor | 73,908 | 0.06 | % | — | — | — | — | |||||||||||||||||
Vincent Pagano Jr. | 9,170 | 0.01 | % | — | — | — | — | |||||||||||||||||
Thomas J. Pellerito | 1,262,914 | 1.01 | % | — | — | — | — | |||||||||||||||||
J. Larry Sorsby | 747,114 | 0.60 | % | — | — | — | — | |||||||||||||||||
David G. Valiaveedan | 52,219 | 0.04 | % | — | — | 2,000 | 0.04 | % | ||||||||||||||||
Stephen D. Weinroth | 282,509 | 0.23 | % | 4,500 | 0.03 | % | — | — | ||||||||||||||||
All Directors and executive officers as a group (10 persons) | 13,853,991 | 10.98 | % | 9,609,373 | 60.00 | % | 2,000 | 0.04 | % | |||||||||||||||
Holders of More Than 5% | ||||||||||||||||||||||||
Estate of Kevork S. Hovnanian (5) | 6,596,543 | 5.28 | % | 3,255,251 | 21.99 | % | — | — | ||||||||||||||||
Peter S. Reinhart as Trustee of the Sirwart Hovnanian 1994 Marital Trust (6) | — | — | 5,210,091 | 35.19 | % | — | — | |||||||||||||||||
Hovnanian Family 2012L.L.C. (7) | 970,849 | 0.78 | % | 3,883,395 | 26.23 | % | — | — |
Class A Common Stock (1) | Class B Common Stock (1) | Depositary Shares (1) (3) | ||||||||||||||||||||||
Directors, Nominees for Director, Certain Executive Officers, Directors and Executive Officers as a Group and Holders of More Than 5% | Amount and Nature of Beneficial Ownership | Percent of Class (2) | Amount and Nature of Beneficial Ownership | Percent of Class (2) | Amount and Nature of Beneficial Ownership | Percent of Class (2) | ||||||||||||||||||
Estate of Kevork S. Hovnanian (4) | 7,567,392 | 9.25 | % | 7,138,646 | 48.69 | % | ||||||||||||||||||
Ara K. Hovnanian (5) | 4,137,001 | 5.05 | % | 1,493,814 | 9.93 | % | ||||||||||||||||||
Robert B. Coutts | 101,019 | 0.12 | % | |||||||||||||||||||||
Edward A. Kangas | 187,236 | 0.23 | % | |||||||||||||||||||||
Joseph A. Marengi | 71,119 | 0.09 | % | |||||||||||||||||||||
Brad G. O’Connor | 23,431 | 0.03 | % | |||||||||||||||||||||
Thomas J. Pellerito | 1,163,918 | 1.42 | % | |||||||||||||||||||||
Peter S. Reinhart as Trustee of the Sirwart Hovnanian 1994 Marital Trust (6) | 5,210,091 | 35.54 | % | |||||||||||||||||||||
John J. Robbins | 118,575 | 0.14 | % | |||||||||||||||||||||
J. Larry Sorsby | 199,302 | 0.24 | % | |||||||||||||||||||||
David G. Valiaveedan | 17,160 | 0.02 | % | 2,000 | 0.04 | % | ||||||||||||||||||
Stephen D. Weinroth | 217,736 | 0.27 | % | 4,500 | 0.03 | % | ||||||||||||||||||
All Directors and executive officers as a group (10 persons) | 13,363,889 | 16.23 | % | 13,847,051 | 92.09 | % | 2,000 | 0.04 | % |
(1) | The figures in the table with respect to Class A Common Stock do not include the shares of Class B Common Stock beneficially owned by the specified persons. Shares of Class B Common Stock are convertible at any time on a |
On July 29, 2008, the Company’s Board of Directors declared a dividend of one Preferred Stock Purchase Right for each outstanding share of Class A Common Stock and Class B Common Stock. The dividend was paid to stockholders of record on August 15, 2008. Subject to the terms, provisions and conditions of the Rights Plan, if the Preferred Stock Purchase Rights become exercisable, each Preferred Stock Purchase Right would initially represent the right to purchase from the Company one ten-thousandth of a share of Series B Junior Preferred Stock for a purchase price of $35.00 per share. However, prior to exercise, a Preferred Stock Purchase Right does not give its holder any rights as a stockholder, including without limitation, any dividend, voting or liquidation rights. |
(2) | Based upon the number of shares outstanding plus options currently exercisable or exercisable within 60 days of January |
(3) | Each Depositary Share represents 1/1,000th of a share of 7.625% Series A Preferred Stock. |
(4) | Includes |
(5) | Includes 6,156,543 shares of Class A Common Stock and 3,255,251 shares of Class B Common Stock held by the Executors of the Estate of Kevork S. Hovnanian, deceased (the “Estate of Kevork S. Hovnanian”). Ara K. Hovnanian is special purpose Executor with respect to investments in the Companyand, accordingly, the shares held by the Estate of Kevork S. Hovnanian are included in “All Directors and executive officers as a group,” but such shares are not also included in |
(6) |
Includes 4,833,826 shares of Class B Common Stock held by the Kevork S. Hovnanian Family Limited Partnership, a Connecticut limited partnership (the “Limited Partnership”). Peter S. Reinhart, as trustee of the Sirwart Hovnanian 1994 Marital Trust (the “Marital Trust”), is the managing general partner of the Limited Partnership and, as such, has the sole power to vote and dispose of the shares of Class B Common Stock held by the Limited Partnership, as well as of the 376,265 shares of Class B Common Stock held directly by the Marital Trust. Mr. Reinhart disclaims beneficial ownership of the shares held by the Limited Partnership and the Marital Trust. |
(7) | Represents 970,849 shares of Class A Common Stock and 3,883,395 shares of Class B Common Stock held by the Hovnanian Family 2012 L.L.C. (the “2012 LLC”). Ara K. Hovnanian is the special purpose manager with respect to investments in the Companyand, accordingly, the shares held by the 2012 LLC are included in “All Directors and executive officers as a group,” but such shares are not also included in Mr. Hovnanian’s separate figure of beneficial ownership. The business address of the 2012 LLC is 110 West Front Street, P.O. Box 500, Red Bank, New Jersey 07701. |
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company’s Based solely on the Company’s review of copies of the forms and amendments of forms it has received and written representations from the Company’s officers and directors, the Company believes that, with respect to the fiscal year ended October 31, executive officers, directors, persons who beneficially own more than 10% of a registered class of the Company’s equity securities and certain entities associated with the foregoing (“Reporting Persons”) to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission (the “SEC”). These Reporting Persons are required by SEC rules to furnish the Company with copies of all Forms 3, 4 and 5, and amendments thereto, that they file with the SEC.2011,2013, all the Reporting Persons complied with all applicable filing requirements.
The Company’s Restated By-laws provide that the Board of Directors shall consist of up to eleven Directors who shall be elected annually by the shareholders. The Company’s AmendedRestated Certificate of Incorporation (the “Certificate(“Certificate of Incorporation”) requires that, at any time when any shares of Class B Common Stock are outstanding, one-third of the Directors shall be independent, as defined therein.
Under the rules of the New York Stock Exchange (the "NYSE"“NYSE”), listed companies that have a controlling shareholderof which more than 50% of the voting power for the election of directors is held by an individual, group or other entity are not required to have a majority of independent directors, as defined by NYSE rules, or to comply with certain other requirements. Because Mr. A. Hovnanian, the Estate of Kevork S. Hovnanian, the Limited Partnership and the 2012 LLC established for members of his family and family trusts hold more than 50% of the voting power of the Company, the Company is a controlled company within the meaning of the rules of the NYSE. However, the Company does not avail itself of any of the exemptions afforded to controlled companies under the NYSE rules. This may change in the future at the Company’s discretion.
The Board of Directors has determined that a Board of Directors consisting of the seven nominees listed below is the best composition in order to satisfy both the independence requirements of the Company’s Certificate of Incorporation as well as the rules of the NYSE. The Board of Directors has also determined that Messrs. Coutts, Kangas, Marengi, RobbinsPagano, and Weinroth are independent as defined under the Company’s Certificate of Incorporation and the NYSE rules.
The following individuals are nominatedhave been recommended to the Board of Directors by the Corporate Governance and Nominating Committee and approved by the Board of Directors to serve as Directors of the Company to hold office until the next Annual Meeting of Shareholders and until their respective successors have been duly elected and qualified.
In the event that any of the nominees for Director should become unavailable to serve as a Director, it is intended that the shares represented by proxies will be voted for such substitute nominees as may be nominated by the Board of Directors, unless the number of Directors constituting a full Board of Directors is reduced. The Company has no reason to believe, however, that any of the nominees is, or will be, unavailable to serve as a Director. Proxies cannot be voted for a greater number of persons than the number of nominees shown below.
Board of Directors
Name | Age | Company Affiliation |
| Year First Became a Director |
| |
Ara K. Hovnanian | 56 | President, Chief Executive Officer, Chairman of the Board & Director |
|
| 1981 |
|
Robert B. Coutts | 63 | Director |
|
| 2006 |
|
Edward A. Kangas | 69 | Director |
|
| 2002 |
|
Joseph A. Marengi | 60 | Director |
|
| 2006 |
|
Vincent Pagano Jr. | 63 | Director |
|
| 2013 |
|
J. Larry Sorsby | 58 | Executive Vice President, Chief Financial Officer & Director |
|
| 1997 |
|
Stephen D. Weinroth | 75 | Director |
|
| 1982 |
|
Name | Age | Company Affiliation | Year First Became a Director | ||||||
Ara K. Hovnanian | 54 | President, Chief Executive Officer, Chairman of the Board & Director | 1981 | ||||||
Robert B. Coutts | 61 | Director | 2006 | ||||||
Edward A. Kangas | 67 | Director | 2002 | ||||||
Joseph A. Marengi | 58 | Director | 2006 | ||||||
John J. Robbins | 72 | Director | 2001 | ||||||
J. Larry Sorsby | 56 | Executive Vice President, Chief Financial Officer & Director | 1997 | ||||||
Stephen D. Weinroth | 73 | Director | 1982 |
Board of Directors — Composition
The Board of Directors seeks to ensure that the Board of Directors is composed of members whose particular experience, qualifications, attributes and skills, when taken together, will allow the Board of Directors to satisfy its oversight responsibilities effectively. As discussed below under “Corporate Governance and Nominating Committee” beginning on page 7,9, a slate of Directors to be nominated for election at the annual shareholders’ meeting each year is approved by the Board of Directors after recommendation by the Corporate Governance and Nominating Committee. In the case of a vacancy on the Board of Directors (other than one resulting from removal by shareholders), the Corporate Governance and Nominating Committee will identify individuals believed to be qualified candidates to serve on the Board of Directors and shall review the candidates who have met those qualifications with the Company’s Chairman who will recommend any director nomineesdetermine if the candidate is eligible for recommendation by the Corporate Governance and Nominating Committee to the full Board of Directors for election.Directors. The Board of Directors will then approve a director nominee to fill the vacancy on the Board of Directors. In identifying candidates for Director, the Corporate Governance and Nominating Committee, the Chairman and the Board of Directors take into account (1) the comments and recommendations of board members regarding the qualifications and effectiveness of the existing Board of Directors or additional qualifications that may be required when selecting new board members that may be made in connection with the self-examinations described below under “Corporate Governance and Nominating Committee” beginning on page 7,9, (2) the requisite expertise and sufficiently diverse backgrounds of the Board of Directors’ overall membership composition, (3) the independence of outside Directors and other possible conflicts of interest of existing and potential members of the Board of Directors and (4) all other factors such bodies and persons consider appropriate. Although the Company has no formal policy regarding diversity, the charter of the Corporate Governance and Nominating Committee includes a statement that it and the Board of Directors believe that diversity is an important component of a board of directors, including such factors as background, skills, experience, expertise, gender, race and culture. As mentioned above, the Corporate Governance and Nominating Committee and the Board of Directors include diversity as one of several criteria that they consider in connection with selecting candidates for the Board of Directors. The Board of Directors seeks to ensure that it is composed of members whose particular background, expertise, qualifications, attributes and skills, when taken together, allow the Board of Directors to satisfy its oversight responsibilities effectively.
When considering whether directors and nominees have the experience, qualifications, attributes and skills, taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the Corporate Governance and Nominating Committee and the Board of Directors focused primarily on the information discussed in each of the Directors’ individual biographies set forth below on pages 57 and 6.8. In particular, with regard to Mr. Coutts, the Corporate Governance and Nominating Committee and the Board of Directors considered his strong background in the manufacturing sector, believing that his experience with a large multinational corporation engaged in the manufacture of complicated products is invaluable in evaluating the multiple integrated processes in the homebuilding business and also valuable in performance management and other aspects of the Company. With regard to Mr. Kangas, the Corporate Governance and Nominating Committee and the Board of Directors considered his significant experience, expertise and background with regard to accounting matters, including the broad perspective brought by his experience in consulting to clients in many diverse industries. With regard to Mr. Robbins,Marengi, the Board of Directors considered his significant experience, expertiseCorporate Governance and background with regard to accounting matters, which includes specialization in homebuilding companies. With regard to Mr. Marengi,Nominating Committee and the Board of Directors considered his strong background in the technology sector, because new technologies and their cost and benefit analyses are important factors in the success of the Company. With regard to Mr. Pagano, the Corporate Governance and Nominating Committee and the Board of Directors considered his significant experience, expertise and background with regard to legal and capital markets matters, including the broad perspective brought by his experience in advising clients in the homebuilding industry and many other diverse industries. With regard to Mr. Weinroth, the Corporate Governance and Nominating Committee and the Board of Directors considered his many years of experience in the investment banking field, which are very valuable to the Company as it continues to evaluate its debt profile and capital structure and various financing and refinancing alternatives. With regard to Mr. Hovnanian, our Chief Executive Officer and Chairman of the Board, the Corporate Governance and Nominating Committee and the Board of Directors considered his more than thirty years of experience with the Company. With regard to Mr. Sorsby, our Chief Financial Officer, the Corporate Governance and Nominating Committee and the Board of Directors considered his more than twenty years of experience with the Company.
Board of Directors — Nominees’ Biographies
Mr. Hovnanian has been Chief Executive Officer since July 1997 after being appointed President in 1988 and Executive Vice President in 1983. Mr. Hovnanian joined the Company in 1979 and has been a Director of the Company since 1981 and was Vice Chairman from 1998 through November 2009. In November 2009, he was elected Chairman of the Board following the death of Kevork S. Hovnanian, the chairman and founder of the Company and the father of Mr. Hovnanian. |
Mr. Coutts retired from the position of Executive Vice President of Lockheed Martin Corporation (NYSE), which he held from 2000 to 2008. Mr. Coutts was President and |
Mr. Kangas was the Global Chairman and Chief Executive Officer of Deloitte | |
Mr. Marengi, | |
Mr. Pagano was a partner at Simpson Thacher & Bartlett LLP until his retirement at the end of 2012. He was the head of the firm’s capital markets practice from 1999 to 2012, and, before that, administrative partner of the firm from 1996 to 1999. He was a member of the firm’s executive committee during nearly all of the 1996 - 2012 period. He also serves on the Boards of Directors of Cheniere Energy Partners GP, LLC, the general partner of Cheniere Energy Partners (NYSE MKT) and L-3 Communications Holdings, Inc. (NYSE). Mr. Pagano serves on the Engineering Advisory Council of Lehigh University. Mr. Pagano was elected to the Board of Directors of Hovnanian Enterprises, Inc. in March 2013 and is the Chairman of the Company’s Corporate Governance and Nominating Committee. |
Mr. Sorsby has been Chief Financial Officer of Hovnanian Enterprises, Inc. since 1996, and Executive Vice President since November 2000. Mr. Sorsby was also Senior Vice President from March 1991 to November 2000 and was elected as a Director of the Company in 1997. | |
Mr. Weinroth was from 2003 to mid-2008 He is Chairman of the Board (Emeritus) of Core Laboratories, N.V. (NYSE), a global oil field service company where he had previously been Chairman from 1994 through 2001. From l989 to 2003, he served as Co-Chairman and head of the Investment Committee of First Britannia Mezzanine, N.V., a European private investment firm. He is presently Chairman of the Central Asia Education Foundation, a successor to the Central Asian-American Enterprise Fund, to which he was appointed by the President of the United States. Mr. Weinroth has been Chairman of four NYSE-listed companies and Chief Executive of three of them. He is also a Trustee and the immediate past Chairman of The Joyce Theatre Foundation, Inc., and Vice Chairman and a Trustee of the Paul Taylor Dance |
During the year ended October 31, 2011,2013, the Board of Directors held four regularly scheduled meetings and twoone telephonic meetings.meeting. In addition, Directors considered Company matters and had communications with the Chairman of the Board of Directors and others outside of formal meetings. During the fiscal year ended October 31, 2011,2013, each Director attended 100% of the meetings of the Board of Directors and at least 95%93% of the meetings of its Committees on which such Director served. Directors are expected to attend the Annual Meeting of Shareholders, but the Company does not have a formal policy with respect to attendance. All of the members of the Board of Directors attended the Annual Meeting of Shareholders held on March 15, 2011.
Audit Committee
The members of the Audit Committee of the Board of Directors are Messrs. Kangas, RobbinsCoutts and Weinroth. The Board of Directors has determined that all of the members of the Audit Committee meet the standards for independence in our Certificate of Incorporation, which is available on our website at www.khov.com under the Investor Relations tab, “SEC Filings/Quarterly Filings/09-08-08 Filing Date,Current Reports/03-15-13,” and the independence requirements mandated by the NYSE listing standards.
The Audit Committee is currently chaired by Mr. Kangas and is responsible for reviewing and approving the scope of the annual audit undertaken by the Company’s independent registered public accounting firm and meeting with them to review the results of their work as well as their recommendations. The Audit Committee selects the Company’s independent registered public accounting firm and also approves and reviews their fees. The duties and responsibilities of the Audit Committee are set forth in its charter, which may be found at www.khov.com under “Investor Relations/Corporate Governance.” During the fiscal year ended October 31, 2011,2013, the Audit Committee met on fourfive occasions and held eight telephonic meetings. The Audit Committee also authorizes staffing and compensation of the Internal Audit Department. The Vice President of Internal Audit for the Company reports directly to the Audit Committee on, among other things, the Company’s compliance with certain Company procedures which are designed to enhance management’s understanding of operating issues and the results of the Audit Department’s annual audits of the various aspects of the Company’s business. In fiscal 2011,2013, the Audit Department issued seventen traditional audit reports and performed 1516 reviews pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. For additional information related to the Audit Committee, see “The Audit Committee” below.
Compensation Committee The Company has a Compensation Committee, although it is not required to have such a committee because it is a controlled company under the rules of the NYSE. The members of the Compensation Committee of the Board of Directors are Messrs. Weinroth, Coutts, Kangas and The Compensation Committee is currently chaired by Mr. Weinroth and is responsible for reviewing salaries, bonuses and other forms of executive compensation for the Company’s senior executives, key management employees and non-employee Directors, and is active in other compensation and personnel areas as the Board of Directors from time to time may request. In addition, all members of the Compensation Committee qualify as Corporate Governance and Nominating Committee The Company has The Corporate Governance and Nominating Committee is currently chaired by Mr. The Guidelines require that In conducting its nomination function, among other factors, the The Company does not have a specific policy regarding shareholder nominations of potential directors to the Board of Directors, other than through the process described under “Shareholder Proposals for the As of the VOTE REQUIRED The election of the nominees to the Company’s Board of Directors for the ensuing year, to serve until the next Annual Meeting of Shareholders of the Company, and until their respective successors may be elected and qualified, requires that each director be elected by the affirmative vote by a majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, represented in person or by proxy at the Mr. Hovnanian and others with voting power over the shares held by the Estate of Kevork S. Hovnanian, the Limited Partnership, the 2012 LLC and certain family trusts have informed the Company that they intend to vote in favor of the nominees named in this proposal. Because of their collective voting power, this proposal is assured passage. Our Board of Directors recommends that shareholders vote FOR the election of the nominees named in this proposal to the Company’s Board of Directors. REGISTERED PUBLIC ACCOUNTING FIRM The selection of an independent registered public accounting firm to examine financial statements of the Company to be made available or transmitted to shareholders and to be filed with the SEC for the fiscal year ending October 31, The Company has been advised that representatives of Deloitte & Touche LLP will attend the Annual Meeting of Shareholders to respond to appropriate questions and will be afforded the opportunity to make a statement if the VOTE REQUIRED Ratification of the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm to examine financial statements of the Company for the year ending October 31, Mr. Hovnanian and others with voting power over the shares held by the Estate of Kevork S. Hovnanian, the Limited Partnership, the 2012 LLC and certain family trusts have informed the Company that they intend to vote in favor of this proposal. Because of their collective voting power, this proposal is assured passage. Our Board of Directors recommends that shareholders vote FOR ratification of the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting Coutts.Marengi. The Board of Directors has determined that all of the members of the Compensation Committee meet the standards for independence in our Certificate of Incorporation and the independence requirements mandated by the NYSE listing standards. The duties and responsibilities of the Compensation Committee are set forth in its charter, which may be found on our website at www.khov.com under “Investor Relations/Corporate Governance.”“non-employee directors”“Non-Employee Directors” for purposes of Rule 16b-3 ofunder the Exchange Act, and as “outside directors” for purposes of Section 162(m) (“Section 162(m)”) of the Internal Revenue Code of 1986, as amended.amended (the “Code”). For a discussion of the criteria used and factors considered by the Compensation Committee in reviewing and determining executive compensation, see “The Compensation Committee” and “Compensation Discussion and Analysis” below. During the fiscal year ended October 31, 2011,2013, the Compensation Committee met on four occasions and held noone telephonic meetings. established a Corporate Governance and Nominating Committee, although the Company is not required to have such committee because it is a controlled company under the rules of the NYSE. The members of the Corporate Governance and Nominating Committee of the Board of Directors are Messrs. Weinroth,Pagano, Kangas and Marengi. The Board of Directors has determined that all of the members of the Corporate Governance and Nominating Committee meet the standards for independence in our Certificate of Incorporation and the independence requirements mandated by the NYSE listing standards.7Weinroth.Pagano. The Corporate Governance and Nominating Committee is responsible for corporate governance matters, and reviewing and recommending nominees for the Board of Directors, succession planning and other Board-related policies. The Corporate Governance and Nominating Committeealso overseesthe annual performance evaluation of the Board of Directors and its Committees, the Board’sBoard of Directors’ periodic review of the Company’s Corporate Governance Guidelines (“Guidelines”) and compliance with the Company’s Related Person Transaction Policy. During the fiscal year ended October 31, 2011,2013, the Corporate Governance and Nominating Committee met on three occasions and held no telephonic meetings.annually each Director prepares annually an assessment of each Board committee on which hesuch Director serves as well as of the full Board of Directors as to the effectiveness of each committee and the full Board of Directors and any recommendations for improvement. The duties and responsibilities of the Corporate Governance and Nominating Committee are set forth in its charter, which may be found at www.khov.com under “Investor Relations/Corporate Governance,” and the Guidelines may be found at the same website address.Board of DirectorsCorporate Governance and Nominating Committee generally considers the size of the Board of Directors best suited to fulfill its responsibilities, the Board of Directors’ overall membership composition to ensure the Board of Directors has the requisite expertise and consists of persons with sufficiently diverse backgrounds, the independence of outside directors and other possible conflicts of interest of existing and potential members of the Board of Directors.20132015 Annual Meeting” below. The Corporate Governance and Nominating Committee will consider director candidates recommended by shareholders.shareholders in the same manner as it considers candidates recommended by others. Possible nominees to the Board of Directors may be suggested by any Director and given to the Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee may seek potential nominees and engage search consultants to assist it in identifying potential nominees. The Corporate Governance and Nominating Committee adopted an amendment to itsCommittee’s charter in November 2009 contains a provisionaffirming its belief that diversity is an important factor to consider in evaluating potential nominees. The Corporate Governance and Nominating Committee recommends to the Board of Directors a slate of nominees for the Board of Directors for inclusion in the matters to be voted upon at the Annual Meeting. The Company’s Restated By-laws provide that Directors need not be shareholders. Vacancies on the Board of Directors, other than those resulting from removal by shareholders, may be filled by action of the Board of Directors.90th120th calendar day prior to March 15, 2012,January 28, 2014, the Board of Directors had not received any recommendation for the nomination of a candidate to the Board of Directors by any shareholder or group of shareholders that at such time held more than 5% of the Company’s voting stock for at least one year.20122014 Annual Meeting. In determining whether each director has received the requisite number of affirmative votes, abstentions and broker non-votes will have no impact on such matter because such shares are not considered votes cast.820122014 is submitted to this Annual Meeting of Shareholders for ratification. Deloitte & Touche LLP has been selected by the Audit Committee of the Company to examine such financial statements. In the event that the shareholders fail to ratify the appointment, the Audit Committee will consider the view of the shareholders in determining its selection of the Company’s independent registered public accounting firm for the subsequent fiscal year. Even if the selection is ratified, the Audit Committee may, in its discretion, direct the appointment of a new independent registered public accounting firm at any time during the fiscal year if the Audit Committee determines that such a change would be in the best interests of the Company and ourits shareholders.representativerepresentatives so desires.2012,2014 requires the affirmative vote by a majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, presentrepresented in person or by proxy at the 20122014 Annual Meeting. In determining whether the proposal has received the requisite number of affirmative votes, abstentions will have no impact on such matter because such shares are not considered votes cast.firm.
(3) Shareholders are being asked to consider and approve a proposal to The principal purpose of the proposed Assuming Proposal 4 to amend and restate the Company’s Senior Executive Short-Term Incentive Plan is approved by shareholders, the increased share reserve under the Approval by shareholders of the We are not seeking to make any other changes to the terms of the plan document other than certain technical changes. The Company’s Board of Directors has approved the adoption of the In reaching our conclusion as to the appropriateness of the additional share proposal, we reviewed key metrics that are typically used to evaluate such proposals. One such metric many investors use is a calculation that quantifies how quickly a company uses its shareholder capital. The total number of shares issuable under awards we have granted under the Existing Plan, the 2008 Stock Incentive Plan and theSenior Executive Short-Term Incentive Plan, as a percentage of our annual weighted average common stock outstanding (commonly referred to as the “burn rate”) has been on average 1.06% over the last three completed fiscal years, which is below the ISS unadjusted industry median of 1.37%. As applicable for the award, this calculation is based on the amount of shares issuable at the target level of performance under awards as of the dates they were granted. In addition to burn rate, many investors look at the economic effect of dilution. Assuming all 6,450,000 shares of common stock of the Company being requested to be added to the share reserve pursuant to this proposal were fully dilutive as of January 14, 2014, the dilutive effect on all outstanding shares would be approximately 4.5%. For a discussion of the Amended Plan, see “Material Features of the Amended Plan” below. The Amended Plan is set forth in Appendix A hereto. The Company’s Board of Directors recommends that shareholders vote for the approval of the Material Features of the The following is a brief summary of the material features of the Purpose The purpose of the Administration The Awards Awards are determined (“granted”) by the Committee and are subject to the terms and conditions stated in the APPROVALAPPROVAL OF THE 2012 HOVNANIAN ENTERPRISES, INC.
AMENDED AND RESTATED STOCK INCENTIVE PLANadopt a new stock incentive plan to be namedamend and restate the 2012 Hovnanian Enterprises, Inc. Stock Incentive Plan (the “2012(as so amended and restated, the “Amended Plan”)., which approval will also be deemed to constitute a re-approval of the material terms of the performance goals for certain performance-based awards that may be granted under the Amended Plan. The 2012Amended Plan, if approved, will permit the Company to continue making equity-based and other incentive awards to its employees, directors and consultants in a manner intended to properly incentivize such individuals by aligning their interest with the interests of the Company’s stockholders. In recent years, theshareholders. The Company has grantedbeen granting equity-based incentive awards under its Amended and Restated 2008the 2012 Hovnanian Enterprises, Inc. Stock Incentive Plan (the “2008“Existing Plan”). However,, however, the Company presently has insufficient shares remaining available for future grants under its 2008the Existing Plan to make equity grants at a level that would be commensurate with the Company’s past practices and performance. The proposed 2012When the Existing Plan is similar in its terms towas initially adopted, the 2008 Plan. Assuming that stockholders approve the proposed 2012 Plan, an aggregate ofCompany had reserved 5,000,000 shares will become available for issuance pursuant to newof awards under the 2012 Plan and no newExisting Plan. As of the January 14, 2014 record date for the 2014 Annual Meeting, approximately 341,741 shares remained available for future grants of awards will be granted under the 2008Existing Plan. The proposed Amended Plan (although awards previously grantedwould add an additional 6,450,000 shares to the number of shares available for future grants under the 2008Existing Plan. We expect that if the Amended Plan will remain outstanding thereunder pursuantis approved by our shareholders, the additional shares should be sufficient to allow us to make equity-based awards in amounts we believe are necessary to attract, motivate and retain talented and experienced individuals for the terms thereof).next two to three years. No awards or contingent awards have been or will be granted utilizing the increased share reserve under the 2012Amended Plan prior to obtaining shareholder approval for the 2012Amended Plan.2012Amended Plan is to facilitate the ability to grant contemplated long-term performance awards to key employees, directors and consultants of the Company. No awards or contingentAs described below under “Compensation Discussion and Analysis,” equity-based awards have historically formed a significant portion of our total compensation in order to align key employees’ and directors’ interests with that of our shareholders. Our ability to make equity-based awards helps us attract, retain and motivate key employees and directors as well as foster long-term value-creation. These efforts have been madeparticularly critical during a difficult homebuilding market.proposed 2012Amended Plan will also facilitate the Company’s ability to issue equity-based awards under the Amended Plan in satisfaction of short-term incentive awards that are earned under the Company’s Amended and Restated Senior Executive Short-Term Incentive Plan.For If Proposal 4 is approved, the Company’s Amended and Restated Senior Executive Short-Term Incentive Plan will not have a discussionseparate share reserve but instead will provide that equity-based award issuances thereunder will be made out of the 2012 Plan, see “Material FeaturesAmended Plan’s share reserve.2012 Plan”Amended Plan will also satisfy the requirement to have the material terms of the permissible performance goals under which compensation may be paid that were initially included under the Existing Plan for purposes of certain awards intended to qualify as “performance-based compensation” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) re-approved by shareholders at least once every five years. Under Section 162(m), the Company may not deduct certain compensation over $1,000,000 in any year to the Chief Executive Officer or any of the three other most highly compensated executive officers of the Company, other than the Chief Financial Officer, unless, among other things, this compensation qualifies as “performance-based compensation” under Section 162(m), and the material terms of the plan for such compensation are approved by shareholders. For purposes of Section 162(m), the material terms include (1) the employees eligible to receive compensation, (2) a description of the business criteria on which the performance goals are based, and (3) the maximum amount of compensation that can be paid to an employee during a specified period. Each of these aspects is discussed below. The 2012 Plan is set forth in Appendix A hereto.2012Amended Plan and, if the Amended Plan is approved by shareholders at the 2014 Annual Meeting, it will become immediately effective as of the date of the 2014 Annual Meeting. If shareholders do not approve the Amended Plan, the Existing Plan will continue to remain in effect according to its terms, and we may continue to make awards (subject to the authorized limit of 5,000,000 shares) under the Existing Plan.2012Amended Plan.92012Amended Plan2012Amended Plan. Because this is only a summary, it does not contain all the information about the 2012Amended Plan that may be important to you and is qualified in its entirety by the full text of the 2012Amended Plan as set forth in Appendix A hereto.2012Amended Plan is to aid the Company and its affiliates in recruiting and retaining key employees, directors and consultants of outstanding ability and to motivate those employees, directors and consultants to exert their best efforts on behalf of the Company and its affiliates by providing incentives through the granting of “Awards”, which consist of options, stock appreciation rights or other stock-based Awards (including performance-based Awards) granted pursuant to the 2012Amended Plan. All employees, directors and consultants of the Company and its affiliates are eligible to participate in the 2012Amended Plan if they are selected by the Compensation Committee of the Board of Directors (the “Committee”) to participate in the 2012Amended Plan (any such individual, a “Participant”). For the fiscal year ended October 31, 2011,2013, approximately 1012 employees, 5 directors (includes non-employee directors only), and no consultants were selected by the Committee to participate in the 2008Existing Plan. The Company anticipates that future participation by employees and directors under the 2012Amended Plan will be at levels similar to their past participation under the 2008Existing Plan.2012Amended Plan is generally administered by the Committee, which may delegate its duties and powers in whole or in part to any subcommittee thereof consisting solely of at least two individuals who are each intended to be “non-employee directors”“Non-Employee Directors” within the meaning of Rule 16b-3 under the Securities Exchange Act, of 1934, as amended, “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), and “independent directors” within the meaning of the applicable rules, if any, of any national securities exchange on which shares of common stock of the Company are listed or admitted to trading:trading; provided, however, that any action permitted to be taken by the Committee may be taken by the Board of Directors in its discretion. Additionally, if the Company’s CEOChief Executive Officer is serving as a member of the Board of Directors, the Board of Directors may by specific resolution constitute the CEOChief Executive Officer as a “committee of one” with the authority to grant Awards covering up to 1,000,000 shares per fiscal year to certain non-executive officer Participants.2012Amended Plan and to such other terms and conditions, not inconsistent therewith as the Committee shall determine. Any stock options or stock appreciation rights granted must have a per share exercise price that is not less than 100% of the fair market value of the Company’s common stock underlying such stock optionsawards on the date an optionaward is granted (other than in the case of optionsawards granted in substitution of previously granted awards). The maximum term for stock options and stock appreciation rights granted under the 2012Amended Plan is ten years from the initial date of grant.
In the event a performance-based Award is granted under the 2012Amended Plan, it may be granted in a manner that wouldis intended to cause the Award to be deductible by the Company under Section 162(m) of the Code., however, there can be no guarantee that a performance-based Award will be treated as “performance-based compensation” under Section 162(m). To that end, performance-based Awards intended to be deductible under Section 162(m) of the Code must be based on the attainment by the Company of written performance goals approved by the Committee. Within 90 days after the start of a designated performance period (or, if less, the number of days which is equal to 25% of such performance period), the Committee will establish the objective performance goals for each Participant. The performance goals will be based on one or more of the following criteria: (1) earnings before or after taxes (including earnings before interest, taxes, depreciation and amortization); (2) net income; (3) operating income; (4) earnings per share of common stock of the Company; (5) book value per share; (6) return on shareholders’ equity; (7) total shareholder return; (8) expense management; (9) return on investment;investment before or after the cost of capital; (10) improvements in capital structure; (11) profitability of an identifiable business unit or product; (12); maintenance or improvements of profit margins; (13) stock price; (14) market share; (15) revenues or sales; (16) costs; (17) cash flow; (18) working capital; (19) changes in net assets (whether or not multiplied by a constant percentage intended to represent the cost of capital); and (20) return on assets.
Prior to the payment of any Award that is intended to qualify as performance-based compensation for purposes of Section 162(m), the Committee or its delegate, will certify that the applicable performance goals have been met. In connection with such certification, the Committee or its delegate, may decide to pay amounts, which are less than the Award otherwise payable for achievement of the applicable performance goals at the sole discretion of the Committee or its delegate.Committee. Payment of such an Award to a Participant will occur only after such certification and will be made as determined by the Committee in its sole discretion after the end of such performance period.
Effect of Certain Events on 2012Amended Plan and Awards
In the event of any change in the outstanding shares of common stock by reason of any stock dividend or split, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other corporate exchange or change in capital structure, any distribution to shareholders of common stock other than regular cash dividends or any similar event, the Committee in its sole discretion and without liability to any person shall make such substitution or adjustment, if any, as it deems to be equitable, as to (1) the number or kind of common stock or other securities that may be issued as set forth in the 2012Amended Plan or pursuant to outstanding Awards, (2) the optionexercise price relating to outstanding options or stock appreciation rights, (3) the maximum number or amount of Awards that may be granted to a Participant during a fiscal year and/or (4) any other affected terms of such Awards. Except as otherwise provided in an Award agreement, in the event of a Change in Control (as defined in the 2012Amended Plan), the Committee in its sole discretion and without liability to any person may take such actions, if any, as it deems necessary or desirable with respect to any Award.
Limitations
The 2012Amended Plan provides that the total number of shares of common stock of the Company that may be issued under the 2012Amended Plan is(inclusive of the 5,000,000 shares initially reserved under the Existing Plan and the additional 6,450,000 shares which are being requested under this proposal) is 11,450,000. The maximum amount that may be paid with respect to performance-based Awards (other than Awards denominated in Shares)shares) during a fiscal year to any Participant cannot exceedshall be equal to the greater of (x) $15 million orand (y) 2.5% of the Company’s income before income taxes as reported in the Company’s audited consolidated financial statements prepared for the year in respect of which the performance-based Award is to be paid.paid or distributed, as applicable. The number of shares covered by Awards granted under the 2012Amended Plan that terminate or lapse without the payment of consideration will be available for future grants under the 2012Amended Plan. Additionally, the maximum number of shares of common stock of the Company for which options or stock appreciation rights may be granted during a fiscal year to any Participant is 2,000,000, and the maximum number of shares that may be subject to other Share-denominatedshare-denominated performance Awards granted during a fiscal year to any Participant is also 2,000,000.
No awardAward may be granted under the 2012Amended Plan after the tenth anniversary of January 10, 2012 (i.e., the date when the Board of Directors adopted the 2012Existing Plan), but Awards theretofore granted may be extended beyond that date.
The Amended Plan generally prohibits the Company from taking actions that would constitute a “repricing” of stock options or stock appreciation rights (for example, lowering exercise prices for outstanding Awards). Additionally, the Amended Plan precludes the payment of dividends or dividend equivalent rights on performance-based Awards unless and until the corresponding performance-based Award has been earned in accordance with its terms.
Amendment and Termination
The Committee may amend, alter or discontinue the 2012Amended Plan, but no amendment, alteration or discontinuation shall be made which, (a) without the approval of the shareholders of the Company, would (except as provided in the 2012Amended Plan in connection with adjustments in certain corporate events), increase the total number of shares of common stock of the Company reserved for the purposes of the 2012Amended Plan or change the maximum number of shares of common stock of the Company for which Awards may be granted to any Participant or amend the prohibitions on repricing set forth above or (b) without the consent of a Participant, would materially impair any of the rights or obligations under any Award theretofore granted to such Participant under the 2012Amended Plan; provided, however, that the Committee may amend the 2012Amended Plan in such manner as it deems necessary to permit the granting of Awards meeting the requirements of the Code or other applicable laws. The Committee may not amend, alter or discontinue the provisions relating to a Change in Control (as defined in the 2012Amended Plan) after the occurrence of a Change in Control.
Clawback/Forfeiture
Any Awards granted under the Amended Plan may be subject to reduction, cancellation, forfeiture or recoupment to the extent required by applicable law or listed company rules, to the extent otherwise provided in an Award agreement at the time of grant or as determined pursuant to the Company’s recoupment policy.
Nontransferability of Awards
Unless otherwise determined by the Committee, an Award shall not be transferable or assignable by the Participant otherwise than by will or by the laws of descent and distribution. Notwithstanding the foregoing, and subject to the conditions stated in the 2012Amended Plan, a Participant may transfer an option (other than an option that is also an incentive stock option granted pursuant to the 2012Amended Plan) or stock appreciation right in whole or in part by gift or domestic relations order to a family member of the Participant.
Certain United States Federal Income Tax Consequences
Stock Options
An employee to whom an incentive stock option (“ISO”) that qualifies under Section 422 of the Code is granted will not recognize income at the time of grant or exercise of such option. No federal income tax deduction will be allowable to the Company upon the grant or exercise of such ISO. However, upon the exercise of an ISO, special alternative minimum tax rules apply for the employee.
When the employee sells shares acquired through the exercise of an ISO more than one year after the date of transfer of such shares and more than two years after the date of grant of such ISO, the employee will normally recognize a long-term capital gain or loss equal to the difference, if any, between the sale prices of such shares and the option price. If the employee does not hold such shares for this period, when the employee sells such shares, the employee will recognize ordinary compensation income and possibly capital gain or loss in such amounts as are prescribed by the Code and regulations thereunder, and the Company will generally be entitled to a federal income tax deduction in the amount of such ordinary compensation income.
An employee to whom an option that is not an ISO (a “non-qualified option”) is granted will not recognize income at the time of grant of such option. When such employee exercises a non-qualified option, the employee will recognize ordinary compensation income equal to the excess, if any, of the fair market value as of the date of a non-qualified option exercise of the shares the employee receives, over the option exercise price. The tax basis of such shares will be equal to the exercise price paid plus the amount includable in the employee’s gross income, and the employee’s holding period for such shares will commence on the day after which the employee recognized taxable income in respect of such shares. Any subsequent sale of the shares by the employee will result in long- or short-term capital gain or loss, depending on the applicable holding period. Subject to applicable provisions of the Code and regulations thereunder, the Company will generally be entitled to a federal income tax deduction in respect of the exercise of non-qualified options in an amount equal to the ordinary compensation income recognized by the employee. Any such compensation includable in the gross income of an employee in respect of a non-qualified option will be subject to appropriate federal, state, local and foreign income and employment taxes.
Restricted Stock
Unless an election is made by the Participant under Section 83(b) of the Code, the grant of an Award of restricted stock will have no immediate tax consequences to the Participant. Generally, upon the lapse of restrictions (as determined by the applicable restricted stock agreement between the Participant and the Company), a Participant will recognize ordinary income in an amount equal to the product of (x) the fair market value of a share of common stock of the Company on the date on which the restrictions lapse, less any amount paid with respect to the Award of restricted stock, multiplied by (y) the number of shares of restricted stock with respect to which restrictions lapse on such date. The Participant’s tax basis will be equal to the sum of the amount of ordinary income recognized upon the lapse of restrictions and any amount paid for such restricted stock. The Participant’s holding period will commence on the date on which the restrictions lapse.
A Participant may make an election under Section 83(b) of the Code within 30 days after the date of transfer of an Award of restricted stock to recognize ordinary income on the date of award based on the fair market value of common stock of the Company on such date. An employee making such an election will have a tax basis in the shares of restricted stock equal to the sum of the amount the employee recognizes as ordinary income and any amount paid for such restricted stock, and the employee’s holding period for such restricted stock for tax purposes will commence on the date after such date.
With respect to shares of restricted stock upon which restrictions have lapsed, when the employee sells such shares, the employee will recognize capital gain or loss consistent with the treatment of the sale of shares received upon the exercise of non-qualified options, as described above.
Stock Units
A Participant to whom a restricted stock unit (“RSU”) is granted generally will not recognize income at the time of grant (although the Participant may become subject to employment taxes when the right to receive shares becomes “vested” due to retirement eligibility or otherwise). Upon delivery of shares of common stock of the Company in respect of an RSU, a Participant will recognize ordinary income in an amount equal to the product of (x) the fair market value of a share of common stock of the Company on the date on which the common stock of the Company is delivered, multiplied by (y) the number of shares of common stock of the Company delivered.
Other Stock-based Awards
With respect to other stock-based Awards paid in cash or common stock, Participants will generally recognize income equal to the fair market value of the Award on the date on which the Award is delivered to the recipient.
Code Section 409A Section 409A General Ordinary income recognized by virtue of the exercise of non-qualified options, the lapse of restrictions on restricted stock or RSUs or payments made in cash or shares of common stock of the Company is subject to applicable tax withholding as required by law. The Company generally will be entitled to a federal tax deduction to the extent permitted by the Code at the time and in the amount that ordinary income is recognized by Participants. The discussion set forth above does not purport to be a complete analysis of all potential tax consequences relevant to recipients of options or other Awards or to their employers or to describe tax consequences based on particular circumstances. It is based on federal income tax law and interpretational authorities as of the date of this proxy statement, which are subject to change at any time. of the Internal Revenue Code (“Section 409A”) of the Code generally sets forth rules that must be followed with respect to covered deferred compensation arrangements in order to avoid the imposition of an additional 20% tax (plus interest) upon the service provider who is entitled to receive the deferred compensation. Certain Awards that may be granted under the 2012Amended Plan may constitute “deferred compensation” within the meaning of and subject to Section 409A. While the Committee intends to administer and operate the 2012Amended Plan and establish terms (or make required amendments) with respect to Awards subject to Section 409A in a manner that will avoid the imposition of additional taxation under Section 409A upon a Participant, there can be no assurance that additional taxation under Section 409A will be avoided in all cases. In the event the Company is required to delay delivery of shares or any other payment under an Award in order to avoid the imposition of an additional tax under Section 409A, the Company will deliver such shares (or make such payment) on the first day that would not result in the Participant incurring any tax liability under Section 409A. The Committee may amend the 2012Amended Plan and outstanding Awards to preserve the intended benefits of Awards granted under the 2012Amended Plan and to avoid the imposition of an additional tax under Section 409A of the Code.
Stock Awards Previously Granted Under the Existing Plan
The following table sets forth information on awards granted under the Existing Plan since its adoption and after giving effect to shares forfeited and reincluded in the Existing Plan pool. The closing price of the Class A Common Stock on the NYSE on January 14, 2014 (the record date for the 2014 Annual Meeting) was $6.17 per share (shares of Class B Common Stock convert on a one-for-one basis to shares of Class A Common Stock).
Name & Position | Stock Option Grants # of Shares Covered | Restricted Stock Unit Grants # of Shares Covered (1) | Total of All Columns in Table # of Shares Covered | ||||||||||
Ara K. Hovnanian, President, Chief Executive Officer and Chairman of the Board | 1,200,000 | 827,733 | 2,027,733 | ||||||||||
J. Larry Sorsby, Executive Vice President, Chief Financial Officer and Director | 240,000 | 303,030 | 543,030 | ||||||||||
Thomas J. Pellerito, Chief Operating Officer | 160,000 | 303,030 | 463,030 | ||||||||||
Brad G. O’Connor, Vice President, Chief Accounting Officer and Corporate Controller | 40,000 | 80,633 | 120,633 | ||||||||||
David G. Valiaveedan, Vice President — Finance and Treasurer | 30,000 | 75,430 | 105,430 | ||||||||||
Current Executive Officers as a Group | 1,670,000 | 1,589,856 | 3,259,856 | ||||||||||
Robert B. Coutts, Director | 0 | 53,919 | 53,919 | ||||||||||
Edward A. Kangas, Director | 0 | 67,108 | 67,108 | ||||||||||
Joseph A. Marengi, Director | 0 | 42,832 | 42,832 | ||||||||||
Vincent Pagano Jr., Director | 0 | 19,520 | 19,520 | ||||||||||
Stephen D. Weinroth, Director | 61,573 | 15,939 | 77,512 | ||||||||||
Current Non-Executive Directors as a Group (2) | 61,573 | 199,318 | 260,891 | ||||||||||
All Employees, including All Current Officers who are not Executive Officers, as a Group | 386,125 | 709,257 | 1,095,382 |
(1) | Includes all full value shares granted under the Existing Plan, which consist of restricted stock units (RSUs), shares issued to non-employee Directors as part of their annual equity award and the maximum number of shares that are potentially issuable under the share portion of awards granted under the 2013 Long-Term Incentive Program under the Existing Plan. |
(2) | The Stock Option Grants column does not include 42,130 stock options granted to Mr. Robbins, a former director. Mr. Robbins was not granted any RSUs. |
Equity Compensation Plan Information
The following table provides information as of October 31, 2011,2013, with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance.
Plan Category | Number of Class A Common Stock securities to be issued upon exercise of outstanding options, warrants and rights (2)(5) | Number of Class B Common Stock securities to be issued upon exercise of outstanding options, warrants and rights (2)(5) | Weighted average exercise price of outstanding Class A Common Stock options, warrants and rights(3) | Weighted average exercise price of outstanding Class B Common Stock options, warrants and rights(4) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in columns (a)) (1) | |||||||||||||||
(a) | (a) | (b) | (b) | (c) | ||||||||||||||||
Equity compensation plans approved by security holders: | 6,033,828 | 3,682,610 | $ | 8.95 | $ | 3.68 | 72,952 | |||||||||||||
Equity compensation plans not approved by security holders: | — | — | — | — | — | |||||||||||||||
Total | 6,033,828 | 3,682,610 | $ | 8.95 | $ | 3.68 | 72,952 |
Number of Class A Common Stocksecurities to beissued uponexercise ofoutstandingoptions,warrants andrights(2)(5) | Number of ClassB Common Stocksecurities to beissued uponexercise ofoutstandingoptions,warrants andrights(2)(5) | Weightedaverageexerciseprice ofoutstandingClass ACommon Stockoptions,warrants andrights(3) | Weightedaverageexerciseprice ofoutstandingClass BCommon Stockoptions,warrants andrights(4) | Number ofsecuritiesremainingavailable forfuture issuanceunder equitycompensationplans(excludingsecuritiesreflected incolumns (a))(1)(6) | |||||||||||
Plan Category | (a) | (a) | (b) | (b) | (c) | ||||||||||
Equity compensation plans approved by security holders: | 6,660,018 | 5,094,021 | $7.20 | $4.03 | 339,141 | ||||||||||
Equity compensation plans not approved by security holders: | — | — | — | — | — | ||||||||||
Total | 6,660,018 | 5,094,021 | $7.20 | $4.03 | 339,141 |
(1) | Under the Company’s equity compensation plans, securities may be issued in either Class A Common Stock or Class B Common Stock. |
(2) | Includes the maximum number of shares that are potentially issuable under the share portion of |
(3) | Does not take into account |
(4) | Does not take into account |
(5) | These shares include |
(6) | The number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in columns (a)) as of the January 14, 2014 record date was 341,741. The increase is primarily due to forfeitures for terminated employees subsequent to October 31, 2013, partially offset by shares issued to the non-employee Directors on January 10, 2014 as part of their annual retainer. |
Additional Equity Compensation Plan Information
The following is the Company’s overhang information, which measures the number of shares subject to equity-based awards outstanding but unexercised or unvested, as of October 31, 2013 regarding all of its existing equity compensation plans, as well as certain other information relating to outstanding awards under the plans:
● | Stock options outstanding: 6,591,054 | |
● | Weighted average exercise price of outstanding stock options: $5.74 | |
● | Weighted average remaining contractual term of outstanding stock options: 6.8 years | |
● | Nonvested RSUs (including RSU awards for performance-based long-term incentive plans based on achieving the actual outcome, where known, or the target outcome, where the performance period has not ended): 2,463,647 | |
● | Vested but not yet issued RSUs: 1,359,445 | |
● | Total shares of Common Stock outstanding as of October 31, 2013 were 139,201,327 and as of the January 14, 2014 record date were 139,704,865 |
The following table sets forth the number of time-based stock options and time-based RSU awards granted by the Company in the years ended October 31, 2013, 2012 and 2011. In addition, the table provides the number of shares of common stock granted related to performance-based awards and the weighted average number of shares of common stock outstanding in the year indicated.
Fiscal Year | Number of Time-Based Stock Options Granted | Number of Time-Based RSUs Granted | Number of Shares of Common Stock Granted Related to Performance-Based Awards (1) | Weighted Average Number of Shares of Common Stock Outstanding (2) | ||||||||||||
2013 | 487,500 | 104,944 | 1,293,269 | 145,087,291 | ||||||||||||
2012 | 1,334,828 | 133,855 | — | 126,350,000 | ||||||||||||
2011 | 269,100 | 29,468 | 420,000 | 100,444,000 |
(1) | Includes RSU and stock option awards granted under the 2008 Hovnanian Enterprises, Inc. Stock Incentive Plan (as amended and restated) and the Existing Plan (including the 2013 Long-Term Incentive Program), based on achieving the target outcome for the performance criteria under the performance-based awards. | |
(2) | Weighted average number of shares of common stock outstanding is the amount used for calculating our basic earnings per share as presented in our audited consolidated financial statements. |
VOTE REQUIRED
Adoption of the 2012Amended Plan requires approval by a majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, represented in person or by proxy at the 20122014 Annual Meeting, provided that a majority of the outstanding shares are voted on the proposal.Meeting. In determining whether the proposal has received the requisite number of affirmative votes, abstentions are considered votes cast“votes cast” under NYSE rules and thus will have the same effect as a vote “against” the proposal and will be counted in determining whether a majority of the outstanding shares of common stock are voted on the proposal. Broker non-votes will not count as votes cast “for” or “against” the proposal to adopt the 2012Amended Plan and will have no effect on the outcome of the proposal, assuming a majority of the outstanding shares of common stock are otherwise voted on the proposal.
Mr. Hovnanian and others with voting power over the shares held by the Estate of Kevork S. Hovnanian, the Limited Partnership, the 2012 LLC and certain family trusts have informed the Company that they intend to vote in favor of the 2012Amended Plan. Because of their collective voting power, this proposal is assured passage.
Our Board of Directors recommends that shareholders vote FOR approval of the 2012Amended Plan.
(4) APPROVAL OF THE AMENDED AND RESTATED
HOVNANIAN ENTERPRISES, INC. SENIOR EXECUTIVE SHORT-TERM INCENTIVE PLAN
Shareholders are being asked to consider and approve the amended and restated Hovnanian Enterprises, Inc. Senior Executive Short-Term Incentive Plan (as amended and restated, the “Short-Term Incentive Plan”) which:
(1) | extends the period of time for which Bonus Awards (as defined below) may be made under the Short-Term Incentive Plan to the date of the Company’s first shareholders’ meeting that occurs during 2019, such that no new Bonus Awards may be granted after such expiration date (Bonus Awards granted prior to the first shareholders’ meeting in 2019 will remain in effect and be subject to the terms of the Short-Term Incentive Plan); |
(2) | provides that any share issuances made with respect to future Bonus Awards would be granted under the 2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan (as amended from time to time, the “Stock Plan”), provided that shares or share-based awards may be awarded under the Stock Plan only if Proposal (3), “Approval of the 2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan” is approved by shareholders; and |
(3) | makes certain changes, clarifications and language improvements (including the addition of total shareholder return as a permissible performance goal under the Short-Term Incentive Plan in order to conform the performance metrics under the Short-Term Incentive Plan to those under the Stock Plan). |
The principal purpose of the proposed Short-Term Incentive Plan is to facilitate the ability to grant performance-based awards to key employees of the Company. As described below under “Compensation Discussion and Analysis,” the Committee seeks to motivate management to achieve improved financial performance of the Company through bonus plans that reward higher performance with increased bonus opportunities. The Short-Term Incentive Plan contains performance metrics aimed to correspond to the financial needs of the Company during the relevant period, thereby incentivizing the participants to achieve financial results that benefit the Company and, ultimately, its shareholders.
The Short-Term Incentive Plan provides for annual bonus awards calculated using a pre-established formula, which is based on the Company’s performance. The Company has proposed to limit the term of the Short-Term Incentive Plan to a period ending upon the Company’s first shareholders’ meeting that occurs during 2019, with the expectation that any extension of the term of the Short-Term Incentive Plan will be approved by shareholders in a manner intended to permit Bonus Awards (defined below) to continue to be granted under the Short-Term Incentive Plan and meet certain requirements of Section 162(m), which section governs the tax deductibility of performance-based compensation. Under Section 162(m), the Company may not deduct certain compensation over $1,000,000 in any year to the Chief Executive Officer or any of the three other most highly compensated executive officers of the Company, other than the Chief Financial Officer, unless, among other things, this compensation qualifies as “performance-based compensation” under Section 162(m), and the material terms of the plan for such compensation are approved by shareholders. For purposes of Section 162(m), the material terms include (1) the employees eligible to receive compensation, (2) a description of the business criteria on which the performance goals are based, and (3) the maximum amount of compensation that can be paid to an employee during a specified period. Each of these aspects is discussed below.
The Company’s Board of Directors has approved the adoption of the Short-Term Incentive Plan and, if the Short-Term Incentive Plan is approved by shareholders at the 2014 Annual Meeting, it will become immediately effective as of the date of the 2014 Annual Meeting. If shareholders do not approve the Short-Term Incentive Plan, Bonus Awards with respect to the 2014 fiscal year that have been contingently granted under the Short-Term Incentive Plan will be canceled.
For a discussion of the Short-Term Incentive Plan, see “Material Features of the Short-Term Incentive Plan” below. The Short-Term Incentive Plan is set forth in Appendix B hereto.
The Company’s Board of Directors recommends that shareholders vote for the approval of the Short-Term Incentive Plan.
Material Features of the Short-Term Incentive Plan
The following is a brief summary of the material features of the Short-Term Incentive Plan. Because this is only a summary, it does not contain all the information about the Short-Term Incentive Plan that may be important to you and is qualified in its entirety to the full text of the Short-Term Incentive Plan as set forth in Appendix B hereto.
Purpose
The purpose of the Short-Term Incentive Plan is to promote the interests of the Company and its shareholders by providing incentives in the form of periodic bonus awards (“Bonus Awards”) to certain senior executive employees of the Company and its affiliates, thereby motivating such executives to attain corporate performance goals set forth in the Short-Term Incentive Plan while intending to preserve for the benefit of the Company and its subsidiaries the associated U.S. federal income tax deduction under Section 162(m). For the fiscal year ended October 31, 2013, five senior executives were selected by the Compensation Committee to participate in the Short-Term Incentive Plan. The Company anticipates that future participation under the Short-Term Incentive Plan will be at levels similar to past participation.
Administration
The Short-Term Incentive Plan is administered by a committee of two or more individuals who are each “Non-Employee Directors” within the meaning of Rule 16b-3 under the Exchange Act, or any successor thereto, “outside directors” as defined under Section 162(m) and “independent directors” within the meaning of the applicable rules, if any, of any national securities exchange on which shares of common stock of the Company are listed or admitted to trading, unless otherwise determined by the Company’s Board of Directors to act as such a committee (the “Committee”). The Compensation Committee may select senior executives of the Company and its affiliates who are “covered employees”, as defined in Section 162(m), or who the Company anticipates may become “covered employees” (the “Participants”), to be granted Bonus Awards under the Short-Term Incentive Plan. For the fiscal year ended October 31, 2013, five “covered employees” were selected by the Committee to participate in the Short-Term Incentive Plan.
Bonus Awards
Bonus Awards granted under the Short-Term Incentive Plan may be granted in a manner that is intended to cause the Bonus Award to be deductible by the Company under Section 162(m), however, there can be no guarantee that a Bonus Award will be treated as “performance-based compensation” under Section 162(m). A Participant’s Bonus Award shall be determined based on the achievement of written performance goals approved by the Committee. Within 90 days after the start of a designated performance period (or, if less, the number of days which is equal to 25% of such performance period), the Committee will establish the objective performance goals for each Participant. The performance goals will be based on one or more of the following criteria: (1) earnings before or after taxes (including earnings before interest, taxes, depreciation and amortization); (2) net income; (3) operating income; (4) earnings per share of common stock of the Company; (5) book value per share; (6) return on stockholders’ equity; (7) expense management; (8) return on investment before or after the cost of capital; (9) improvements in capital structure; (10) profitability of an identifiable business unit or product; (11) maintenance or improvements of profit margins; (12) stock price; (13) market share; (14) revenues or sales; (15) costs; (16) cash flow; (17) working capital; (18) changes in net assets (whether or not multiplied by a constant percentage intended to represent the cost of capital); (19) return on assets and (20) total shareholder return.
Prior to the payment of any Bonus Award, the Committee, will certify that the applicable performance goals have been met. In connection with such certification, the Committee may decide to pay amounts which are less than the Bonus Award otherwise payable for achievement of the applicable performance goals. The Committee may base the decision to reduce the Bonus Award on any criteria it deems relevant. Payment of a Bonus Award to a Participant will occur only after such certification and will be made as determined by the Committee in its sole discretion after the end of such performance period. The Short-Term Incentive Plan provides that the Committee shall determine, in its discretion, whether a Bonus Award shall be payable in cash, common stock of the Company, share-based awards, or a combination thereof, which may include, without limitation, permitting a Participant to elect to defer receipt of all or any portion of such Bonus Award (in a manner consistent with Section 162(m) and Section 409A of the Code) into a right to receive deferred cash or shares of common stock of the Company at a future date (such right, a “Deferred Share Unit”). Any such shares or share-based awards issued in settlement of a Bonus Award shall be granted pursuant to the Stock Plan, provided that shares or share-based awards may be awarded under the Stock Plan only if Proposal (3), “Approval of the 2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan” is approved by shareholders.
Effect of Certain Events on Short-Term Incentive Plan and Bonus Awards
In the event of a Change in Control (as defined in the Stock Plan described under Proposal (3) and attached as Appendix A), the Committee in its sole discretion and without liability to any person may take such actions, if any, as it deems necessary or desirable with respect to any Bonus Award.
Limitations
The Short-Term Incentive Plan provides that the maximum Bonus Award to any Participant with respect to any fiscal year shall be the greater of (x) $15 million and (y) 2.5% of the Company’s income before income taxes, as reported in the Company’s audited consolidated financial statements for the year in respect of which the Bonus Award is to be payable or distributed, as applicable.
No new Bonus Awards may be granted under the Short-Term Incentive Plan after the date of the Company’s first shareholders’ meeting that occurs during 2019, but previously granted Bonus Awards may extend beyond that date.
Amendment and Termination
The Committee may at any time amend, suspend or terminate the Short-Term Incentive Plan in whole or in part. Notwithstanding the foregoing, no amendment, suspension or termination of the Short-Term Incentive Plan shall be made which (1) without the Participant’s consent, materially impairs any of the rights or obligations under any Bonus Award theretofore granted to a Participant under the Short-Term Incentive Plan, or (2) without the approval of the shareholders of the Company changes the maximum amount of any Bonus Award which may be payable or distributed to any Participant; provided, however, that the Committee may amend the Short-Term Incentive Plan in such manner as it deems necessary to permit the granting of Bonus Awards meeting the requirements of the Code or other applicable laws.
Nontransferability of Bonus Awards
A Participant’s rights and interest under the Short-Term Incentive Plan generally may not be assigned, transferred, hypothecated or encumbered, except in the event of a Participant’s death.
Participants of the Short-Term Incentive Plan
For the fiscal year ending October 31, 2014, five Participants were selected by the Committee to participate in the Short-Term Incentive Plan (five Participants in the Executive Officers Group, no Participants in the Non-Executive Director Group, and no Participants in the Non-Executive Officer Employee Group). Bonus Awards with respect to such 2014 fiscal year have been contingently granted under the Short-Term Incentive Plan by the Company, subject to achievement of the relevant performance goals and the approval of the Short-Term Incentive Plan by the Company’s shareholders at the 2014 Annual Meeting.
New Plan Benefits
The following table sets forth information on the maximum bonus for fiscal 2014 which may be earned under the Short-Term Incentive Plan if the Short-Term Incentive Plan is approved by shareholders and the performance conditions are met.
Short-Term Incentive Plan
Maximum Fiscal 2014 Bonus Award Potential
Name And Position | Bonus Awards Dollar Value (1) | ||
Ara K. Hovnanian, President, Chief Executive Officer and Chairman of the Board | $2,500,000 | ||
J. Larry Sorsby, Executive Vice President, Chief Financial Officer and Director | $950,000 | ||
Thomas J. Pellerito, Chief Operating Officer | $950,000 | ||
Brad G. O’Connor, Vice President, Chief Accounting Officer and Corporate Controller | $197,327 | ||
David G. Valiaveedan, Vice President — Finance and Treasurer | $153,831 | ||
Executive Officer Group | $4,751,158 | ||
Non-Executive Director Group | N/A | ||
Non-Executive Officer Employee Group | N/A |
(1) | Represents the maximum bonus which may be earned in fiscal 2014 under the Short-Term Incentive Plan. Bonus Awards may be paid in cash or in shares of Common Stock of the Company. A portion of earned bonuses may, at the Committee’s discretion, also be paid in the form of deferred shares that vest in four equal annual installments beginning on the second November 1st following the fiscal year during which the service giving rise to the deferred share award was performed, subject to rounding and continued employment with the Company. Deferred share award recipients who have reached age 58 or who have completed at least 20 years of service for the Company, however, will be fully vested in all shares relating to a deferred share award on the later of (1) the January 15th following the fiscal year during which the service giving rise to the deferred share is performed or (2) the date on which age 58 is reached or 20 years of service is completed. |
Equity Compensation Plan Information
Information as of October 31, 2013 with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance is set forth under Proposal (3) “Approval of the 2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan — Equity Compensation Plan Information.”
VOTE REQUIRED
Adoption of the Short-Term Incentive Plan requires approval by a majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, represented in person or by proxy at the 2014 Annual Meeting. In determining whether the proposal has received the requisite number of affirmative votes, abstentions are considered “votes cast” under NYSE rules and thus will have the same effect as a vote “against” the proposal. Broker non-votes will not count as votes cast “for” or “against” the proposal to adopt the Short-Term Incentive Plan and will have no effect on the outcome of the proposal.
Mr. Hovnanian and others with voting power over the shares held by the Estate of Kevork S. Hovnanian, the Limited Partnership, the 2012 LLC and certain family trusts have informed the Company that they intend to vote in favor of the Short-Term Incentive Plan. Because of their collective voting power, this proposal is assured passage.
Our Board of Directors recommends that shareholders vote FOR approval of the Short-Term Incentive Plan.
(5) ADVISORY VOTE ON EXECUTIVE COMPENSATION
In accordance with the requirements of Section 14A of the Exchange Act (which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)) and the related rules of the SEC, we are including in these proxy materials a separate resolution subject to shareholder vote to approve, in a non-binding vote, the compensation of our named executive officers, including the compensation tables and any related narrative discussion, as disclosed on pages 27 to 65.
In considering their vote, shareholders may wish to review with care the information on the Company’s compensation policies and decisions regarding the named executive officers presented in Compensation Discussion and Analysis on pages 27 to 49, as well as the discussion regarding the Compensation Committee on pages 25 and 26.
As we discuss in the Compensation Discussion and Analysis section, the Board of Directors believes that the Company’s long-term success depends in large measure on the talents of the Company’s employees. The Company’s compensation system plays a significant role in the Company’s ability to attract, retain and motivate the highest quality associates in a difficult market. The principal underpinnings of the Company’s compensation system are an acute focus on performance, shareholder alignment, sensitivity to the relevant market place and a long-term orientation.
The Compensation Committee ties increases or decreases in overall compensation with the overall financial performance of the Company. During fiscal years when the Company’s profitability has been higher, total compensation has been higher. During more recent years when the Company’s performance has been lower due in part to the economic downturn and recession, particularly in the housing industry, the Compensation Committee’s policies and actions have significantly lowered overall compensation. These policies and actions include:
● | Significant reductions in annual bonus opportunities, where, on average, the maximum award for fiscal 2013 for all named executive officers was approximately 87% lower than the maximum award during the last ten years; |
● | Selection of bonus metrics to correspond to the financial needs of the Company during the relevant period. During periods of profitability, the bonus metrics were focused on profitability and return on shareholders’ equity measures. During periods when there was little or no likelihood of profits, bonus metrics were focused on reducing the Company’s debt obligations and improving cash flow and liquidity to enable the Company to weather the difficult economic conditions and return to profitability; |
● | Focus on a return to profitability and lowering net debt or refinancing debt over multi-year performance periods through long-term incentive awards for all named executive officers (“NEOs”) in fiscal 2010 and fiscal 2013; |
● | Policy of generally targeting a fixed number of stock options rather than a specific option value as part of annual compensation. Despite the fact that the stock price has remained significantly lower than historical levels, the number of each NEO’s option grants has remained relatively consistent, with the exception of the option grants for the Chairman of the Board, President and Chief Executive Officer (the “CEO”), the Executive Vice President and Chief Financial Officer (the “CFO”) and the Chief Operating Officer (the “COO”) in fiscal 2012 and 2013. The number of fiscal 2012 options granted to the CEO, CFO and COO was greater than fiscal 2011, however the fiscal 2012 option grants had an exercise price 33 1/3% above the closing stock price on the grant date. The number of option grants for fiscal 2013 were the same as fiscal 2012, but 50% of the fiscal 2013 option grants for the CEO, CFO and COO are subject to specific performance conditions; and |
● | Active management of both equity award levels and the number of shares available for new equity-based awards. |
The text of the resolution in respect of this proposal is as follows:
“Resolved, that the compensation paid to the Company’s named executive officers as disclosed pursuant to Item 402 of Regulation S-K in the Proxy Statement relating to the Company’s Annual Meeting of Shareholders to be held on March 11, 2014, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby approved.”
The Board recommends that shareholders vote FOR approval of this resolution.
The Compensation Committee of the Board of Directors (the “Committee”) is the principal overseer of the Company’s various policies and procedures related to executive compensation. The Committee meets at least threefour times a year to discuss industry trends with regard to overall compensation issues and consults with outside compensation consultants as needed. The Committee is governed by its Charter which is available on the Company’s public website (www.khov.com) under “Investor Relations/Corporate Governance”.
Areas of Responsibility
The Committee, in conjunction with the Board of Directors and with management’s input, shapes the Company’s executive compensation philosophy and objectives. In particular, the Committee is charged with:
● | Reviewing, at least annually, the salaries, bonuses and other forms of compensation, including stock option grants, for the Company’s senior executives (which include the |
● | Reviewing, at least annually, compensation paid to the Company’s non-employee Directors; |
● | Participating in the review of compensation of other designated key employees of the Company; |
● | Periodically reviewing the Company’s policies and procedures pertaining to the Company’s equity award plans and forms of equity grants to all employees and non-employee Directors, employee benefit plans (for example, the 401(k) plan and deferred compensation plans), severance agreements and executive |
● | Fostering good corporate governance practices as they relate to executive compensation; and |
● | Reviewing, at least annually, as part of the Board of Directors’ oversight responsibilities, the Company's compensation program |
These areas of responsibilities are discussed in more detail below under “Compensation Discussion and Analysis.” During the fiscal year ended October 31, 2011,2013, the members of the Committee were all independent, non-employee Directors.
Compensation Review Process for the Named Executive Officers
The Committee, in conjunction with the Board of Directors and with management’s input, is responsible for making decisions related to the overall compensation of the NEOs.
At least annually, the Committee establishes objective financial measures for determining bonus awards to the NEOs. The Committee also considers salary, employee benefits and discretionary bonus awards, if any, for the NEOs.
In determining overall compensation for the NEOs, the Committee may consult with other members of the Board of Directors, including the CEO and the CFO. These individuals often provide the Committee with insight on the overall performance of executives, including the achievement of personal objectives, if any,CFO rather than relying solely on the Company’s financial performance measures in determining their compensationcompensation. Each of these individuals often provides the Committee with insight on the exception thatindividual and overall performance of executives (other than with respect to himself), including the achievement of personal objectives, if any. The CEO and CFO are not present for the Committee’s evaluation of their individual performance. The Committee also engages an outside compensation specialist related to various compensation issues. Notwithstanding any of this input, the Committee has the sole discretion to make all final decisions related to NEO compensation.
Outside Compensation Consultant
For fiscal 2013, the Committee engaged Frederic W. Cook & Co., Inc. (“F.W. Cook”) as the Committee’s outside compensation consultant to provide certain services related to executive and non-employee Director compensation. In fiscal 2013, F.W. Cook assisted the Committee with its review of the Company’s annual bonus and long-term incentive plans for the NEOs as well as its review of the compensation program for the non-employee directors. F.W. Cook does not provide any other services to the Company unless approved by the Committee, and no such services were provided in fiscal 2013. In addition, the Company’s prior compensation consultant, Pearl Meyer & Partners (“Pearl Meyer”), was engaged through a portion of fiscal 2013. Pearl Meyer’s role was limited to having assisted the Company in preparing its Proxy Statement relating to fiscal 2012, but otherwise did not provide any other services to the Company during fiscal 2013. After considering the relevant factors, the Company has determined that no conflicts of interest have been raised in connection with the services F.W. Cook and Pearl Meyer performed for the Company in fiscal 2013.
The Committee’s primary objective in engaging F.W. Cook has been to obtain advice and feedback related to maintaining programs that provide compensation opportunities for executives within the median range of the competitive homebuilderPeer Group forcomparable financial performance. F.W. Cook also provided assistance to the Committee in fostering an overall compensation program as discussed above.
The Committee weighs the information gatheredadvice and feedback from PM&P,its compensation consultant and the members of the Board of Directors, as well as the views of, and information gathered by, the members of management it has consulted in conjunction with its review of other information the Committee considers relevant when making decisions or making recommendations to the full Board of Directors regarding executive compensation.
Board Communication
The Company’s Board of Directors is updated at least quarterly of any compensation decisions or recommendations made by the Committee, and the Committee requests feedback from the Board of Directors regarding specific compensation issues as it deems necessary.
Compensation Committee Report
The Committee has reviewed and discussed the Compensation Discussion and Analysis provided below with the Company’s management. Based on itsthis review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statementProxy Statement and in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2011.
COMPENSATION COMMITTEE
Stephen D. Weinroth, Chair
Robert B. Coutts
Edward A. Kangas
Joseph A. Marengi
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended October 31, 2011,2013, the members of the Compensation Committee were Messrs. Weinroth, Coutts, Kangas and Coutts.Marengi. Each of Messrs. Weinroth, Coutts, Kangas and Coutts areMarengi is a non-employee Directors, wereDirector, was never officersan officer or employeesemployee of the Company or any of its subsidiaries and did not have any relationships requiring disclosure under Item 404404(a) of Regulation S-K during fiscal 2011.in this Proxy Statement. None of our executive officers served on the board of directors or compensation committee of any other entity that has or had one or more executive officers who served on our Board of Directors or our Compensation Committee during fiscal 2011.
Company Performance in Fiscal 2013
Beginning in the second quarter of fiscal 2012, the Company began to see positive operating trends, which continued into fiscal 2013. Below are some highlights of the Company’s performance during fiscal 2013:
● | Total revenues for fiscal 2013 were $1.85 billion, up 24.2% from $1.49 billion during fiscal 2012; |
● | During fiscal 2013, the dollar value of net contracts, including those in our unconsolidated joint ventures, increased 14.6% to $2.2 billion compared with $1.9 billion for fiscal 2012, and the number of net contracts increased 5.8% to 6,177 homes for fiscal 2013 compared with 5,838 homes in the previous year; |
● | During fiscal 2013, deliveries, including those in our unconsolidated joint ventures, were 5,930 homes compared with 5,356 homes during fiscal 2012, representing an increase of 10.7%; |
● | Contract backlog as of October 31, 2013, including that in our unconsolidated joint ventures, was $848.4 million for 2,392 homes, which was an increase of 14.3% and 11.5%, respectively, compared to October 31, 2012; |
● | During fiscal 2013, homebuilding gross margin percentage, before interest expense and land charges included in cost of sales, was 20.1% compared with 17.8% in fiscal 2012; |
● | During fiscal 2013, total selling, general and administrative expenses were $220.2 million, or 11.9% of total revenues, compared with $190.3 million, or 12.8% of total revenues, for fiscal 2012; |
● | During fiscal 2013, the Company enhanced its capital structure by entering into a $75 million revolving credit facility, raising $24.6 million of additional non-recourse financing and issuing $41.6 million of Senior Notes due in 2016, the proceeds of which were used to redeem outstanding Senior Notes due in 2014. In addition, in November 2013, the Company announced a $150 million increase of its land banking arrangement with GSO Capital Partners LP, the credit arm of The Blackstone Group; and |
● | After an increase of 199% from fiscal 2011 to fiscal 2012, the fiscal year-end closing price of a share of Class A Common Stock increased 17.7% from fiscal 2012 to fiscal 2013. |
Best Practices
● | Pay-for-Performance: The |
The following graph demonstrates the link between the CEO’s annual realized pay and the Company’s Total Shareholder Return (“TSR”). Annual realized pay includes: (1) base salary, annual bonus, perquisites and other compensation (“Annual Compensation”) plus (2) long-term cash awards and stock awards vesting during the fiscal year and the realized value of options exercised (“Realized Value of Long-Term Compensation”).
Hovnanian CEO Pay Alignment with TSR Performance ($ `000)
(1) | Represents the | ||
(2) | |||
The TSR Index measures the change in the Company's stock price relative to fiscal 2011. The index for each fiscal year is |
● | Emphasis on Long-Term Value Creation and Retention: The Committee seeks to align the interests of management with the long-term interests of the Company’s shareholders by granting a significant portion of |
● | Maintaining an Appropriate Peer Group: In constructing the Peer Group described below, the Committee selected those companies that compete directly with the Company in the homebuilding industry, are of comparable size and complexity in operations to the Company and are generally in the markets in which the Company competes. The Committee reviews the composition of the Peer Group on an annual basis and makes adjustments, if needed. The Committee reviews the executive compensation of the Peer Group companies and seeks to award a total compensation opportunity for our NEOs near the median of the Peer Group, with variation in actual compensation earned both above and below the median, depending on performance. |
● | CEO Total Direct Compensation vs. Peer Group: The following graphs compare the CEO’s total direct compensation (the sum of base salary, annual bonus/incentive and long-term incentive awards (including the annualized value of long-term incentive program awards at the target outcome for the performance criteria), but excluding all other compensation elements) to the Peer Group chief executive officer median data for fiscal 2010 through 2012. No comparison is shown for fiscal 2013 because complete Peer Group chief executive officer median data was not available at the time of filing this Proxy Statement. For fiscal 2013, our CEO’s base salary was $1.1 million, his bonus was $1.5 million and his long-term incentive awards (including the annualized value of long-term incentive program awards at the target outcome for the performance criteria) were $5.3 million. We expect fiscal 2013 Peer Group chief executive officer total direct compensation to increase from prior levels based on improvement trends across the homebuilding industry during fiscal 2013. |
Hovnanian CEO Total Direct Compensation vs. Peer Group CEO Median Total Direct Compensation (1)(3)
(1) | Reflects the sum of base salary, annual bonus/incentive and long-term incentive awards (including the annualized value of long-term incentive program awards at the target outcome for the performance criteria) and excludes all other compensation elements. | |
(2) | Long-term incentives include the annualized value of long-term incentive program awards at the target outcome for the performance criteria. | ||
(3) | Data shown is based on each Peer Group company’s respective fiscal year which varies among Peer Group companies and, consequently, may be different than the Company’s fiscal year. |
Hovnanian CEO Total Direct Compensation vs.
Peer Group CEO Median Total Direct Compensation (1)(2)
(1) | Reflects the sum of base salary, annual bonus/incentive and long-term incentive awards (including the annualized value of long-term incentive program awards at the target outcome for performance criteria) but excludes all other compensation elements. | |
(2) | Data shown is based on each Peer Group company’s respective fiscal year which varies among Peer Group companies and, consequently, may be different than the Company’s fiscal year. |
● | No Excise Tax Gross-Ups |
● | Maintenance and Enforcement of Stock Ownership Guidelines: The Board of Directors has established stock ownership guidelines |
● | Perquisites: The Committee has provided NEOs only a few perquisites in addition to typical medical, dental and life insurance benefits. The Company limits the personal use of Company automobiles and its fractional aircraft share, reimbursement for country club dues and personal income tax preparation and accounting services to the CEO. Our perquisites do not include any tax gross-ups. |
● | Clawback Policy: Under Section 304 of the Sarbanes-Oxley Act of 2002, if we are required to restate our financial results due to material noncompliance with any financial reporting requirements as a result of misconduct, the CEO and CFO could be required to reimburse us for any bonus or other incentive-based or equity-based compensation received during the 12 months following the first public issuance of the non-complying document, and any profits realized from the sale of our securities during those 12 months. In addition |
Compensation Decisions for Fiscal The Committee’s compensation decisions for fiscal ● Base Salaries: ● Annual Bonuses: Consistent with the achievement of specified financial or personal objectives, fiscal ● Discretionary Bonuses: The Committee did not award discretionary bonuses to any NEO for fiscal ● The Committee, in conjunction with the Board of Directors and with senior management, has been instrumental in shaping the Company’s compensation philosophy and objectives because of its responsibilities and oversight of the Company’s various policies and procedures concerning executive compensation. The six primary objectives that the Committee Primary Objectives for the Compensation Program The Company’s primary objectives for compensating its executives are as follows: 1. To fairly compensate its executives in a manner that is appropriate with respect to their performance, level of responsibilities, abilities and skills; 2. To offer compensation that guides, motivates, retains and rewards its executives for the achievement of the Company’s financial performance, strategic initiatives and individual goals; 3. To align the executive’s interests with the interests of 4. To maintain competitive pay opportunities for its executives so that it retains its talent pool and, at the same time, has the ability to attract new and highly-qualified individuals to join the organization as it grows or in the event of succession or replacement of an executive; 5. To safeguard that the reward system is appropriately designed in the context of a challenging business environment; and 6. To ensure that compensation plans do not incentivize a level of risk that is reasonably likely to have a material adverse effect on the Company. Tailored Compensation Consistent with these objectives, the Company’s compensation philosophy also takes into consideration the ● CEO, CFO and COO: The compensation package of the CEO, Mr. Ara K. Hovnanian, the CFO, Mr. J. Larry Sorsby, and the COO, Mr. Thomas J. Pellerito, differ from that of the other NEOs due to their unique roles and elevated set of responsibilities. Because the CEO, CFO and COO make executive decisions that influence the direction, stability and profitability of the Company, their overall compensation is intended to strongly align with objective financial measures of the Company. ● Other NEOs: The Company’s Vice President — Chief Accounting Officer and Corporate Controller, Mr. Brad G. O’Connor, and Vice President — Finance and Treasurer, Mr. David G. Valiaveedan, have, as result of their respective positions, less direct influence on the Company’s strategic and operational decisions. Therefore, overall compensation levels for these NEOs reflect both objective financial measures of the Company and the attainment of personal objectives (as determined by the Committee, which may consult with the CFO, the CEO and other members of senior management). Variable Incentive Compensation The Company’s compensation philosophy emphasizes variable incentive compensation elements (bonus and long-term incentives), the value of which reflects the Company’s financial and stock performance. For executives who report to the CFO, including Messrs. O’Connor and Valiaveedan, the variable compensation elements also include personal performance objectives. For all executive officers, the Committee retains the flexibility to adjust incentive awards downward or to consider discretionary bonus awards in “special circumstances” as described on page Peer Group Considerations As context for setting the compensation levels for the CEO, CFO and COO in fiscal The Committee relies heavily on Peer Group comparisons for the CEO, CFO and COO. Because only Consideration of Market Conditions In determining overall compensation for all the NEOs, the Committee also takes into account leadership abilities and risk management contributions, which are especially critical during difficult market conditions. Since late 2006 through the beginning of 2012, the homebuilding industry As an example of the Committee’s consideration of market conditions, during fiscal 2013, the Committee sought to emphasize cash flow and liquidity As another example of the Say-on-Pay and Say-on-Frequency In light of the voting results with respect to the frequency of shareholder votes on executive compensation at the 2011 Annual Meeting of Shareholders The Board of Directors thoughtfully considers the opinions expressed by shareholders through their votes, periodic meetings and other communications, and believes that shareholder engagement leads to enhanced governance practices. During fiscal 2013, the Company conducted proactive investor outreach programs, including attending nine investor conferences as well as other meetings with the investment community and meeting one-on-one or in small groups with more than 200 investors. Additionally, the Company periodically engages investors to discuss specific matters of importance to shareholders. In addition, the Committee considered the result of the 2013 advisory, non-binding “say-on-pay” proposal in connection with the discharge of its responsibilities. A substantial majority of our shareholders (98.5% of the votes cast by shareholders of Class A Common Stock and Class B Common Stock, voting together) approved the compensation of our named executive officers for fiscal 2012 described in our proxy statement for the 2013 Annual Meeting of Shareholders. As this level of support was extremely high, the Committee decided that the say-on-pay vote result did not necessitate substantive changes to our compensation programs. We currently expect the next Compensation Elements at a Glance There are five main compensation elements that support the Company’s compensation objectives, each of which is discussed in detail below. 1. Base salaries; 2. Annual bonuses; 3. Stock grants (for example, stock options and restricted stock unit (“RSU”) awards); 4. Long-Term Incentive 5. Other employee benefits, including limited perquisites. Compensation Mix Fixed vs. Variable Compensation. A significant portion of executives’ “Total Direct Compensation” (which includes base salary, annual bonuses, stock grants and The intent of the Committee for fiscal 2013 was to maintain variable compensation opportunity as a significant percentage of Total Direct Compensation opportunity for all NEOs Long-Term vs. Short-Term Compensation. An important portion of each NEO’s Total Direct Compensation is long-term compensation, which normally includes stock option and/or The average long-term compensation amounts (including stock and option grants at their grant date fair value and the LTIP Base Salaries Base salaries are intended to reward executives for their day-to-day contributions to the Company. The Committee believes that base salaries within the competitive median range are necessary to retain the Company’s executive talent pool, and it determined that the fiscal Base salaries of all the NEOs are reviewed annually by the Committee and are subject to adjustment based on factors that may include individual performance, change in responsibilities, average salary increases or decreases in the industry, compensation for similar positions ● CEO: For fiscal 2007 through ● CFO: For fiscal 2011 through 2013, the CFO did not receive any adjustments in his annual base salary. ● COO: For fiscal ● Other NEOs: For fiscal Annual Bonuses Regular Bonuses The Company provides each of the NEOs with an opportunity to earn annual bonuses, which are intended to reward executives for the attainment of short-term financial objectives and, in the case of some NEOs, individual performance objectives. Fiscal The Committee has discretion under the Short-Term Incentive Plan to reduce or eliminate the amount of any bonus amounts payable to any participant based on performance or any other factors the 20112011 reflect2013 reflected a conservative approach to fixed pay elements (base salary), the achievement of pre-established goals (annual bonuses) and long-term equity awards well below median in view of the Company’s stock performance and the challenging business environment.· Three of the five NEOs (the The CEO CFO and COO)CFO received no base salary increase for fiscal 2011.2013. The remaining twothree NEOs each received a nominal salary increase. The amountsCommittee approved a base salary increase from $550,000 to $600,000 for Mr. Pellerito, which became effective in December 2012, to position his salary closer to the SummaryPeer Group chief operating officer median (as described further under “Compensation Philosophy and Objectives – Peer Group Considerations”). Messrs. O’Connor and Valiaveedan each received a 3% base salary increase, which also became effective in December 2012, in consideration of their individual performance and in line with the Company’s ordinary course merit-based and cost of living salary increase practices. See “Details of Compensation TableElements – Base Salaries” below for fiscal 2011 appear to reflect increases for the CFO and COO because their fiscal 2010 salary increases occurred after the beginning of the 2010 fiscal year, resulting in a pro-rated salary figure being reported for fiscal 2010.additional information on base salaries.·20112013 annual bonuses were paid to all NEOs. Bonuses for the CEONEOs were higher than in fiscal 2012 given the Company’s significant improvements in Adjusted EBITDA (as defined below) and CFO were the same asreturn to profitability. Additional details are described below under “Details of Compensation Elements – Annual Bonuses – Regular Bonuses.”2010. The COO’s bonus was paid at the same rate as for fiscal 2010, taking into consideration that he was COO for only a portion of fiscal 2010. Bonuses for the other NEOs increased by 2%, the amount of their annual salary increase, since their bonus calculations are a percentage of base salary.2013.·Discretionary Bonuses: None were made in fiscal 2011 to any NEO.·Plan (described below): GrantsProgram described below: For fiscal 2013, the Committee granted the same number of equity awards madestock options to the NEOs as in fiscal 2011 and the annualized target value2012. The Committee also determined that 50% of the Company’s Long-Term Incentive Plan fell considerablystock options granted in June 2013 to the CEO, CFO and COO would be subject to performance conditions. These performance-based options vest in four equal annual installments, commencing on the second anniversary date of the grant, except that no portion of the award will vest unless the specific performance conditions described below median Peer Group long-term incentive compensation levels.under “Details of Compensation Elements – Stock Grants” are met. The Long-Term Incentive Plan2013 LTIP, described below under “Details of Compensation Elements,” was implemented in fiscal 20102013 as a multi-year award with a three-year31-month performance period (fiscal 2011-2013), withand additional vesting conditions infor two fiscal 2014 and 2015.years beyond the performance period.18·Impact on CEO Total Direct Compensation: The following graphs compare fiscal 2011 CEO direct compensation (excluding all other compensation elements) to the most recently published Peer Group median data available to the Committee when finalizing fiscal 2011 CEO compensation.(1)Reflects the most recently published Peer Group Median data available to the Committee when finalizing fiscal 2011 CEO compensation.(2)Reflects the sum of base salary, annual bonus/incentive and long-term incentive awards, excluding all other compensation elements.(1)Reflects the most recently published Peer Group Median data available to the Committee when finalizing fiscal 2011 CEO compensation.19consideredconsiders in making compensation decisions are discussed below.below, as are our other philosophies and mechanisms for determining compensation. In making compensation-related decisions, the Committee also considered its role in promoting good corporate governance practices.theour shareholders; very unique roles played by each of the NEOs for whom compensation is reported in the tables below, and the Committee seeks to individually tailor their compensation packages to align their pay mix and pay levels with their contributions to, and positions within, the Company. For example:··20 and Discretionary Awards2841 under “Discretionary Bonuses.” No discretionary bonus awards were made in fiscal 2011 to any NEO.2011,2013, the Committee considered the compensation levels and practices of its Peer Group companies. The Company’s Peer Group includes the following 11 publicly-traded homebuilding companies: (1) Beazer Homes USA, Inc.; (2) D.R. Horton, Inc.; (3) KB Home; (4) Lennar Corporation; (5) M.D.C. Holdings, Inc.; (6) Meritage Homes Corporation; (7) NVR, Inc.; (8) Pulte Homes,Group, Inc.; (9) Ryland Group, Inc.; (10) The Standard Pacific Corp.; and (11) Toll Brothers, Inc. The companies in the Peer Group are the same as those used in fiscal 20102012 and were selected by the Committee, in consultation with PM&P,the Committee’s former compensation consultant, Pearl Meyer, and management, because of their comparable business profile. In particular, the Company’s revenue size relative to the companies in the Peer Group and the presence of the Peer Group companies in the Company’s markets were considered the most relevant factors for selection of peer companies within the homebuilding industry. The Committee and PM&P will continue to review the appropriateness of the Peer Group composition. For the other NEOs, the Committee places equal or greater weight on its consideration of internal pay equity, an evaluation of individual performance contributions and other factors described in detail below.sixfour of the 11 Peer Group companies report data for a chief operating officer position, the Committee may also review broad-based compensation survey data for the COO. The Committee periodically reviews the compensation for the other NEOs relative to the Peer Group and broad-based compensation survey data, with consideration of internal pay relationships in years when market benchmarking is not conducted. The Committee does not consider the specific participants in the broad-based compensation survey data to be a material factor in its review.reviews. The Committee believes that a review of market survey data periodically (but not necessarily every year) is sufficient for these positions based on their roles and historical compensation levels. ConsiderationsDuring fiscal 2011, In addition, in establishing compensation levels, the Committee takes into consideration competitive market pressures, both within and outside of the homebuilding industry.continued to behad been impacted by a lack of consumer confidence, increasing home foreclosure rates, large supplies of resale and new home inventories, and more restrictive lending standards for homebuyers. The result has been continuedhomebuyers, resulting in weak demand for new homes, slower sales, higher than normal cancellation rates, and increased price discounts and other sales incentives to attract homebuyers.The heightened importance Although new home demand remains at historically low levels, during fiscal 2013, the overall homebuilding market continued the improvement that started in 2012. As a result, the Company experienced higher revenues and gross margins, increased contracts and deliveries and pre-tax profitability for the fiscal year for the first time since fiscal 2006. See “Executive Summary” for highlights of the Company’s performance in fiscal 2013.as well as the Company’s budget cuts and, downsizing, were considered by the Committee in making executive compensation decisions for fiscal 2011. Asas a result, during fiscal 2013, the fiscal 2011 annualbonus formula for the CEO, CFO and COO also included a cash balances component. In addition, the EBITDA component of the bonus formulas offor the CEO and CFO continuedwas structured so that it would require improvement in Adjusted EBITDA in fiscal 2013 compared to place a heavier focus on cash flow and liquidity. The fiscal 2011 annual2012 Adjusted EBITDA in order for these NEOs to be eligible for the same or increased bonus levels under this component of the fiscal 2013 bonus formula for the COO was changed from hiscompared to their earned fiscal 2010 personal objectives bonus formula relating to his partial year service in the COO role to a full-year bonus formula similar to that2012 bonuses.CEO and CFO. For fiscal 2011,consideration of market conditions, the COO’s maximum payout was equal toCommittee determined that 50% of the annualized amount of his fiscal 2010 annual bonus for his period of service as COO. Thestock options granted in June 2013 to the CEO, CFO and COO’s salaries remainedCOO would be subject to performance conditions. These performance-based options vest in four equal annual installments, commencing on the same as in fiscal 2010. As noted above,second anniversary date of the CFO’s and COO’s salaries appear to reflect increases because their fiscal 2010 salary increases were effective after the beginning of fiscal 2010, resulting in pro-rated prior year salary figures. In addition, Mr. Pellerito’s fiscal 2010 salary reflects only agrant, provided that no portion of the yearaward will vest unless the Committee determines that the Company achieved $100 million in the COO role. The salariesPre-tax Profit (as defined below) in at least one of the Vice President — Chief Accounting Officer and Corporate Controller, Mr. Brad G. O’Connor, and Vice President — Finance and Treasurer, Mr. David G. Valiaveedan, were increased by 2% over fiscal 2010, with a corresponding increase in the dollar amount of their bonus opportunity for2014, fiscal 2011. These adjustments were made to provide better alignment with the compensation of comparable positions in the Peer Group.21The Committee established these compensation levels taking into consideration competitive market pressures, both within and outside of the homebuilding industry, and the strength of leadership required in this challenging business environment.ResultsThe Committee considered the result of the 2011 advisory, non-binding “say-on-pay” proposal in connection with the discharge of its responsibilities. A substantial majority of our shareholders (98.0% of the votes cast by shareholders of Class A Common Stock and Class B Common Stock, voting together) approved the compensation of our named executives officers described in our proxy statement in 2011. As this level of support was extremely high, the Committee decided that the say-on-pay vote did not require changes to our compensation programs.inat which a substantial majority of our shareholders (96.3% of the votes cast by shareholders of Class A Common Stock and Class B Common Stock, voting together) voted for “say-on-pay” proposals to occur every three years, the Board of Directors initially decided that the Company willwould hold, in accordance with the vote of an overwhelming majority, a triennialan advisory vote on the compensation of named executive officers untilevery three years. However, the Company voluntarily elected to hold a “say-on-pay” vote at its 2013 Annual Meeting of Shareholders in addition to the scheduled “say-on-pay” vote at this 2014 Annual Meeting of Shareholders. The Company’s next advisory vote on the compensation of its named executive officers is required to be held at the Company’s 2017 Annual Meeting of Shareholders.requiredadvisory vote on the frequency of shareholder votes on executive compensation. Accordingly, we currently expect to hold the next “say-on-pay” vote at the Company’s 2014 Annual Meeting of Shareholders. We currently expect to next hold a shareholder vote on frequencyofficer compensation to occur at the Company’s 2017 Annual Meeting of Shareholders.1.2.3.4.Plan (definedPrograms (“LTIPs”) (described below) (payable in both cash and stock); and5.Long-Term Incentive Plan (“LTIP”)LTIP awards) opportunity is attributed toconsists of variable compensation – that is, the ultimately realized compensation on an annualized compensationbasis is dependent on either Company or individual performance. Of the elements of Total Direct Compensation, base salary is fixed compensation, while annual bonuses, stock grants and LTIP awards are variable compensation. An important part of each NEO’s compensation package consists of stock options, the ultimate value of which is tied to the Company’s stock performance. These variable elements are intended to align the executives’ performance and interests with Company performance and long-term shareholder value. for fiscal 2011 and to maintain its approximate level from year to year. In addition, the Committee intends for Total Direct Compensation and the level of variable compensation realized to align with the median level of the Peer Group in years when the Company performs at median levels compared to the Peer Group. InFrom fiscal 2007 2008, 2009, 2010 and 2011through fiscal 2013, the percentage of variable compensation received by the Company’s NEOs had declined from historical levels because total bonus amounts ultimately received by our NEOs were zero for the CEO for fiscal 2007 and significantly lower than historical amounts for all NEOs forfrom fiscal 2007 2008, 2009, 2010 and 2011, withthrough fiscal 20112013. Fiscal 2013 bonus amounts, on average, were approximately 92%87% lower than the highest award for these NEOs during the last ten years. In fiscal 2011,2013, the Committee also awarded the same number of stock grantsoptions to each of the NEOs as in fiscal 2012, as discussed below, at continued lower amounts and well belowwith 50% of the Peer Group median long-term incentive values foroptions awarded to the CEO, CFO and COO and well below the Peer Group and broad-based compensation survey median for the other NEOs.22restricted stock unitRSU awards and deferred share awards granted in lieu of cash for a portion of total bonus amounts. In fiscal 2009, 2010, and 2011, there were no awards of deferred shares to NEOs due to the reduced amount of the bonuses, and the bonus amounts were paid 100% in cash. Short-term compensation consists of base salary and the cash portion of annual bonus amounts. Long-term compensation is intended to foster long-term commitment by the executive, employee-shareholder alignment and improved long-term shareholder value. From fiscal 2009 through fiscal 2013 there were no deferred shares awarded to NEOs due to the reduced amount of the overall bonuses for each NEO as compared to more profitable years, and the annual bonus amounts were paid 100% in cash. In fiscal 2010 and 2013, the Committee also adopted a special LTIPLTIPs for the named executive officersNEOs and other key senior executives of the Company, as discussed below. The Committee does not currently anticipate considering a similar LTIP program until after the expiration of the current three-year LTIP performance period. No RSUs were granted to any NEOs in fiscal 2013.awardawards annualized at target) as a percent of Total Direct Compensation for fiscal years 20072009 through 20112013 for the CEO and CFO were 55% and 36%41%, respectively. The average long-term compensation amount (including stock and option grants at their grant date fair value and the LTIP awardawards annualized at target) as a percent of Total Direct Compensation for fiscal years 2010 and fiscal 2011through 2013 for the COO (who was promoted to his current position in fiscal 2010) was 37%42%. The average long-term compensation amounts (including stock and option grants at their grant date fair value and the LTIP awards annualized at target) as a percent of Total Direct Compensation for Messrs. O’Connor and Valiaveedan are lower than that of the CEO, CFO and COO because, while the Committee believes it is important for these executives to be compensated in part based on the long-term performance of the Company, they have less direct influence on the long-term financial success of the Company as compared to the CEO, CFO and COO.20112013 base salaries of the Company’s executive officers were necessary to retain their services.involvingin the Company’s Peer Group or broad-based compensation survey data if comparable data waswere unavailable from the Peer Group companies, as well as other factors such as cost of living increases and internal pay relationships with other executives. The Committee also consults with PM&P in determining the need for salary adjustments.·2011,2013, the CEO did not receive any adjustments in his existing annual base salary. This is reflective ofreflects the Company’s budget cuts and downsizing due to industry conditions. In addition, basedBased on discussions with PM&P,F.W. Cook and Peer Group market data gathered by management, the Committee determined that the CEO’s fiscal 20112013 base salary was near the median base salary level of other chief executive officers at Peer Group companies.·Based on discussions with PM&P, theThe Committee determined that the CFO’s fiscal 20112013 base salary fellwas near the median base salary level of other chief financial officers at Peer Group companies.·2011,2013, the COO did not receive any adjustments inreceived a base salary increase from $550,000 to $600,000 to position his annual base salary.salary closer to the Peer Group chief operating officer median. Notwithstanding that increase, the Committee determined that Mr. Pellerito’s base salary remains below the median base salary level of other chief operating officers at Peer Group companies. The Committee determined that this level is appropriate given that he is relatively new to the COO role.·2010, Messrs.2013, Mr. O’Connor and Valiaveedan did not receive any increase in their respective base salaries. However, for fiscal 2011, Messrs. O’Connor andMr. Valiaveedan each received a 2%3% salary increase. In making these determinations, the Committee considered theincrease in consideration of their individual performance of each executive,and in line with the merit budget for employees of the Company generallyCompany’s ordinary course merit-based and the cost of living.living salary increase practices. 2320112013 annual bonus awards were made pursuant to the Company’s amended and restated Hovnanian Enterprises, Inc. Senior Executive Short-Term Incentive Plan (the “Short-Term Incentive Plan”) and the 2008 Plan, each of, which is a shareholder approved plan, although no stock awards were paid as partplan.fiscal 2011 bonus awards under either plan.
Bonus opportunities are intended to be competitive with industry-wide practices in order to retain and attract executive talent. For fiscal 2011,2013, as in fiscal years 2009 and 2010,through 2012, the earned bonuses for the NEOs were paid 100% in cash.
The regular annual bonus opportunities in fiscal 20112013 for each of the NEOs are shown in the following table. The performance goals for each NEOMessrs. O’Connor and Valiaveedan are discussed below.
CEO | CFO | COO | Vice President — Chief Accounting Officer and Corporate Controller | Vice President — Finance and Treasurer | ||||||
Return on Average Common Equity ("ROACE") (1) | % of Pre-tax | $ Bonus based on ROACE | N/A | $ Bonus based on ROACE | $ Bonus based on ROACE | |||||
Adjusted EBITDA | $ Bonus based on Adjusted EBITDA | $ Bonus based on Adjusted EBITDA | $ Bonus based on Adjusted EBITDA | N/A | N/A | |||||
Tailored Personal Objectives | N/A | N/A | N/A | $ Bonus based on achievement of specific goals | $ Bonus based on achievement of specific goals | |||||
Formula | Total award is greater of (a) ROACE or (b) sum of Adjusted EBITDA | Total award is greater of (a) ROACE or (b) sum of Adjusted EBITDA | Total award is | Total award is sum of ROACE and personal objectives factors, with maximum amount of | Total award is sum of ROACE and personal objectives factors, with maximum amount of | |||||
(1) | Based on fiscal 2013 results, payments under the ROACE award component were zero. |
Historically, annual bonuses for the CEO and the CFO have been linked to a measure of the Company’s return on average equity (ROACE, as the current example), a common industry practice. For fiscal 2011,2012, the bonus formula for the CEO, CFO and CFO, the bonus formulaCOO included a component related to net debt was changed to a calculation based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) improvement. The fiscal 2013 bonus formulas for these NEOs continued to focus on EBITDA improvement but, because the Committee sought in 2013 to emphasize cash flow and maintain adequate liquidity, a separate cash balances. The COO’sbalances measure was also included, as described further below. In recognition of the Company’s improvements in operating trends beginning in the second quarter of fiscal 20112012 and to further incentivize future improvements, the Committee increased the overall fiscal 2013 maximum bonus opportunity was based on the same EBTIDA improvement and cash balances goals. The Committee believes that the goals established for fiscal 2011, which are described below, support the financial objectives of the Company and were set at levels that were challenging, but attainable. Furthermore, the maximum bonus levels for the CEO, CFO and CFO were capped at no more than the actual 2010 bonus amounts earnedCOO to $1,500,000, $575,000 and the maximum bonus level for the COO was capped at no more than the annualized amount of his actual 2010 bonus amount earned for his period of service as COO. The Committee made the change$575,000, respectively, from $949,500, $350,000 and $350,000, respectively, in focus to EBITDA improvement and cash balances because management has effectively restructured the balance sheet and debt obligations that were the focus of the fiscal 2008, 2009 and 2010 bonus formulas.
Specifically, the bonus formulas for the CEO and the CFO for fiscal 20112013 provided that annual bonuses would be equal to the greater of (a) the executive’s bonus formula based on the Company’s ROACE andor (b) the new bonus formula based on the Company’s Adjusted EBITDA improvement and cashplus fiscal quarter ending Cash balances. The COO’s bonus formula for fiscal 2013 was based solely on the sum of the Company’s Adjusted EBITDA plus fiscal quarter ending Cash balances factors. “ROACE” is defined as “net income” (as described below) divided by “average common equity” (stockholder’s(stockholders’ equity less preferred stock at the beginning of the fiscal year and at the end of each fiscal quarter during the year divided by five). “EBITDA improvement”For all of the ROACE bonus formulas discussed below for the NEOs, “net income” used in calculating ROACE is after taxes and preferred dividends (as reflected on the Company’s financial statements) and excludes land charges. “Pre-tax Profit” is defined as earnings (losses) before income tax expense as reflected on the difference betweenCompany’s audited financial statements, excluding the impact of any items deemed by the Committee to be extraordinary items (for example, losses from land impairments and losses from debt repurchases/debt retirement such as call premiums, above par purchase prices and related issuance costs or gains from debt repurchases). “Adjusted EBITDA” is defined as EBITDA reflected in the Company’s fiscal 20112013 financial statements, excluding gains or losses on extinguishment of debt, inventory impairment losses and land option write-offs,write-offs. “Cash” is defined as homebuilding cash and cash equivalents plus restricted cash that collateralizes letters of credit. The Committee used this Adjusted EBITDA measure because it believed it was appropriate to exclude from the Company’sbonus formula items outside management’s control (for example, impairments driven by a declining market) and it did not want to discourage management from making capital structure improvements (for example, debt extinguishments, which could result in gains or losses on the extinguishment of debt). Specifically, the Committee determined that the fiscal 2013 EBITDA number reflected in its fiscal 2010 financial statements.
For fiscal 2011,2013, the bonus formulas for Messrs. O’Connor and Valiaveedan remained the same as their fiscal 2010 formulas.2012 formulas, except that, in recognition of the Company’s improvements in operating trends beginning in the second quarter of fiscal 2012 and to further incentivize future improvements, if the Company achieved positive Pre-tax Profit (as defined above) in fiscal 2013, the maximum amounts these NEOs could receive under the personal objectives component of their respective bonus formulas (60% and 50% of base salary, respectively) would no longer be reduced by 50%. Messrs. O’Connor and Valiaveedan have, as result of their respective positions, less direct influence on the Company’s strategic and operational decisions compared to the CEO, CFO and COO, and, therefore, their bonus formulas weredo not revised to include an Adjusted EBITDA improvement and cashplus fiscal quarter ended Cash balances component. Specifically, these NEOs’ fiscal 20112013 bonus formulas provided, as in fiscal 2010,2012, that bonuses would be based on both (a) a formula based on the Company’s ROACE and (b) the attainment of tailored personal objectives. The following description provides detail as to the determination of each NEO’s annual bonus.
ROACE percentage | % Pre-tax Income |
0.0% | 0.00% |
5.0% | 1.00% |
10.0% | 1.25% |
15.0% | 1.50% |
20.0% | 2.00% |
EBITDA Improvement (millions) | $ | 0.0 | $ | 37.5 | $ | 75.0 | ||||||
Bonus (thousands) | $ | 0.0 | $ | 474.8 | $ | 949.5 |
(a) ROACE Calculation Method* | ||||
ROACE percentage | Bonus (thousands) | |||
0.0% | $ | 0 | ||
4.7% 5.0% 10.0% 15.0% 20.0% 25.0% | $ | 350.0 |
EBITDA Improvement (millions) | $ | 0.0 | $ | 37.5 | $ | 75.0 | ||||||
Bonus (thousands) | $ | 0.0 | $ | 175.0 | $ | 350.0 |
EBITDA Improvement (millions) | $ | 0.0 | $ | 37.5 | $ | 75.0 | ||||||
Bonus (thousands) | $ | 0.0 | $ | 125.0 | $ | 250.0 |
ROACE Percentage | Brad O’Connor | David Valiaveedan | ||||||
0.0% | $0 | $0 | ||||||
5.0% | 10% of base salary | 15% of base salary | ||||||
10.0% | 20% of base salary | 30% of base salary | ||||||
15.0% | 40% of base salary | 40% of base salary | ||||||
20.0% | 60% of base salary | 50% of base salary |
Since fiscal 2007, the NEOs have also been offered the opportunity to earn a one-time retention bonus equal to 3% of such NEO’s fiscal year end 2007 base salary if the NEO remains employed with the Company through the end of the first fiscal year in which the Company’s ROACE returns to 20%. At the end of fiscal 2011,2013, the Company’s ROACE did not meet this threshold, so there were no resulting retention bonuses earned for fiscal 2013.
Fiscal 2013 bonus formulas for each of the NEOs are further tailored as set forth below and are assessed annually. The following description provides detail as to the determination of each NEO’s fiscal 2013 annual bonus. Due to the reduced amount of the bonuses as compared to more profitable years, all bonuses for fiscal 2013 were paid out100% in cash. In addition, for this year.
● | CEO: The CEO’s bonus formula for fiscal 2013 provided for a bonus award equal to the greater of (a) a fixed percentage of Pre-tax Profit based on the Company’s ROACE or (b) a fixed dollar amount based on the Company’s Adjusted EBITDA plus a fixed dollar amount based on the Company’s quarterly Cash balances, with his total bonus not to exceed $1,500,000. The methodology underlying the ROACE portion of the formula was historically designed to yield an annual bonus that would result in a Total Direct Compensation opportunity that falls within the median range of the Peer Group for comparable financial performance as well as supporting the financial objectives of the Company. The Committee intends to consider removing or increasing the cap as the Company’s financial results improve. Prior to fiscal 2009, there was no imposed cap on the CEO’s bonus. |
FOR THE CEO, THE BONUS FORMULA WAS THE GREATER OF:
(a) ROACE Calculation Method*
ROACE percentage | % Pre-tax Profit |
0.0% | 0.00% |
5.0% | 1.00% |
10.0% | 1.25% |
15.0% | 1.50% |
20.0% | 2.00% |
* | The bonus is interpolated on a linear basis between the points shown in the table, and may be extrapolated beyond the maximum ROACE percentage shown at a rate of 0.10% of Pre-tax Profit per percentage point increase in ROACE, which is the rate applied between the last two tiers of the above chart, but was capped at $1,500,000 and was also subject to the maximum bonus payable under the Short-Term Incentive Plan. |
OR
(b) Adjusted EBITDA and Cash Balances Calculation Method*
Adjusted EBITDA (millions) | Bonus (thousands) |
$0.0 | $0.0 |
$96.7 | $675.0 |
$107.4 | $750.0 |
$118.2 | $850.0 |
$123.5 | $1,000.0 |
$128.9 or greater | $1,150.0 |
PLUS
Number of Fiscal 2013 Quarter-Ends | Bonus (thousands) |
Less than 2 | $0.0 |
2 | $150.0 |
3 | $250.0 |
4 | $350.0 |
* | The Adjusted EBITDA bonus is interpolated on a linear basis between the points shown in the table. The total bonus was capped at $1,500,000, and was also subject to the maximum payout under the Short-Term Incentive Plan. |
Based on the bonus formula above, because there was no payment under the ROACE component, the CEO’s 2013 cash bonus was entirely attributed to the Adjusted EBITDA and Cash Balances Calculation Method of his bonus formula. Fiscal 2013 Adjusted EBITDA was $179.6 million, which significantly exceeded the maximum performance level, and the Cash balances at the end of all four fiscal 2013 quarters were above $170 million. As a result, Mr. Hovnanian earned a cash bonus equal to the cap of $1,500,000.
● | CFO: The CFO’s bonus formula for fiscal 2013 provided for a bonus amount equal to the greater of (a) a fixed dollar amount based on the Company’s ROACE or (b) a fixed dollar amount based on the Company’s Adjusted EBITDA plus a fixed dollar amount based on the Company’s quarterly Cash balances, with his total bonus not to exceed $575,000. The ROACE portion of the formula was historically designed to yield an annual bonus that would result in a Total Direct Compensation opportunity that falls within the median range of the Peer Group chief financial officers for comparable financial performance. The Committee intends to consider removing or increasing the cap as the Company’s financial results improve.Prior to fiscal 2009, there was no imposed cap on the CFO’s bonus. |
FOR THE CFO, THE BONUS FORMULA WAS THE GREATER OF:
(a)ROACE Calculation Method*
ROACE percentage | Bonus (thousands) | |||
0.0% | $ 0.0 | |||
5.0% | $ 375.0 | |||
7.67% | $ 575.0 | |||
10.0% | $ 575.0 | |||
15.0% | $ 575.0 | Capped | ||
20.0% | $ 575.0 | |||
25.0% | $ 575.0 |
* | The bonus is interpolated on a linear basis between the first three percentage points shown in the table, but was capped at $575,000 and was also subject to the maximum payment under the Short-Term Incentive Plan. |
OR
(b) Adjusted EBITDA and Cash Balances Calculation Method*
Adjusted EBITDA (millions) | Bonus (thousands) |
$0.0 | $0.0 |
$96.7 | $250.0 |
$107.4 | $280.0 |
$118.2 | $315.0 |
$123.5 | $370.0 |
$128.9 or greater | $425.0 |
PLUS
Number of Fiscal 2013 Quarter-Ends | Bonus (thousands) |
Less than 2 | $0.0 |
2 | $75.0 |
3 | $100.0 |
4 | $150.0 |
* | The Adjusted EBITDA bonus is interpolated on a linear basis between the points shown in the table. The total bonus was capped at $575,000, and was also subject to the maximum payout under the Short-Term Incentive Plan. |
Based on the bonus formula and the ROACE and Adjusted EBITDA and Cash balances results described above, Mr. Sorsby earned a cash bonus equal to the cap of $575,000, which was entirely attributed to the Adjusted EBITDA and Cash Balances Calculation Method of his bonus formula.
● | COO: The COO’s bonus formula for fiscal 2013 provided for a bonus amount equal to a fixed dollar amount based on the Company’s Adjusted EBITDA plus a fixed dollar amount based on the Company’s quarterly Cash balances, with his total bonus not to exceed $575,000. The Committee intends to consider removing or increasing the cap as the Company’s financial results improve. |
FOR THE COO, the Adjusted EBITDA and Cash Balances Calculation Method*
Adjusted EBITDA (millions) | Bonus (thousands) |
$0.0 | $0.0 |
$96.7 | $250.0 |
$107.4 | $280.0 |
$118.2 | $315.0 |
$123.5 | $370.0 |
$128.9 or greater | $425.0 |
PLUS
Number of Fiscal 2013 Quarter-Ends | Bonus (thousands) |
Less than 2 | $0.0 |
2 | $75.0 |
3 | $100.0 |
4 | $150.0 |
* | The Adjusted EBITDA bonus is interpolated on a linear basis between the points shown in the table. The bonus was capped at $575,000, and was also subject to the maximum payout under the Short-Term Incentive Plan. |
Based on the bonus formula and the Adjusted EBITDA and Cash balances results described above, Mr. Pellerito earned a cash bonus equal to the cap of $575,000.
● | Other NEOs: Fiscal 2013 incentive opportunities for Messrs. O’Connor and Valiaveedan were based on a combination of Company performance and individual performance factors that were within each of these executives’ control and that would have a positive impact on the Company. Therefore, the bonus program for these NEOs targeted the achievement of both (a) ROACE financial performance objectives for the Company and (b) personal objectives. For fiscal 2013, the total bonuses payable under both components were capped at the maximum percentages of base salary they could achieve under the personal objectives portion of their respective bonus formulas. If the Company achieved positive Pre-tax Profit in fiscal 2013, the caps were 60% and 50% of base salary, respectively. If the Company did not achieve positive Pre-tax Profit in fiscal 2013, the caps would be 30% and 25% of base salary, respectively. The Committee intends to consider removing or increasing the caps as the Company’s financial results improve. |
FOR OTHER NEOs, THE BONUS FORMULA WAS BOTH:
(a) Calculation Method – for Achievement of Financial Performance Measure*
ROACE Percentage | Brad O’Connor | David Valiaveedan |
0.0% | $0 | $0 |
5.0% | 10% of base salary | 15% of base salary |
10.0% | 20% of base salary | 30% of base salary |
15.0% | 40% of base salary | 40% of base salary |
20.0% | 60% of base salary | 50% of base salary |
* | The bonuses are interpolated on a linear basis between the points shown in the table. The total bonuses payable under both components were subject to the maximum bonus payable under the Short-Term Incentive Plan and were capped at the maximum percentages of base salary these NEOs could achieve under the personal objectives portion of their respective bonus formulas. If the Company achieved positive Pre-tax Profit in fiscal 2013, Messrs. O’Connor and Valiaveedan’s caps were 60% and 50% of base salary, respectively. If the Company did not achieve positive Pre-tax Profit in fiscal 2013, the caps were 30% and 25% of base salary, respectively. |
AND
(b) Calculation Method – for Meeting Personal Objectives Measure*
Goals | Brad O’Connor | David Valiaveedan |
Threshold | Up to 20% of base salary | Up to 30% of base salary |
Target | Up to 40% of base salary | Up to 40% of base salary |
Outstanding | Up to 60% of base salary | Up to 50% of base salary |
* | “Threshold,” “target,” and “outstanding” levels are determined by the CFO and the CEO, who may consult with other members of senior management, other than Messrs. O’Connor and Valiaveedan with respect to their own compensation, and are used for internal evaluation purposes only. As stated above, the total bonuses payable under both components were subject to the maximum bonus payable under the Short-Term Incentive Plan and were capped at the maximum percentages of base salary these NEOs could achieve under the personal objectives portion of their respective bonus formulas. If the Company achieved positive Pre-tax Profit in fiscal 2013, the caps were 60% and 50% of base salary, respectively. If the Company did not achieve positive Pre-tax Profit in fiscal 2013, the caps were 30% and 25%, respectively. |
Mr. O’Connor’s fiscal 2013 personal objectives included leading the Company’s accounting department in determining best practices to implement standardized accounting processes and controls across the organization now that a majority of the Company’s operations use the same enterprise-wide information system; creating reporting tools for financial planning, projecting cash flows and reviewing actual results using the applications and data available from the new enterprise-wide system; and ensuring federal and state deferred tax assets are used effectively and in accordance with federal and state tax laws. Mr. O'Connor successfully completed these objectives by leading a team of the Company’s accounting and finance associates in defining and implementing standardized accounting processes and controls across the organization and continually developing new and enhanced reporting tools considering the data available from the new enterprise-wide system. In addition, Mr. O’Connor led the tax team in their analysis and preparation for fully and properly utilizing the federal and state deferred tax assets as they become available.
Mr. Valiaveedan’s fiscal 2013 personal objectives included developing and executing the Company’s capital structure strategy, including obtaining non-recourse bank financing, negotiating joint venture and land banking agreements, preparing Company projections and managing existing joint ventures. During fiscal 2013, Mr. Valiaveedan played an integral role in the development and execution of the Company’s capital markets strategy. Most significantly, he led the origination and execution of the Company’s $75 million revolving credit facility and approximately $114 million of non-recourse debt. He also oversaw the execution of land banking transactions to fill the $250 million land banking arrangement with GSO Capital Partners, LP and extended the maturity date on $41.6 million of senior notes. Mr. Valiaveedan also successfully negotiated a new joint venture agreement and the joint venture’s related $20 million revolving credit facility. These transactions significantly improved the Company’s liquidity. In addition, Mr. Valiaveedan successfully managed the preparation of Company financial projections which included multiple scenarios to evaluate company performance under different financial and performance assumptions and led to improved decision making.
Based on the bonus formulas above and the Committee’s determinations regarding each executive’s personal objectives, neither of these NEOs earned bonuses related to the ROACE Calculation Method for fiscal 2013, but each earned a cash bonus for meeting his respective fiscal 2013 personal objectives in full (the “outstanding” category). Because the Company achieved positive Pre-tax Profit in 2013, the cap described above was not reduced, resulting in payments of $191,580 and $149,350 for Mr. O’Connor and Mr. Valiaveedan, respectively.
Discretionary Bonuses
The Committee has the authority to make discretionary bonus awards, which it considers under special circumstances, including exceptional contributions not reflected in the regular bonus measures, new hire sign-on bonuses and retention rewards. No discretionary bonus awards were granted to the NEOs in fiscal 2011.
Stock Grants
The Committee may make grants of stock options, stock appreciation rights, restricted stock and restricted stock units (“RSUs”),RSUs, unrestricted shares of stock or stock-based awards settled in cash pursuantunder the shareholder-approved 2012 Hovnanian Enterprises, Inc. Stock Incentive Plan (as amended or amended and restated from time to the 2008 Plan.time). In fiscal 2011,2013, the Committee awarded stock options and RSUs to each of the NEOs. The Committee determined that for fiscal 2011, a mix of 90% stock options and 10% RSUs would be appropriate based on the limited number of shares remaining available for grant under the 2008 Plan. The number of RSUs granted in lieu of stock options was calculated using a standardized ratio of 3-to-1 which has been in effect since fiscal 2004. Messrs. Pellerito, O’Connor and Valiaveedan were eligible to elect to receive additional RSUs in lieu of stock options, but only Mr. Valiaveedanneither made such an election. Instead of receiving a mix of 90% stock options and 10% RSUs, Mr. Valiaveedan elected to receive 75% stock options and 25% RSUs. No other stock-based awards were made to NEOs in fiscal 2011.
Stock options are intended to establish a strong commitment to maintain employment with the Company and focus on creating long-term shareholder value. In addition, stock options are selected over other types of stock-based awards because their design inherently rewards executives only if the stock price increases, which provides a balance with cash incentives and the more retention-oriented RSU grants. Because the ultimate value received by stock option and RSU holders is directly tied to increases in the Company’s stock price, stock options and RSUs also serve to link the interests of management and shareholders and to motivate executive officers to make decisions that will increase the long-term total return to shareholders. Additionally, grants under the 2008Stock Plan include vesting and termination provisions that the Committee believes will encourage stock option and RSU holders to remain long-term employees of the Company.
The Committee ultimately approves the size of the grants taking into account the recommendations by the CEO (other than for his own grant) and other criteria as determined by the Committee. The Committee generally targets a specific number of options rather than a specific option value. This philosophy directly aligns option grant values with shareholder value since option values are generally higher when the stock price is increasing and lower when the stock price is decreasing. Consequently, despite the fact that the stock price has remained significantly lower than historical levels, the number of each NEO’s option grants (and RSU grants in lieu of a portion of option grants) has remained relatively consistent, with the exception of the special performance grantoption grants for the CEO, CFO and CFOCOO in fiscal 2009.2012 and 2013. The number of fiscal 2012 options granted to the CEO, CFO and COO was greater than fiscal 2011; however, the fiscal 2012 option grants had an exercise price 33 1/3% above the closing stock price on the grant date. The number of option grants for fiscal 2013 was the same as fiscal 2012 for all NEOs with the exercise price set at the closing stock price on the grant date. Fifty percent of the fiscal 2013 option grants for the CEO, CFO and COO are subject to specific performance conditions. The Committee’s determination and rationale for the fiscal 20112013 grants is described below.
Stock options and RSUs generally vest (assuming, in the case of the performance-based awards that the conditions have been met), in four equal annual installments, commencing on the second anniversary date of the grant date, providing a five-year period before becoming fully vested.
Fiscal 20112013 Stock Option and RSU Awards
In determining the fiscal 20112013 equity awards for the NEOs, the Committee considered, without giving specific weight to any one factor, then availablethen-available information on Peer Group equity awards for the NEOs, PM&P guidance regarding the anticipated range of declinechanges in equity award values across industries, the Company’s available share pool and the potential impact on shareholder dilution, the Company’s stock performance, the historical equity awards provided to each NEO, the desire to retain the employment of each NEO and the desire to continue to link a portion of each NEO’s compensation with future Company performance. Except for the CEO, all stock option awards in fiscal 20112013 were made in the form of options to purchase shares of Class A Common Stock and all RSU awards were made in the form of a right to receive Class A Common Stock. Because the Committee took into consideration the potential benefits to the Company previously expressed by the Board of Directors of the continuity of share ownership and control of the Hovnanian family, the CEO’s stock option award was made in the form of options to purchase shares of Class B Common Stock and his RSU award was made in the form of a right to receive Class B Common Stock.
● | CEO, CFO and | |
● | Other NEOs. In fiscal |
In fiscal 2012, the NEOs’ long-term incentive values on the grant date (including the 2012 option grants and the annualized value of the 2010 LTIP at target, discussed below) were considerably below the median value of long-term incentive awards granted for comparable positions in the Peer Group. Due to the timing of our fiscal year-end, no comparison could be made for fiscal 2013 because complete Peer Group median data was not available at the time of filing this Proxy Statement. The Committee expects 2013 Peer Group compensation levels will increase from prior levels based on improvement trends across the homebuilding industry during fiscal 2013.
2010 Long-Term Incentive Plan
In fiscal 2010, the Company adopted a Long-Term Incentive Program (“(the “2010 LTIP”) under its previous stockholder-approved Amended and Restated 2008 Hovnanian Enterprises, Inc. Stock Incentive Plan to aid the Company in retaining key employees and to motivate them to exert their best efforts to promptly return the Company to profitability and lower debt levels by providing rewards at the end of a multi-year period. The 2010 LTIP iswas intended to incentivize achievement of specified pre-tax profit goals and specified improvements in the Company’s capital structure through reductions in homebuilding debt.
Each of the NEOs is a participant in the 2010 LTIP and their awards,award payouts, if any, will beare determined based on actual performance for the full 36-month performance period, subject to the vesting requirements over an additional 24-month period, as described below. This performance period commenced on November 1, 2010 (the beginning of fiscal 2011) and will endended on October 31, 2013 (that is, the performance period covers fiscal 2011, 2012 and 2013). After the performance period, the awards, to the extent earned, remain subject to vesting conditions during fiscal 2014 and 2015. The executive will not receive the full award unless the Company achieves the pre-tax profit and homebuilding debt performance goals and the executive remains employed for the entire five-year period. The Committee does not currently anticipate considering a similar LTIP program until after the expiration of the current three-year LTIP performance period.
Pre-tax profit and homebuilding debt were chosen as the performance metrics for the 2010 LTIP because they arewere determined to be critical during thisthe challenging economic cycle. The Committee determineddecided that other goals, such as revenue growth and cost reductions, would be reflected in pre-tax profit calculations, but in a balanced way with an emphasis on achieving profitability. The Committee believed that a focus on revenue growth alone would not adequately emphasize profitability and that a focus on cost-cutting alone could emphasize short-term achievements that may sacrifice future profitability. The Committee also determined that if the currentthen difficult economic conditions continuecontinued during all or most of the 2010 LTIP’s performance period and achievement of pre-tax profit iswas not attainable, then realization of reduced homebuilding debt would put the Company in a better financial position to weather such an extended downturn and return to profitability when the economic conditions ultimately improve.
Award payouts, if any, willwould be based on a specific target multiple of each participant’s base salary in effect on the date the participant iswas granted the award (the “Grant Date,“grant date,” or June 11, 2010, for all NEOs) and, if. If the participant selected shares of stock are elected as a form of payout, the target number of shares was set based on the closing price of the Class A Common Stock on the Grant Date,grant date, regardless of whether the share price increasesincreased or decreasesdecreased by the time the award is determined or distributed. In order to manage the potential dilution impact of the 2010 LTIP, the Committee required that at least 20% of the payout be in the form of cash. All stock awards under the 2010 LTIP were made in the form of rights to receive shares of Class A Common Stock, except for the CEO whose award was made in the form of rights to receive shares of Class B Common Stock because the Committee took into consideration the potential benefits to the Company previously expressed by the Board of Directors of the continuity of share ownership and control of the Hovnanian family. The following describes for each NEO histhe target multiple of base salary and form of his irrevocable payout election:
Target Multiple | ||||||||||
of 2010 Base Salary | Payout Method | |||||||||
CEO | ||||||||||
3.00 | 20% cash / 80% shares | |||||||||
CFO | 2.00 | 20% cash / 80% shares | ||||||||
COO | 2.00 | 20% cash / 80% shares | ||||||||
Other NEOs | 1.00 | 20% cash / 80% shares |
Although the Committee views both the stock and cash portions of the 2010 LTIP as multi-year incentive plan awards, they are reported differently for purposes of the Summary Compensation Table.Table under “Executive Compensation” below. The share payout portions arewere reflected as “Stock Awards” in fiscal 2010 at their grant date fair value under Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 718, Compensation – Stock Compensation ("ASC Topic 718"), which was based on the probable outcome as of the Grant Date.grant date. Conversely, the actual amounts earned on the cash payout portions, if any, will beare reflected in the Summary Compensation Table as “Non-Equity Incentive Plan Compensation” infor fiscal 2013 (which coincides with the end of the performance period) or, if participants achievehad achieved a minimum performance payment during an earlier fiscal year, even though such payment remains subject to subsequent vesting restrictions, then such minimum payment would behave been reflected in that earlier fiscal year. At the end of fiscal 2011, the Company did not reach breakeven or positive Pre-tax Profit (as defined below), so no minimum payment was achieved in this year.
For purposes of the 2010 LTIP, “Pre-tax Profit”“pre-tax profit” is defined as earnings (loss) before income tax paymentsexpense as reflected on our audited financial statements, excluding the impact of any items deemed to be extraordinary items for financial reporting purposes. “Homebuilding Debt”debt” is defined as total (recourse) notes payable excluding accrued interest, as reflected on our consolidated audited balance sheet, less any debt issued after January 2010 that has an equity component such as debt convertible into shares of stock.
The following table illustrates the percent of the target award that can becould have been achieved at each performance level. Awards will bewere interpolated on a linear basis between performance levels but willwere not be extrapolated above the maximum performance levels listed below.
Homebuilding Debt as of 10/31/2013 (in billions) | |||||||
Greater than $1.70 | $1.65 | $1.60 | $1.55 | $1.50 | $1.40 or less | ||
FY 2013 Pre-tax Profit (in millions) | $100 or more | 100% of target award | 125% of target award | 150% of target award | 175% of target award | 200% of target award | 250% of target award |
$75 | 75% of target award | 100% of target award | 125% of target award | 150% of target award | 175% of target award | 225% of target award | |
$50 | 50% of target award | 75% of target award | 100% of target award | 125% of target award | 150% of target award | 200% of target award | |
$25 | 25% of target award | 50% of target award | 75% of target award | 100% of target award | 125% of target award | 175% of target award | |
Less than $0 | 0% of target award | 25% of target award | 50% of target award | 75% of target award | 100% of target award | 150% of target award |
|
| Homebuilding Debt as of 10/31/2013 (in billions)
| |||||
|
| Greater than $1.70 | $1.65 | $1.60 | $1.55 | $1.50 | $1.40 or less |
| $100 or more | 100% of target award | 125% of target award | 150% of target award | 175% of target award | 200% of target award | 250% of target award |
| $75 | 75% of target award | 100% of target award | 125% of target award | 150% of target award | 175% of target award | 225% of target award |
FY 2013 Pre-tax Profit (in millions) | $50 | 50% of target award | 75% of target award | 100% of target award | 125% of target award | 150% of target award | 200% of target award |
| $25 | 25% of target award | 50% of target award | 75% of target award | 100% of target award | 125% of target award | 175% of target award |
| Less than $0 | 0% of target award | 25% of target award | 50% of target award | 75% of target award | 100% of target award | 150% of target award |
If the Company reachesreached breakeven or positive Pre-tax Profitpre-tax profit for either of fiscal 2011 or 2012, a participant will bewould have been eligible for a minimum payment equal to 50% of the target award, provided that he meetsmet the vesting requirements described below. This minimum payment iswould have been inclusive of and not incremental to any other award granted to the participant under the 2010 LTIP and willwould not exceedhave exceeded 50% of target award if the Company achievesachieved breakeven or positive Pre-tax Profitpre-tax profit in both fiscal 2011 and 2012. As noted above, noNo minimum payout was achieved in either fiscal 2011.
As a condition of earning each portion of the award, and as a retention inducement, otherfollowing the performance period, a participant must also be employed through the vesting dates outlined below (other than in cases of death, disability or qualified retirement, or in the case of Messrs. O’Connor and Valiaveedan, specified termination following a change in control of the Company). The vesting percentages relate to the earned award value as of October 31, 2013.
1. | 50% of the award vested on October 31, 2013 and was paid in January 2014; |
2. | 30% of the award will become vested on October 31, 2014 and is payable in January 2015; and |
3. | 20% of the award will become vested on October 31, 2015 and is payable in January 2016; |
with the cash portion of the earned award value becoming vested and payable before any share portion of the earned award value becomes vested and payable.
2013 Long-Term Incentive Program
In fiscal 2013, the Company adopted a Long-Term Incentive Program (the “2013 LTIP”) under its stockholder-approved Stock Plan to further aid the Company in retaining key employees and to motivate them to exert their best efforts to achieve greater levels of profitability and to extend the maturity and/or reduce the amount of existing homebuilding debt by providing rewards at the end of a multi-year period. The 2013 LTIP is intended to incentivize achievement of specified pre-tax profit goals and specified improvements in the Company’s capital structure through refinancings of, or reductions in, homebuilding debt.
Each of the NEOs is a participant in the 2013 LTIP and their award payouts, if any, will be determined based on actual performance for the full 31-month performance period, subject to vesting requirements over an additional 24-month period, as described below. This performance period commenced on March 11, 2013 and will end on October 31, 2015 (that is, the performance period covers a portion of fiscal 2013 and all of fiscal years 2014 and 2015). After the performance period, the awards, to the extent earned, remain subject to vesting conditions during fiscal 2016 and 2017. The executive will not receive the full award unless the Company achieves the pre-tax profit and refinancings and/or reductions in existing homebuilding debt performance goals and the executive remains employed for the entire 55-month period.
Pre-tax profit and refinancings and/or reductions in existing homebuilding debt were chosen as the performance metrics for the 2013 LTIP to focus management on improving the operating performance of the Company while ensuring an adequate capital structure for growth.
Award payouts, if any, will be based on a specific target multiple of each participant’s base salary in effect on the date the participant was granted the award (the “grant date,” or March 11, 2013, for all NEOs). The target number of shares was set based on the closing price of the Class A Common Stock on the grant date, regardless of whether the share price increases or decreases by the time the award is determined or distributed. In order to manage the potential dilution impact of the 2013 LTIP, the Committee required that 40% of the payout be in the form of cash. All stock awards under the 2013 LTIP were made in the form of rights to receive shares of Class A Common Stock, except for the CEO whose award was made in the form of rights to receive shares of Class B Common Stock because the Committee took into consideration the potential benefits to the Company previously expressed by the Board of Directors of the continuity of share ownership and control of the Hovnanian family. The following describes the target multiple of base salary and form of payout for each NEO:
Target Multiple | |||||
of 2013 Base Salary | Payout Method | ||||
CEO | 3.00 | 40% cash / 60% shares | |||
CFO | 2.00 | 40% cash / 60% shares | |||
COO | 2.00 | 40% cash / 60% shares | |||
Other NEOs | 1.00 | 40% cash / 60% shares |
Although the Committee views both the stock and cash portions of the 2013 LTIP as multi-year incentive plan awards, they are reported differently for purposes of the Summary Compensation Table under “Executive Compensation” below. The share payout portions are reflected as “Stock Awards” in fiscal 2013 at their grant date fair value under FASB ASC Topic 718, which was based on the probable outcome as of the grant date. Conversely, the actual amounts earned on the cash payout portions, if any, will be reflected in the Summary Compensation Table as “Non-Equity Incentive Plan Compensation” in fiscal 2015 (which coincides with the end of the performance period) even though such payment remains subject to subsequent vesting restrictions.
For purposes of the 2013 LTIP, “pre-tax profit” is defined as earnings (loss) before income tax expense as reflected on our audited financial statements, excluding the impact of any items deemed to be extraordinary items for financial reporting purposes and excluding losses from land impairments and losses from debt repurchases/debt retirement such as call premiums, above par purchase prices and related issuance costs. “Existing Homebuilding Debt” is defined as total (recourse) notes payable excluding accrued interest, as reflected on our consolidated audited balance sheet as of January 31, 2013 (the most current balance sheet at the time the 2013 LTIP was adopted), less any debt that has an equity component such as debt convertible into equity, tangible equity units and/or exchangeable notes. To qualify under the 2013 LTIP as a refinancing of “Existing Homebuilding Debt,” any such refinanced Existing Homebuilding Debt must have a minimum maturity date of five years from the date of the refinancing or be refinanced with a revolving line of credit.
The following table illustrates the percent of the target award that can be achieved at each performance level. Awards will be interpolated on a linear basis between performance levels but will not be extrapolated above the maximum performance levels listed below.
Refinancings of Existing Homebuilding Debt Between 3/11/2013 and 10/31/2015 and/or Reductions of Existing Homebuilding Debt Between 11/01/2013 and 10/31/2015 (in millions)
| |||||||
$125 or less | $165 | $205 | $245 | $285 | $325 or more | ||
$200 or more | 100% | 125% | 150% | 175% | 200% | 250% | |
FY 2015 Pre-tax | $150 | 75% | 100% | 125% | 150% | 175% | 225% |
Profit | $100 | 50% | 75% | 100% | 125% | 150% | 200% |
$50 or less | 0% | 15% | 30% | 45% | 60% | 90% | |
As a condition of earning each portion of the award, and as a retention inducement, following the performance period, a participant must also be employed through the vesting dates outlined below.below (other than in cases of death, disability or qualified retirement, or in the case of Messrs. O’Connor and Valiaveedan, specified termination following a change in control of the Company). The vesting percentages relate to the earned award value as of October 31, 2013.
1. |
20% of the award will become vested on October 31, 2015 and is payable in January |
2. | 30% of the award will become vested on October 31, 2016 and is payable in January 2017; and |
3. | 50% of the award will become vested on October 31, 2017 and is payable in January 2018; |
with the cash portion of the earned award value becoming vested and payable before any share portion of the earned award value becomes vested and payable.
Other Employee Benefits
The Company maintains additional employee benefits that the Committee believes enhance executive safety, efficiency and time that the executive is able to devote to Company affairs.
We do not believe that special perquisites or other personal benefits generally provided to employees of the Company,should play a major role in our executive compensation program. However, some NEOs are also eligible to participate inprovided one or more of the following programs:
● | Auto allowance, including car maintenance and fuel expense; |
● | Personal use of the Company’s automobiles (including driver’s compensation) and a fractional share in an aircraft; |
● | Executive term life insurance; |
● | Annual Executive Physical Exam Program; |
● | Golf membership or country club fee reimbursement; |
● | Personal income tax |
● | Personal accounting services. |
The Committee annually reviews the elements and level of executive perquisites for the NEOs. In particular, in evaluating the appropriateness of these benefits for the CEO, the Committee tooktakes into consideration the degree to which the CEO is required to travel to various Company locations and business functions on a daily basis. Based on its review, the Committee has requested that the CEO use Company-provided transportation to enhance the efficient use of his time.
The Company’s contributions to the NEOs’ 401(k) plan and executive deferred compensation plan (“EDCP”) accounts were suspended on February 20, 2009 and continued to be suspended throughout2009. In fiscal 2011. However, in fiscal 2011,2012, a one-time Employer Non-Elective Contributionemployer non-elective contribution funded by the use of the amount of forfeitures account was made to all eligible participants’ 401(k) plan accounts for the 20102011 calendar year, in accordance with the terms of the 401(k) plan.
Specific benefits and the incremental costs of such benefits are described in detail in the footnotes to the Summary Compensation Table. The Company does not offer any defined benefit pension plans to its employees.
The Committee approved a 3% base salary increase, to $310,000effective December 21, 2013, for Mr.each of Messrs. Sorsby, Pellerito, O’Connor and Valiaveedan, in lightconsideration of his promotion to VP, Chief Accounting Officertheir individual performance and Corporate Controller. in line with the Company’s ordinary course merit-based salary and cost of living increase practices. For the eighth year in a row, the Committee did not increase the CEO’s base salary.
The Committee also approved a base salary increase to $550,000determined that, for Mr. Pellerito to move him closer tofiscal 2014, the Peer Group median. Mr. Valiaveedan received a base salary increase to $290,000 to further align him with the Peer Group and broad-based compensation survey median. The Committee maintained the base salariesAdjusted EBITDA component of the CEO, CFO and CFO at theirCOO’s bonus formulas would change to a Pre-tax Profit (defined in the same manner as the fiscal 2011 amounts.
Beginning with the January 2012,10, 2014 pay period, the Company entered into changereinstated its 401(k) match at 100% of the level it matched prior to its suspension in control severance protection agreements with Messrs. O’Connor and Valiaveedan.February 2009 (see “Details of Compensation Elements – Other Employee Benefits” above). The Committee considers the continued servicesreinstated match is up to 6% of these key executives whose skills are not specifically tiedemployee contributions based on tenure. This applied to the homebuilding industry to beall participants in the best interests401(k) plan, including the NEOs. Consistent with the full reinstatement of the 401(k) match in January 2014, the Committee approved the full reinstatement of the EDCP contribution for the NEOs and certain other executives of the Company to provide up to 6% of earnings above the annual 401(k) limit for calendar 2014 based on tenure. Calendar year contributions will be credited in the subsequent fiscal year and reflected in the proxy statement for that year.
In January 2014, we adopted a recoupment, or “clawback” policy, that applies to our executive officers, including our named executive officers. Under the policy, the Board will require, at its shareholders. The agreements are designeddiscretion and approval, reimbursement and/or cancellation of incentive-based compensation (including stock options awarded as compensation) awarded to reinforcean executive officer where the Board has determined that (a) the Company is required to prepare an accounting restatement due to the material noncompliance by the Company with any financial reporting requirement under the securities laws, (b) the misconduct of the executive contributed, either directly or indirectly, to the noncompliance that resulted in the obligation to restate the Company’s financial statements and encourage their continued attention(c) a lower award and/or payout thereof would have been made to the executive based upon the restated financial results, and, dedication to their duties of employment without personal distraction or conflict of interest in circumstances which could ariseunder the policy, the Board may recover from the occurrence of a change in controlexecutive any excess of the Company. These agreements provide benefits following a change in control only ifamount that would have been awarded based on the restated financial results. The policy applies to incentive-based compensation awarded to an executive officer during the three-year period preceding the date on which the Company is terminated involuntarily or terminates with Good Reason. The provisions of such agreements are described below under “Potential Payments Upon Termination Or Change-In-Control Table.”
As a general matter, the Committee always takes into account the various tax and accounting implications of compensation. When determining amounts of equity grants to executives and employees, the Committee also examines the accounting cost associated with the grants.
The Company’s annual bonus and stock option programs are intended to allow the Company to make awards to executive officers that are deductible under Section 162(m) of the Internal Revenue Code,, which provision otherwise sets limits on the tax deductibility of compensation paid to a company’s most highly compensated executive officers (with the exception of the Company’s CFO). The Committee will continue to seek ways to limit the impact of Section 162(m) of the Internal Revenue Code.. However, the Committee believes that the tax deduction limitation should not compromise the Company’s ability to establish and implement incentive programs that support the compensation objectives discussed above. Accordingly, achieving these objectives and maintaining required flexibility in this regard may result in compensation that is not deductible for federal income tax purposes. The bonus formulas approved by the Committee for fiscal 20112013 were, however, intended to be established in accordance with the requirements for deductibility as performance-based compensation under Section 162(m) of the Internal Revenue Code.
For fiscal 2011,2013, stock options were granted on the second Friday in June for all eligible employees, consistent with our practice of granting equity awards annually on the second Friday in June. The Company’s practice of setting “fixed” equity award grant dates is designed to avoid the possibility that the Company could grant stock awards prior to the release of material, non-public information whichthat is likely to result in an increase in its stock price, or delay the grant of stock awardsuntil after the release of material, non-public information that is likely to result in a decrease in the Company’s stock price. Exercise prices of stock options were set at the closing price per share of the Company’s Class A Common Stock on the NYSE on the date the options were granted.
The Board of Directors of the Companyhas adopted stock ownership guidelines, recommended by the Committee, which set forth recommended minimum amounts of stock ownership, directly or beneficially, for specified senior executive officers who have the most long-term strategic impact for shareholders. On an annual basis, theCEO, CFO, COO and non-employee Directors. The Corporate Governance and Nominating Committee reviews adherence to the Company’s stock ownership guidelines on an annual basis, which guidelines are incorporated into the Company’s Corporate Governance Guidelines. The Company believes these guidelines further enhance the Company’s commitment to aligning the interests of executiveour non-employee Directors and senior management with those of itsour shareholders.
Under the Committee determined thatterms of the ownership guidelines, once the stock ownership guidelines wereare met, they would beare deemed satisfied for subsequent annual review periods, regardless of decreases in the Company’s stock price so long ason the executive or non-employee Director does not sell any portion of the share amounts which were originally included in determining that the recommended thresholds were met. The Committee reviewed this determination in fiscal 2011 and maintained this policy.
Senior Executive Officers
The guidelines provide that the following senior executive officers of the Company are encouragedrequested to achieve and maintain minimum stock ownership amounts as follows:
Chairman, President and CEO – 5x6 times current base salary
CFO – 2x3 times current base salary
COO – 3 times current base salary
The CEO, CFO and COO currently meet their respective stock ownership guidelines.
See “Non-Employee Director Compensation” for information on the stock ownership guidelines for non-employee Directors.
The following table summarizes the compensation for the fiscal years ended October 31, 2011,2013, October 31, 20102012, and October 31, 20092011 of the chief executive officer, the chief financial officer, and the next three most highly compensated executive officerspersons serving as executive officers as of October 31, 2011.2013. These five individuals compose our named executive officers or “NEOs.”
Summary Compensation Table
Name and Principal Position | Year | Salary (1) | Bonus (2) | Stock Awards (3) | Option Awards (4) | Non-Equity Incentive Plan Compen- sation (5) | Change in Pension Value and Nonqualified Deferred Compensa-tion Earnings | All Other Compen- sation (6) | Total (7) | ||||||||||||||||||||||||
Ara K. Hovnanian, (8) | 2011 | $ | 1,092,606 | — | $ | 24,125 | $ | 529,875 | $ | 949,500 | — | $ | 170,049 | $ | 2,766,155 | ||||||||||||||||||
President, Chief | 2010 | $ | 1,092,606 | — | $ | 2,622,255 | $ | 1,413,750 | $ | 949,500 | — | $ | 188,189 | $ | 6,266,300 | ||||||||||||||||||
Executive Officer and | 2009 | $ | 1,092,606 | — | — | $ | 1,380,000 | $ | 699,500 | — | $ | 267,015 | $ | 3,439,121 | |||||||||||||||||||
Chairman of the Board | |||||||||||||||||||||||||||||||||
J. Larry Sorsby, | 2011 | $ | 600,000 | — | $ | 4,825 | $ | 105,975 | $ | 350,000 | — | $ | 48,259 | $ | 1,109,059 | ||||||||||||||||||
Executive Vice | 2010 | $ | 572,308 | — | $ | 960,001 | $ | 282,750 | $ | 350,000 | — | $ | 52,229 | $ | 2,217,288 | ||||||||||||||||||
President and | 2009 | $ | 500,000 | $ | 75,000 | — | $ | 276,000 | $ | 254,800 | — | $ | 58,822 | $ | 1,164,622 | ||||||||||||||||||
Chief Financial Officer | |||||||||||||||||||||||||||||||||
Thomas J. Pellerito, | 2011 | $ | 500,000 | — | $ | 3,217 | $ | 70,650 | $ | 250,000 | — | $ | 42,913 | $ | 866,780 | ||||||||||||||||||
Chief Operating | 2010 | $ | 468,870 | $ | 28,750 | $ | 799,999 | $ | 188,500 | $ | 203,548 | — | $ | 38,276 | $ | 1,727,943 | |||||||||||||||||
Officer | |||||||||||||||||||||||||||||||||
Brad G. O’Connor, | 2011 | $ | 284,523 | — | $ | 965 | $ | 21,195 | $ | 85,680 | — | $ | 27,401 | $ | 419,764 | ||||||||||||||||||
Vice President — Chief Accounting Officer and Corporate Controller | |||||||||||||||||||||||||||||||||
David G. Valiaveedan, | 2011 | $ | 274,361 | — | $ | 2,413 | $ | 17,663 | $ | 68,850 | — | $ | 27,357 | $ | 390,644 | ||||||||||||||||||
Vice President — | 2010 | $ | 270,000 | — | $ | 221,913 | $ | 42,413 | $ | 67,500 | — | $ | 24,696 | $ | 626,522 | ||||||||||||||||||
Finance and Treasurer | 2009 | $ | 267,692 | $ | 35,000 | $ | 3,718 | $ | 24,150 | $ | 67,500 | — | $ | 6,321 | $ | 404,381 |
Name and Principal Position | Year | Salary (1) | Bonus(2) | Stock Awards (3) | Option Awards (4) | Non-Equity Incentive Plan Compensation (5) | Change in Pension Value and Nonqualified Deferred Compensation Earnings | All Other Compen- sation (6) | Total (7) | ||||||||||||||||
Ara K. Hovnanian, | 2013 | $1,092,606 | — | $1,966,692 | $3,084,000 | $2,534,152 | — | $185,619 | $8,863,069 | ||||||||||||||||
President, Chief | 2012 | $1,092,606 | — | — | $1,032,000 | $949,500 | — | $181,582 | $3,255,688 | ||||||||||||||||
Executive Officer | 2011 | $1,092,606 | — | $24,125 | $529,875 | $949,500 | — | $170,049 | $2,766,155 | ||||||||||||||||
and Chairman of the Board | |||||||||||||||||||||||||
J. Larry Sorsby, | 2013 | $600,000 | — | $719,999 | $616,800 | $953,600 | — | $49,897 | $2,940,296 | ||||||||||||||||
Executive | 2012 | $600,000 | — | — | $206,400 | $350,000 | — | $50,433 | $1,206,833 | ||||||||||||||||
Vice President and | 2011 | $600,000 | — | $4,825 | $105,975 | $350,000 | — | $48,259 | $1,109,059 | ||||||||||||||||
Chief Financial Officer | |||||||||||||||||||||||||
Thomas J. Pellerito, | 2013 | $590,385 | — | $719,999 | $411,200 | $890,500 | — | $41,823 | $2,653,907 | ||||||||||||||||
Chief Operating | 2012 | $538,462 | — | — | $137,600 | $250,000 | — | $46,406 | $972,468 | ||||||||||||||||
Officer | 2011 | $500,000 | — | $3,217 | $70,650 | $250,000 | — | $42,913 | $866,780 | ||||||||||||||||
Brad G. O’Connor, | 2013 | $317,512 | — | $191,583 | $102,800 | $279,920 | — | $16,626 | $908,441 | ||||||||||||||||
Vice President — | 2012 | $308,029 | $50,000 | — | $35,600 | $93,000 | — | $28,303 | $514,932 | ||||||||||||||||
Chief Accounting | 2011 | $284,523 | — | $965 | $21,195 | $85,680 | — | $27,401 | $419,764 | ||||||||||||||||
Officer and Corporate | |||||||||||||||||||||||||
Controller | |||||||||||||||||||||||||
David G. Valiaveedan, | 2013 | $297,027 | — | $179,222 | $77,100 | $234,535 | — | $16,622 | $804,506 | ||||||||||||||||
Vice President — | 2012 | $288,821 | $50,000 | — | $26,700 | $72,500 | — | $28,269 | $466,290 | ||||||||||||||||
Finance and Treasurer | 2011 | $274,361 | — | $2,413 | $17,663 | $68,850 | — | $27,357 | $390,644 |
(1) | The “Salary” |
(2) | The “Bonus” Column. In accordance with SEC rules, the “Bonus” column discloses discretionary cash bonus awards. |
(3) | The “Stock Awards” Column. This column reflects the aggregate grant date fair value of RSUs granted in fiscal 2011 |
(4) | The “Option Awards” Column. Similar to the “Stock Awards” column, this column reflects the aggregate grant date fair |
(5) | “Non-Equity Incentive Plan Compensation” Column. This column represents the cash portion of the performance-based annual bonus awards earned by the NEOs in the fiscal year |
(6) | “All Other Compensation” Column. This column discloses all other compensation for the fiscal year indicated, including reportable perquisites and other personal benefits. |
Fiscal 2011 Perquisites (Supplemental Table) | |||||||||||||||||||
Total Perquisites and Description | Fiscal 2011 Perquisites that Exceeded the Greater of $25,000 or 10% of Total Perquisites | ||||||||||||||||||
Name | Total Fiscal 2011 Perquisites | Types of Perquisites (a) | Personal Use of Company’s Fractional Aircraft Share | Personal Use of Company’s Automobiles (c) | |||||||||||||||
Ara K. Hovnanian | $ | 168,617 | (1) (2) (4) (5) (6) (7) | (b) | $ | 67,773 | |||||||||||||
J. Larry Sorsby | $ | 46,827 | (3) (4) (5) | N/A | N/A | ||||||||||||||
Thomas J. Pellerito | $ | 41,481 | (3) (4) (5) | N/A | N/A | ||||||||||||||
Brad G. O’Connor | $ | 25,991 | (3) (4) (5) | N/A | N/A | ||||||||||||||
David G. Valiaveedan | $ | 25,961 | (3) (4) (5) | N/A | N/A |
For fiscal 2013, total perquisites and other personal benefits, and those that exceeded the greater of $25,000 or 10% of total perquisites and other personal benefits for each NEO, were as follows:
Total Perquisites and Description | Fiscal 2013 Perquisites that Exceeded the Greater of $25,000 or 10% of Total Perquisites | ||||||||||
Name | Total Fiscal 2013 Perquisites | Types of Perquisites(a) | Personal Use of Company’s Automobiles (b) | Personal Income Tax Preparation (c) | |||||||
Ara K. Hovnanian | $176,216 | (1) (2) (4) (5) (6) (7) (8) | $104,527 | $28,430 | |||||||
J. Larry Sorsby | $40,494 | (3) (4) (5) | N/A | N/A | |||||||
Thomas J. Pellerito | $32,604 | (3) (4) (5) | N/A | �� | N/A | ||||||
Brad G. O’Connor | $10,140 | (3) (4) (5) | N/A | N/A | |||||||
David G. Valiaveedan | $10,140 | (3) (4) (5) | N/A | N/A |
(a) | (1) Personal use of the Company’s fractional aircraft share; (2) Personal use of the Company’s automobiles; (3) Perquisites related to executives’ use of their own vehicles; (4) |
(b) |
The incremental costs of personal use of the Company’s automobiles are calculated as the allocable share of all costs of the automobiles for the fiscal year (including depreciation and, for the CEO, the Company's driver's salary and benefits) based upon the percentage of total miles driven during the fiscal year represented by personal trips. |
(c) | Reflects the |
In addition to the perquisites and other personal benefits listed above, the NEOs received the following other compensation in fiscal 2013:
Fiscal 20112013 All Other Compensation Other Than Perquisites (Supplemental Table)
Name | Term Life Insurance Premiums | Company Contributions to the Executive’s Retirement Plan (401(k)) (a) | Company Contributions to the Executive Deferred Compensation Plan (“EDCP”) | |||||||||||
Ara K. Hovnanian | $ | 442 | $ | 990 | — | |||||||||
J. Larry Sorsby | $ | 442 | $ | 990 | — | |||||||||
Thomas J. Pellerito | $ | 442 | $ | 990 | — | |||||||||
Brad G. O’Connor | $ | 420 | $ | 990 | — | |||||||||
David G. Valiaveedan | $ | 406 | $ | 990 | — |
Name | Term Life Insurance Premiums | Company Contributions to the Executive’s Retirement Plan (401(k)) (a) | Company Contributions to the Executive Deferred Compensation Plan (EDCP) | ||||||
Ara K. Hovnanian | $1,753 | $7,650 | — | ||||||
J. Larry Sorsby | $1,753 | $7,650 | — | ||||||
Thomas J. Pellerito | $1,569 | $7,650 | — | ||||||
Brad G. O’Connor | $ 748 | $5,738 | — | ||||||
David G. Valiaveedan | $ 893 | $5,589 | — |
(a) | Beginning with the |
(7) | “Total” Compensation Column.This column reflects the sum of all the columns (the Salary, Bonus, Stock Awards, Option Awards, Non-Equity Incentive Plan Compensation, Change in Pension Value and Nonqualified Deferred Compensation Earnings, and All Other Compensation columns) of the Summary Compensation Table. |
Fiscal |
The table below is intended to provide additional, supplemental compensation disclosure and not as a replacement for the Summary Compensation Table.
Fiscal 20112013 Total Compensation (Supplemental Table)
Fiscal 2011 | Cash Awards of Fiscal 2011 | Stock Awards | Intrinsic Expense Value of Outstanding Options in Fiscal 2011 | Change in Pension Value and Nonqualified Deferred Compensation | All Other Compensation in Fiscal | Total of All Columns of Supplemental | ||||||||||||||||||||||
Name | Salary | Bonus | (a) | (b) | Earnings | 2011 | Table | |||||||||||||||||||||
Ara K. Hovnanian | $ | 1,092,606 | $ | 949,500 | — | — | — | $ | 170,049 | $ | 2,212,155 | |||||||||||||||||
J. Larry Sorsby | $ | 600,000 | $ | 350,000 | — | — | — | $ | 48,259 | $ | 998,259 | |||||||||||||||||
Thomas J. Pellerito | $ | 500,000 | $ | 250,000 | $ | 1,585 | — | — | $ | 42,913 | $ | 794,498 | ||||||||||||||||
Brad G. O’Connor | $ | 284,523 | $ | 85,680 | $ | 13,186 | — | — | $ | 27,401 | $ | 410,790 | ||||||||||||||||
David G. Valiaveedan | $ | 274,361 | $ | 68,850 | $ | 9,866 | — | — | $ | 27,357 | $ | 380,434 |
Name | Fiscal 2013 Salary | Fiscal 2013 Cash Bonus | Fiscal 2013 Stock Vested (excluding LTIP) (a) | Intrinsic Value of Options Granted in Fiscal 2013 (b) | 2010 LTIP Cash Realized (c) | 2010 LTIP Stock Realized (d) | Change in Pension Value and Nonqualified Deferred Compensation Earnings | Fiscal 2013 All Other Compen-sation | Total of All Columns of Supplemental Table | ||||||||||||||||||
Ara K. Hovnanian | $1,092,606 | $1,500,000 | $15,813 | — | $1,034,152 | $1,695,530 | — | $185,619 | $5,523,720 | ||||||||||||||||||
J. Larry Sorsby | $600,000 | $575,000 | $3,163 | — | $378,600 | $620,730 | — | $49,897 | $2,227,390 | ||||||||||||||||||
Thomas J. Pellerito | $590,385 | $575,000 | $7,608 | — | $315,500 | $517,274 | — | $41,823 | $2,047,590 | ||||||||||||||||||
Brad G. O’Connor | $317,512 | $191,580 | $12,541 | — | $88,340 | $144,837 | — | $16,626 | $771,436 | ||||||||||||||||||
David G. Valiaveedan | $297,027 | $149,350 | $15,421 | — | $85,185 | $139,666 | — | $16,622 | $703,271 |
(a) | "Fiscal 2013 Stock |
(b) | The “Intrinsic |
(c) | Reflects the cash portion of the 2010 LTIP awards that were realized in fiscal |
(d) | Reflects the stock portion of the 2010 LTIP awards that were realized in fiscal 2013 on the basis of performance through October 31, 2013 at the stock price on that date. The shares relating to the stock portion of the 2010 LTIP awards began to be distributed in January 2014, and are subject to additional vesting terms as described in the “Compensation Discussion and Analysis” section above. |
The following table summarizes both:
(1) The potential equity and non-equity incentive plan awards that could have been or could be earned by each of the NEOs at the defined levels of “Threshold,” “Target” and “Maximum” based on the performance-based awards granted to the NEOs in fiscal 2011;2013; and
(2) All other plan-based awards, such as stock options and RSUs, granted in fiscal 2011.
Each of the following columns is described in the footnotes below the table.
Grants of Plan-Based Awards in Fiscal 2011
Grant | Estimated Future Payouts Under Non-Equity Incentive Plan Awards | Estimated Future Payouts Under Equity Incentive Plan Awards (#) | All Other Stock Awards: Number of Shares of Stock or Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards | ||||||||||||||||||||||||||||||||||||||||
Name | Date | Threshold | Target | Maximum | Threshold | Target | Maximum | (4) | (5) | (6) | (7) | |||||||||||||||||||||||||||||||||||
Ara K. | (1) | $ | 0 | — | $ | 949,500 | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||||
Hovnanian | 06/10/2011 | (2) | 337,500 | (8) | $ | 1.93 | $ | 529,875 | ||||||||||||||||||||||||||||||||||||||
06/10/2011 | (3) | 12,500 | (8) | $ | 24,125 | |||||||||||||||||||||||||||||||||||||||||
J. Larry | (1) | $ | 0 | $ | 350,000 | $ | 350,000 | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||
Sorsby | 06/10/2011 | (2) | 67,500 | (8) | $ | 1.93 | $ | 105,975 | ||||||||||||||||||||||||||||||||||||||
06/10/2011 | (3) | 2,500 | (8) | �� | $ | 4,825 | ||||||||||||||||||||||||||||||||||||||||
Thomas J. | (1) | $ | 0 | $ | 125,000 | $ | 250,000 | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||
Pellerito | 06/10/2011 | (2) | 45,000 | $ | 1.93 | $ | 70,650 | |||||||||||||||||||||||||||||||||||||||
06/10/2011 | (3) | 1,667 | $ | 3,217 | ||||||||||||||||||||||||||||||||||||||||||
Brad G. | (1) | $ | 57,120 | $ | 85,680 | $ | 85,680 | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||
O’Connor | 06/10/2011 | (2) | 13,500 | $ | 1.93 | $ | 21,195 | |||||||||||||||||||||||||||||||||||||||
06/10/2011 | (3) | 500 | $ | 965 | ||||||||||||||||||||||||||||||||||||||||||
David G. | (1) | $ | 68,850 | $ | 68,850 | $ | 68,850 | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||
Valiaveedan | 06/10/2011 | (2) | 11,250 | $ | 1.93 | $ | 17,663 | |||||||||||||||||||||||||||||||||||||||
06/10/2011 | (3) | 1,250 | $ | 2,413 |
Grant | Estimated Possible Payouts Under Non-Equity Incentive Plan Awards | Estimated Future Payouts Under Equity Incentive Plan Awards (#) | All Other Stock Awards: Number of Shares of Stock or Units | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards | ||||||||||||||||||||||||
Name | Date | Threshold | Target | Maximum | Threshold | Target | Maximum | (#) | (5) | (6) | (7) | |||||||||||||||||||
Ara K. | (1) | $0 | $— | $1,500,000 | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Hovnanian | 3/11/2013 | (2) | 0 | 331,093 | 827,733 | $1,966,692 | ||||||||||||||||||||||||
3/11/2013 | (3) | $0 | $1,311,127 | $3,277,818 | ||||||||||||||||||||||||||
6/14/2013 | (4) | 0 | 300,000 | 300,000 | 300,000 | $6.28 | $3,084,000 | |||||||||||||||||||||||
J. Larry | (1) | $0 | $575,000 | $575,000 | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Sorsby | 3/11/2013 | (2) | 0 | 121,212 | 303,030 | $719,999 | ||||||||||||||||||||||||
3/11/2013 | (3) | $0 | $480,000 | $1,200,000 | ||||||||||||||||||||||||||
6/14/2013 | (4) | 0 | 60,000 | 60,000 | 60,000 | $6.28 | $616,800 | |||||||||||||||||||||||
Thomas J. | (1) | $0 | $415,000 | $575,000 | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Pellerito | 3/11/2013 | (2) | 0 | 121,212 | 303,030 | $719,999 | ||||||||||||||||||||||||
3/11/2013 | (3) | $0 | $480,000 | $1,200,000 | ||||||||||||||||||||||||||
6/14/2013 | (4) | 0 | 40,000 | 40,000 | 40,000 | $6.28 | $411,200 | |||||||||||||||||||||||
Brad G. | (1) | $63,860 | $191,580 | $191,580 | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
O’Connor | 3/11/2013 | (2) | 0 | 32,253 | 80,633 | $191,583 | ||||||||||||||||||||||||
3/11/2013 | (3) | $0 | $127,720 | $319,300 | ||||||||||||||||||||||||||
6/14/2013 | (4) | 20,000 | $6.28 | $102,800 | ||||||||||||||||||||||||||
David G. | (1) | $74,675 | $149,350 | $149,350 | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Valiaveedan | 3/11/2013 | (2) | 0 | 30,172 | 75,430 | $179,222 | ||||||||||||||||||||||||
3/11/2013 | (3) | $0 | $119,480 | $298,700 | ||||||||||||||||||||||||||
6/14/2013 | (4) | 15,000 | $6.28 | $77,100 |
(1) | Regular Bonuses for CEO and CFO. As stated above under “Regular Bonuses” in the Compensation Discussion and Analysis, the fiscal |
For purposes of the above table presentation, bonuses earned at the “target” levels for the CEO and the CFO would be equal to the greater of (a) the ROACE calculation method assuming a “target” percentage of 15% in accordance with the respective bonus formula tables or (b) the amount that could be earned under the Adjusted EBITDA and Cash Balances calculation at the “target” level or the “mid-point” range of the respective bonus formula tables as described above under “Regular Bonuses” in the Compensation Discussion and Analysis, except that their total bonuses could not exceed $1,500,000 and $575,000 for the CEO and CFO, respectively. Based on the greater of both components of their respective “target” levels of the bonus formulas, the ROACE portion of the bonus formulas would be greater than the Adjusted EBITDA and Cash Balances portion for Mr. Sorsby. As a result, the total cash bonus payable to Mr. Sorsby at this level would be capped at $575,000. Mr. Hovnanian’s ROACE calculation method would provide for a payment of 1.5% of Pre-tax Profit and, because Pre-tax Profit was not determinable at the time the fiscal 2013 bonus formula was established, no target amount is reflected for Mr. Hovnanian in the above table. The maximum cash bonuses that could be earned by Messrs. Hovnanian and Sorsby for fiscal 2013 under either the ROACE calculation method or the Adjusted EBITDA and Cash Balances calculation method in total were $1,500,000 and $575,000, respectively. Regular Bonus for COO. As described above under “Regular Bonuses” in the Compensation Discussion and Analysis, the fiscal 2013 bonus formula for Mr. Pellerito was based solely on the Adjusted EBITDA and Cash Balances calculation method, except that his bonus could not exceed $575,000. Mr. Pellerito would not earn any bonus under the Adjusted EBITDA calculation method if the Adjusted EBITDA calculation (as discussed above under “Regular Bonuses” in the Compensation Discussion and Analysis) was $0 or lower. Because bonus amounts above that level, however, would be interpolated, $0 has been disclosed at the “threshold” level for purposes of the above table for this NEO. For purposes of the above table presentation, the bonus earned at the “target” level for the COO would be the amount that could be earned under the Adjusted EBITDA and Cash Balances calculation at the “target” level of the bonus formula as described above under “Regular Bonuses” in the Compensation Discussion and Analysis. The total cash bonus payable to Mr. Pellerito at this level would be $415,000. The maximum cash bonus that could be earned by Mr. Pellerito for fiscal 2013 was $575,000. Regular Bonuses for the Vice President — Chief Accounting Officer and Corporate Controller and the Vice President — Finance and Treasurer.As stated above under “Regular Bonuses” of the Compensation Discussion and Analysis, the fiscal 2013 bonus formulas for Messrs. O’Connor and Valiaveedan were based on both the ROACE calculation method and the “Meeting Personal Objectives” method, subject to a cap equal to the maximum percentages of base salary they could achieve under the personal objectives portion of their respective bonus formulas. If the Company achieved positive Pre-tax Profit in fiscal 2013, the caps were 60% and 50% of base salary, respectively. If the Company did not achieve positive Pre-tax Profit in fiscal 2013, the caps would be 30% and 25% respectively. For purposes of the above table presentation, the “threshold” level is defined as when the ROACE percentage and Pre-tax Profit are at or below zero and the “threshold” achievement of the personal objectives established for Messrs. O’Connor and Valiaveedan at the beginning of the fiscal year (as described above in the Compensation Discussion and Analysis under “Regular Bonuses”) is achieved. Based on the “threshold” level, these NEOs would not have earned a bonus payout for fiscal 2013 based on the ROACE percentage, but, based upon the “threshold” achievement of their personal objectives, Messrs. O’Connor and Valiaveedan would have earned bonus payouts of 20% and 30% of their base salary, respectively. However, because Mr. Valiaveedan’s bonus payout would exceed the cap of 25% of his base salary, his award would be capped. As a result, for fiscal 2013, Messrs. O’Connor and Valiaveedan at “threshold” would have earned total cash bonuses of $63,860 and $74,675, respectively. For purposes of the above table presentation, the “target” level assumes the Company’s ROACE percentage is at 15%, the Company achieves positive Pre-tax Profit and the “target” or a “substantial” percentage of the personal objectives established for Messrs. O’Connor and Valiaveedan at the beginning of the fiscal year is achieved. Since the payouts based on their respective “target” levels would exceed the maximum percentages of base salary they could achieve under the personal objectives portion of their respective bonus formulas, the bonuses for Messrs. O’Connor and Valiaveedan at this level would be capped. The applicable caps of 60% and 50% of base salary for Messrs. O’Connor and Valiaveedan, respectively, would result in bonuses of $191,580 and $149,350, respectively. For purposes of this table presentation, the “maximum” level is defined as when the Company achieves Pre-tax Profit and when the maximum award earned under the ROACE calculation method and the maximum award if all or an “outstanding” percentage of the personal objectives established for Messrs. O’Connor and Valiaveedan at the beginning of the fiscal year are achieved. The maximum bonus payable under the ROACE calculation is capped at a 20% ROACE level for Messrs. O’Connor and Valiaveedan. Since the payouts based on the maximum level would exceed the maximum percentages of base salary they could achieve under the personal objectives portion of their respective bonus formulas, the bonuses for Messrs. O’Connor and Valiaveedan would be capped. The applicable caps of 60% and 50% of base salary for Messrs. O’Connor and Valiaveedan, respectively, would result in bonuses of $191,580 and $149,350, respectively.
For purposes of the above table presentation, the “threshold” level is defined as when pre-tax profit is $50 million or less and refinancings of or reductions in existing homebuilding debt are less than $125 million. Because payout levels above that level, however, would be interpolated, $0 has been disclosed at the “threshold” level for purposes of the above table. The “target” level is defined as when pre-tax profit is $100 million and refinancings of or reductions in existing homebuilding debt are $205 million. The “maximum” level is defined as when pre-tax profit is $200 million or greater and refinancings of or reductions in existing homebuilding debt are $325 million or greater. For the other conditions to earning each portion of the 2013 LTIP awards, see footnote (2) above.
The following table shows all unexercised stock options, unvested deferred shares, and unvested restricted stock units held at the end of fiscal Outstanding Equity Awards at Fiscal
The following table shows the total value of all unexercised stock options (exercisable and unexercisable) that each of the NEOs held at the end of fiscal 2013: Value of Outstanding Option Awards at Fiscal
2013 The following table discloses information with respect to stock options exercised by the NEOs in fiscal
2013:
(5) 2013 The following table provides a summary of the NEOs’ participation in the Company’s nonqualified executive deferred compensation plan Nonqualified Deferred Compensation for Fiscal
2013
Narrative to the Nonqualified Deferred Compensation for Fiscal 2013 Table The EDCP’s total account balance is equal to the “Deferred Share Deferral Account” balance. The “Deferred Share Deferral Account” balance includes the value of vested stock awarded under any Company stock incentive plan for which shares may have been deferred under the EDCP. Upon a termination of employment before retirement, EDCP account balances generally are paid in a lump sum during the 60-day period immediately following the last day of the calendar quarter of termination. Upon a termination of employment due to retirement, EDCP account balances for Messrs. Hovnanian and Sorsby will be paid in a lump sum no earlier than six months after the date of retirement or in installments over 2 to 15 years. In the event of Mr. Sorsby’s or Mr. Pellerito’s termination of employment for any reason, including death, disability or qualified retirement, all undelivered shares of Class A Common Stock underlying their 2010 LTIP awards and, in the case of Mr. Pellerito, his RSUs, that have been considered vested will be delivered in accordance with the terms of these awards. See footnote (4) to the “Nonqualified Deferred Compensation for Fiscal 2013” table above. (6) The following table summarizes payments and benefits that would be payable to each of the NEOs in the event of their termination of employment or upon the occurrence of a change-in-control (“triggering event”). For purposes of this table, the effective date of termination is assumed to be October 31, “Nonqualified Deferred Compensation for Fiscal 2013” table above. Potential Payments Upon Termination Or Change-In-Control Table
For purposes of this table presentation, consideration of the forms of compensation or additional payments or benefits to an NEO in the event of a triggering event includes:
For purposes of this table, the following programs were also considered.
The Committee annually reviews the compensation program for Prior to fiscal 2012, non-employee Directors generally received an annual grant consisting of a fixed number of 15,000 stock options with an additional 6,000 stock options for each committee on which a Director served. In fiscal 2011, however, due to the limited share reserves under the 2008 Plan, non-employee Directors received an annual grant consisting of a fixed number of 13,500 stock options and 500 RSUs with an additional 5,400 stock options and 200 RSUs for each committee on which a Director served. In May In May 2012, the Committee also authorized the amendment of the Executive Deferred Compensation Plan (EDCP) to allow for Director deferrals of retainers, meeting fees and restricted share units, including a choice to defer such compensation until termination from the Board of Directors. Deferrals of stock retainers had been previously authorized under the EDCP. Below is a summary of non-employee Director compensation for fiscal 2013:
For fiscal In connection with his departure in March 2013, Mr. Robbins received a $7,801 cash award in recognition of his many years of service to Board of Directors. For additional information related to non-employee Director compensation, please also refer to the “Director Compensation for Fiscal In conjunction with promoting high ethical standards for the distribution of equity-based incentives, the Committee The Board of Directors of the Company has adopted stock ownership guidelines, The Corporate Governance and Nominating Committee reviews adherence to the Company’s stock ownership guidelines Mr. Pagano was elected to the Board of Directors in March 2013 and has until March 2018 to meet these guidelines. The following table summarizes the compensation of the Company’s non-employee Directors related to their 2013. Director Compensation for Fiscal
2013
Total Fees Earned
Total Annual Retainer (Supplemental Table)
Table Of Contents
Grant Date Fair Value for the Total 2013 (Supplemental Table)
The following table shows all unexercised stock options and unvested RSUs that each of the non-employee 2013: Outstanding Non-Employee Director Equity Awards at Fiscal
Membership, Independence, & Qualifications For fiscal 2013, Messrs. Kangas, as Chairman, executive management positions, including at Fortune 500 companies. Responsibilities of the Audit Committee & Charter The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors and is governed by its Charter, which is available on the Company’s public website, www.khov.com, under “Investor Relations/Corporate Governance.” Policies & Procedures Established By Audit Committee In accordance with SEC regulations, the Audit Committee has established procedures for the appointment, compensation, retention and oversight of the independent registered public accounting firm engaged to prepare or issue an audit report or other audit, review, or attest services. The Company’s independent registered public accounting firm reports directly to the Audit Committee, and the Audit Committee is responsible for the resolution of disagreements between such firm and management regarding financial reporting. The Audit Committee has established whistle blowing procedures as required by Section 301 of the Sarbanes-Oxley Act of 2002 and Audit and Non-Audit Services Pre-Approval Policy The Audit Committee has also established procedures for the pre-approval of audit and permitted non-audit services provided by an independent registered public accounting firm. The Company’s “Audit and Non-Audit Services Pre-Approval Policy” (“Pre-Approval Policy”) was most recently reviewed and approved by the Audit Committee at its meeting held on October 17, 2013. As set forth in the Pre-Approval Policy, audit services require specific approval by the Audit Committee, except for certain services that have received general pre-approval by the Audit Committee. In accordance with the Pre-Approval Policy, the Audit Committee annually reviews and pre-approves the services that may be provided by the independent registered public accounting firm without obtaining specific pre-approval from the Audit Committee. Prior to establishing the list of pre-approved services, the Audit Committee determines if the Company’s independent registered public accounting firm is an effective provider of services. The Audit Committee may revise the list of general pre-approved services from time to time, based on subsequent determinations. For fiscal year The Audit Committee may delegate to one or more of its members the authority to approve in advance all significant audit or permitted non-audit services to be provided by the independent registered public accounting firm, so long as decisions are presented to the full Audit Committee at its next scheduled meeting. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls over financial reporting. In fulfilling its oversight responsibilities, the Audit Committee has reviewed and discussed the audited financial statements for the fiscal year ended October 31, The Audit Committee has reviewed with the independent registered public accounting firm, which is responsible for expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles:
The Audit Committee, under the Audit Committee Charter, reviews 2013. AUDIT COMMITTEE Edward A. Kangas, Chair Robert B. Coutts Stephen D. Weinroth Audit Fees The aggregate fees billed by Deloitte & Touche LLP in each of fiscal Audit-Related Fees The aggregate fees billed by Deloitte & Touche LLP in The aggregate fees billed by Deloitte & Touche LLP in All Other Fees There were no fees billed for products and services provided by Deloitte & Touche LLP Pre-Approval Policies and Procedures All of the services covered under the captions “Audit Fees,” “Audit-Related Fees,” “Tax Fees” and “All Other Fees” were pre-approved by the Audit Committee. For a discussion of the Audit Committee’s pre-approval policies and procedures, see “The Audit Committee” above. The Audit Committee has determined that the provision of all non-audit services performed by Deloitte & Touche LLP The Corporate Governance and Nominating Committee is primarily responsible for reviewing the Company’s existing Corporate Governance Guidelines and further developing such guidelines and other policies and procedures that enhance the Company’s corporate governance. In accordance with promoting strong corporate governance, the Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, controller and all other associates of the Company, including its Directors and other officers. The Company has also adopted Corporate Governance Guidelines. The Company makes available to the public various corporate governance related information on its public website (www.khov.com) under “Investor Relations/Governance” and to any shareholder who requests such information in writing. Information on the website includes the Company’s Code of Ethics, Corporate Governance Guidelines (including the Related Person Transaction Policy) and Charters of the Audit Committee, the Compensation Committee, and the Corporate Governance and Nominating Committee. Shareholders, associates of the Company and other interested parties may communicate directly with the Board of Directors by corresponding to the address below. Correspondence will be discussed at the next scheduled meeting of the Board of Directors, or as indicated by the urgency of the matter. Attn: Board of Directors of Hovnanian Enterprises, Inc. c/o Mr. Edward A. Kangas, Director & Chairman of the Audit Committee Privileged & Confidential Hovnanian Enterprises, Inc. 110 West Front Street P.O. Box 500 Red Bank, N.J. 07701 The Company’s non-employee Directors meet without management after each regularly scheduled meeting of the Board of Directors. The presiding Director is selected to preside at these executive sessions by the directors in attendance. Shareholders, associates of the Company and other interested parties may communicate directly with non-employee Directors as a group by corresponding to the address below. Attn: Non-Employee Directors of Hovnanian Enterprises, Inc. c/o Mr. Edward A. Kangas, Director & Chairman of the Audit Committee Privileged & Confidential Hovnanian Enterprises, Inc. 110 West Front Street P.O. Box 500 Red Bank, N.J. 07701 In addition, associates of the Company may anonymously report concerns or complaints via the K. Hovnanian Corporate Governance Hotline or by following the procedure discussed in the Company’s Code of Ethics. The Company is exposed to a number of risks and undertakes at least annually an Enterprise Risk Management review to identify and evaluate these risks and to develop plans to manage them effectively. The Company’s Executive Vice President and Chief Financial Officer, Mr. Sorsby (who is himself a member of the Board of Directors), is directly responsible for the Company’s Enterprise Risk Management function and reports both to the President, Chief Executive Officer and Chairman and to the Audit Committee in this capacity. In fulfilling his risk management responsibilities, the CFO works closely with members ofsenior management,including the Vice President — Corporate Counsel, Vice President — Risk Management, Vice President — Human Resources, On behalf of the Board of Directors, the Audit Committee plays a key role in the oversight of the Company’s Enterprise Risk Management function. In that regard, the CFO meets with the Audit Committee at least four times a year to discuss the risks facing the Company, highlighting any new risks that may have arisen since they last met. The Audit Committee also reports to the Board of Directors on a regular basis to apprise them of their discussions with the CFO regarding the Company’s Enterprise Risk Management efforts. In fiscal 2013, we systematically reviewed all of our incentive compensation programs for potential risk areas as well the Company. By design, the Company’s compensation program for executive officers does not incentivize excessive risk-taking. Our base salary component of compensation does not encourage risk-taking because it is a fixed amount. The remaining elements of executive officer compensation have the following risk-limiting characteristics:
From 1997 to 2009, the Company had separate individuals serving as Chairman of the Board and as Chief Executive Officer. This structure reflected the continuing strong leadership, energy and passion brought to the Board of Directors by our founder, Mr. Kevork Hovnanian, and the day-to-day management direction of the Company under Mr. Ara Hovnanian as President and CEO. Following the death of Mr. K. Hovnanian in September 2009, the Board of Directors appointed Mr. A. Hovnanian to the additional position of Chairman, believing that his more than 30 years of service to the Company, vast industry experience and close relationship with our founder uniquely qualified him for this role. The Board of Directors believes that combining these positions under Mr. A. Hovnanian’s leadership has enabled him to carry on the tradition of a strong leader that has always marked this family-controlled company and to successfully navigate the Company through the current challenging economic environment, as well as any future challenges. In the view of the Board of Directors, this leadership structure also enables the Board of Directors to better fulfill its risk oversight responsibilities, as described above under “Oversight of Risk Management.” Although the Board of Directors has not formally designated a lead independent Director, Mr. Kangas, the chairman of the Audit Committee, serves as the Director to whom correspondence may be directed on behalf of both the Board of Directors and the non-employee Directors, as described above under “Corporate Governance” beginning on page The Board of Directors has adopted a written Related Person Transaction Policy (the “Related Person Transaction Policy”) to assist it in reviewing, approving and ratifying related person transactions and to assist the Company in the preparation of related disclosures required by the SEC. This Related Person Transaction Policy supplements the Company’s other policies that may apply to transactions with related persons, such as the Company’s Corporate Governance Guidelines and its Code of Ethics. The Related Person Transaction Policy provides that all Related Person Transactions (as defined in the Related Person Transaction Policy) covered by the Related Person Transaction Policy and involving a director, director In reviewing Related Person Transactions for approval or ratification, the Corporate Governance and Nominating Committee or disinterested directors will consider the relevant facts and circumstances, including, without limitation:
The Corporate Governance and Nominating Committee or the disinterested directors will not approve or ratify a Related Person Transaction unless, after considering all relevant information, it has determined that the transaction is in, or is not inconsistent with, the Company’s best interests and the best interests of its shareholders. Generally, the Related Person Transaction Policy applies to any current or proposed transaction in which:
A copy of our Related Person Transaction Policy is available as part of our Corporate Governance Guidelines on our website at www.khov.com under “Investors Relations/Corporate Governance.” Related Person Transactions The following transactions were reviewed, approved and ratified by the Board of Directors or by the Corporate Governance and Nominating Committee in accordance with our Related Person Transaction Policy: During the fiscal years ended October 31, During the fiscal In November 2012, one of our joint ventures in which we have a 50% interest sold an option to acquire a parcel of land for approximately $5.5 million. The total cost to the buyer was approximately $11.1 million and on which the commission was paid. John Pellerito, the son of Mr. Pellerito, one of our executive officers, was employed by the brokerage firm that handled the transaction and received $145,710 as a commission in connection with the transaction. Mr. Pellerito did not have a financial interest in the brokerage firm involved in the transaction nor did he receive any portion of the commission paid to his son. Ms. Jovana Pellerito, the daughter-in-law of Mr. Pellerito, one of our executive officers, is employed by the Company and, in fiscal 2013, her total compensation, including salary, commissions and other benefits, totaled approximately $172,000. Her compensation is commensurate with that of similarly situated employees in her position. The Company has a significant interest in the amount of estate tax liabilities and any necessary sales by the Estate of Kevork S. Hovnanian, deceased, and other members of the Hovnanian family of their assets (which includes a significant amount of shares of the Company’s Class A Common Stock and Class B Common Stock) to pay such liabilities because the benefit of federal net operating loss carryforwards (“NOLs”) to the Company would be significantly reduced or eliminated if we were to experience an “ownership change” as defined in Section 382 of the Internal Revenue Code. Based on recent impairments and current financial performance, the Company has generated NOLs of approximately $1.5 billion through the fiscal year ended October 31, 2013, and may generate NOLs in future years. During fiscal 2013, an outside law firm was retained to advise the Executors of the Estate and other members of the Hovnanian family in connection with estate tax planning. The fees and other charges of such legal services during fiscal 2013 totaled $249,653, of which (1) the Company and (2) the Estate and Hovnanian family each paid half. Kevork S. Hovnanian was the founder and former Chairman of our Company. Our current Chairman of the Board and Chief Executive Officer and other members of his immediate family are Executors and among the beneficiaries of the will of Kevork S. Hovnanian. IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON MARCH Our For information on how to obtain directions to the Company’s The solicitation of proxies is being made by our Board of Directors on our behalf primarily through the internet and by mail, but directors, officers, employees, and contractors retained by us may also engage in the solicitation of proxies by telephone. The cost of soliciting proxies will be borne by us. In addition, we may reimburse brokers, custodians, nominees and other record holders for their reasonable out-of-pocket expenses in forwarding proxy material to beneficial owners. Voting Unless otherwise directed, the persons named in the proxy card(s) intend to vote all shares represented by proxies received by them in favor of the election of the nominees to the Board of Directors of the Company named herein, in favor of the ratification of the selected independent registered public accounting firm, in favor of the 2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan, in favor of the Amended and Restated Hovnanian Enterprises, Inc. Senior Executive Short-Term Incentive Plan and in favor of the Each share of Class A Common Stock entitles the holder thereof to one vote, and each share of Class B Common Stock entitles the holder thereof to ten votes (except as provided below). Votes of Class A Common Stock and Class B Common Stock will be counted together without regard to class for proposals that require the affirmative vote of the holders of a majority of the votes cast. All votes will be certified by the Inspectors of Election, who are employees of the Company. Abstentions and broker non-votes will have no effect on the vote for proposal one and proposal five, because such shares are not considered votes cast. Abstentions will have no effect on the vote for proposal two, because such shares are not considered votes cast. Under the rules of the NYSE, abstentions will count as a vote “against” proposals three and four, and broker non-votes will have no effect on the vote for proposals three and four. Brokers may vote shares with respect to proposal two in the absence of client instructions and thus there will be no broker non-votes with respect to proposal two. Notwithstanding the foregoing, the Company’s Certificate of Incorporation provides that each share of Class B Common Stock held, to the extent of the Company’s knowledge, in nominee name by a stockbroker, bank or otherwise will be entitled to only one vote per share unless the Company is satisfied that such shares have been held continuously, since the date of issuance, for the benefit or account of the same named beneficial owner of such shares (as defined in the Certificate of Incorporation) or any Permitted Transferee (as defined in the Certificate of Incorporation). Beneficial owners of shares of Class B Common Stock held in nominee name wishing to cast ten votes for each share of such stock must properly complete their voting instruction card, which is specially designed for beneficial owners of Class B Common Stock. The Company has also supplied nominee holders of Class B Common Stock with instructions and specially designed proxy cards to accommodate the voting of the Class B Common Stock. In accordance with the Company’s Certificate of Incorporation, shares of Class B Common Stock held in nominee name will be entitled to ten votes per share only if the beneficial owner voting instruction card and the nominee proxy card relating to such shares is properly completed, mailed, and received not less than 3 nor more than 20 business days prior to March Additional Matters Management does not intend to present any business at the meeting other than that set forth in the accompanying Notice of Annual Meeting of Shareholders, and it has no information that others will attempt to do so. If other matters requiring the vote of shareholders properly come before the meeting and any adjournments or postponements thereof, it is the intention of the persons named in the proxy cards to vote the shares represented by the proxies held by them in accordance with their judgment on such matters. Under the SEC’s rules and regulations, any stockholder desiring to submit a proposal to be included in our September 29, 2014. Our restated bylaws require timely notice of business to be brought before a shareholders’ meeting, including nominations of persons for election as directors. To be timely, a stockholder’s notice must be delivered to our Secretary at our principal executive offices not earlier than 120 days prior to the first anniversary of the
Red Bank, New Jersey January 27, 2014 2012 HOVNANIAN ENTERPRISES, INC. AMENDED AND RESTATED STOCK INCENTIVE PLAN
The purpose of the Plan is to aid the Company and its Affiliates in recruiting and retaining key employees, directors and consultants of outstanding ability and to motivate such employees, directors and consultants to exert their best efforts on behalf of the Company and its Affiliates by providing incentives through the granting of Awards. The Company expects that it will benefit from the added interest which such key employees, directors or consultants will have in the welfare of the Company as a result of their proprietary interest in the Company’s success.
The following capitalized terms used in the Plan have the respective meanings set forth in this Section: (a) Act: The Securities Exchange Act of 1934, as amended, or any successor thereto. (b) Affiliate: With respect to the Company, any entity directly or indirectly controlling, controlled by, or under common control with, the Company or any other entity designated by the Board in which the Company or an Affiliate has an interest. (c) Award: An Option, Stock Appreciation Right or Other Stock-Based Award granted pursuant to the Plan. (d) Beneficial Owner: A “beneficial owner”, as such term is defined in Rule 13d-3 under the Act (or any successor rule thereto). (e) Board: The Board of Directors of the Company. (f) Change in Control: The occurrence of any of the following events: (i) any Person (other than a Person holding securities representing 10% or more of the combined voting power of the Company’s outstanding securities as of the Effective Date, or any Family Member of such a Person, the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), becomes the Beneficial Owner, directly or indirectly, of securities of the Company, representing 50% or more of the combined voting power of the Company’s then-outstanding securities; (ii) during any period of twenty-four consecutive months (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board, and any new director (other than (A) a director nominated by a Person who has entered into an agreement with the Company to effect a transaction described in Sections 2(f) (i), (iii) or (iv) of the Plan or (B) a director nominated by any Person (including the Company) who publicly announces an intention to take or to consider taking actions (including, but not limited to, an actual or threatened proxy contest) which if consummated would constitute a Change in Control) whose election by the Board or nomination for election by the Company’s shareholders was approved in advance by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the consummation of any transaction or series of transactions under which the Company is merged or consolidated with any other company, other than a merger or consolidation which (iv) the (g) Code: The Internal Revenue Code of 1986, as amended, or any successor thereto. (h) Committee: The Compensation Committee of the Board (or a subcommittee thereof as provided under Section 4), or such other committee of the Board to which the Board has delegated power to act under or pursuant to the provisions of the Plan, or the full Board. (i) Company: Hovnanian Enterprises, Inc., a Delaware corporation, and any successors thereto. (j) Disability: Inability of a Participant to perform in all material respects his duties and responsibilities to the Company, or any Subsidiary of the Company, by reason of a physical or mental disability or infirmity which inability is reasonably expected to be permanent and has continued (i) for a period of six consecutive months or (ii) such shorter period as the Committee may reasonably determine in good faith. The Disability determination shall be in the sole discretion of the Committee and a Participant (or his representative) shall furnish the Committee with medical evidence documenting the Participant’s disability or infirmity which is satisfactory to the Committee. (k) Effective Date: January 10, 2012, the date the Plan (prior to the amendment and restatement thereof) was initially adopted by the Board. (l) Fair Market Value: On a given date, the closing price of the Shares as reported on such date on the Composite Tape of the principal national securities exchange on which such Shares are listed or admitted to trading, or, if no Composite Tape exists for such national securities exchange on such date, then on the principal national securities exchange on which such Shares are listed or admitted to trading, or, if the Shares are not listed or admitted on a national securities exchange, the arithmetic mean of the per Share closing bid price and per Share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System (or such market in which such prices are regularly quoted), or, if there is no market on which the Shares are regularly quoted, the Fair Market Value shall be the value established by the Committee in good faith. If no sale of Shares shall have been reported on such Composite Tape or such national securities exchange on such date or quoted on the National Association of Securities Dealer Automated Quotation System on such date, then the immediately preceding date on which sales of the Shares have been so reported or quoted shall be used. (m) Family Member: (i) any Person holding securities representing 10% or more of the combined voting power of the Company’s outstanding securities as of the Effective Date; (ii) any spouse of such a person; (iii) any descendant of such a person; (iv) any spouse of any descendant of such a person; or (v) any trust for the benefit of any of the aforementioned persons. (n) ISO: An Option that is also an incentive stock option granted pursuant to Section 6(d) of the Plan. (o) Other Stock-Based Awards: Awards granted pursuant to Section 8 of the Plan. (p) Option: A stock option granted pursuant to Section 6 of the Plan. (q) Option Price: The purchase price per Share of an Option, as determined pursuant to Section 6(a) of the Plan. (r) Participant: An employee, director or consultant of the Company or any of its Affiliates who is selected by the Committee to participate in the Plan. (s) Performance-Based Awards: Certain Other Stock-Based Awards granted pursuant to Section 8(b) of the Plan. (t) Person: A “person”, as such term is used for purposes of Section 13(d) or 14(d) of the Act (or any successor section thereto). (u) Plan: The 2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan. (v) Shares: Shares of common stock of the Company. (w) Stock Appreciation Right: A stock appreciation right granted pursuant to Section 7 of the Plan. (x) Subsidiary: A subsidiary corporation, as defined in Section 424(f) of the Code (or any successor section thereto).
Subject to Sections 4, 6(f) and 9 of the Plan, the total number of Shares which may be issued under the Plan pursuant to grants of ISOs or other Awards is 11,450,000 (inclusive of the 5,000,000 Shares initially reserved under the Plan as of the Effective Date, and the 6,450,000 Shares added to the Plan pursuant to the 2014 amendment and restatement thereof) and the maximum number of Shares for which Options or Stock Appreciation Rights may be granted during a fiscal year to any Participant shall be 2,000,000. The Shares may consist, in whole or in part, of unissued Shares or treasury Shares. The issuance of Shares The maximum number of Shares subject to Awards granted during a calendar year to any non-employee director serving on the Board, taken together with any cash fees paid to such non-employee director during such calendar year, shall not exceed $600,000 in total value (calculating the value of any such Awards based on the grant date fair value of such Awards for financial reporting purposes).
The Plan shall be administered by the Committee, which may delegate its duties and powers in whole or in part to any subcommittee thereof consisting solely of at least two individuals who are each intended to qualify as “non-employee directors” within the meaning of Rule 16b-3 under the Act (or any successor rule thereto), “outside directors” within the meaning of Section 162(m) of the Code (or any successor section thereto) and “independent directors” within the meaning of the applicable rules, if any, of any national securities exchange on which Shares are listed or admitted to trading; provided, however, that any action permitted to be taken by the Committee may be taken by the Board, in its discretion. The Committee is authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make any other determinations that it deems necessary or desirable for the administration of the Plan. The Committee may correct any defect or omission or reconcile any inconsistency in the Plan in the manner and to the extent the Committee deems necessary or desirable. Any decision of the Committee in the interpretation and administrations of the Plan, as described herein, shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned (including, but not limited to Participants and their beneficiaries or successors). Determinations made by the Committee under the Plan need not be uniform and may be made selectively among Participants, whether or not such Participants are similarly situated. Awards may, in the discretion of the Committee, be made under the Plan in assumption of, or in substitution for, outstanding awards previously granted by the Company or its Affiliates or a company acquired by the Company or with which the Company combines. The number of Shares underlying such substitute awards shall be counted against the aggregate number of Shares available for Awards under the Plan. The Committee shall require payment of any minimum amount it may determine to be necessary to withhold for federal, state, local or other, taxes as a result of the exercise or vesting of an Award. Unless the Committee specifies otherwise, the Participant may elect to pay a portion or all of such minimum withholding taxes by (a) delivery in Shares or (b) having Shares withheld by the Company from any Shares that would have otherwise been received by the Participant. The number of Shares so delivered or withheld shall have an aggregate Fair Market Value sufficient to satisfy the applicable minimum withholding taxes. If the chief executive officer of the Company is a member of the Board, the Board by specific resolution may constitute such chief executive officer as a committee of one which shall have the authority to grant Awards of up to an aggregate of 1,000,000 Shares in each fiscal year to Participants who are (i) not subject to the rules promulgated under Section 16 of the Act (or any successor section thereto) or (ii) covered employees (or anticipated to become covered employees) as such term is defined in Section 162(m) of the Code; provided, however, that such chief executive officer shall notify the Committee of any such grants made pursuant to this Section 4.
No Award may be granted under the Plan after the tenth anniversary of the Effective Date, but Awards theretofore granted may extend beyond that date.
Options granted under the Plan shall be, as determined by the Committee, non-qualified or incentive stock options for federal income tax purposes, as evidenced by the related Award agreements, and shall be subject to the foregoing and the following terms and conditions and to such other terms and conditions, not inconsistent therewith, as the Committee shall determine: (a) Option Price. The Option Price per Share shall be determined by the Committee, but shall not be less than 100% of the Fair Market Value of a Share on the date an Option is granted (other than in the case of Options granted in substitution of previously granted awards, as described in Section 4). (b) Exercisability. Options granted under the Plan shall be exercisable at such time and upon such terms and conditions as may be determined by the Committee, but in no event shall an Option be exercisable more than ten years after the date it is granted. The Committee may, in its discretion, accelerate the date after which Options may be exercised in whole or in part. If the chief executive officer of the Company is a member of the Board, the Board by specific resolution may constitute such chief executive officer as a committee of one which shall have the authority to accelerate the date after which Options may be exercised in whole or in part. (c) Exercise of Options. Except as otherwise provided in the Plan or in an Award agreement, an Option may be exercised for all, or from time to time any part, of the Shares for which it is then exercisable. For purposes of Section 6 of the Plan, the exercise date of an Option shall be the later of the date a notice of exercise is received by the Company and, if applicable, the date payment is received by the Company pursuant to clauses (i), (ii), (iii) or (iv) in the following sentence. The purchase price for the Shares as to which an Option is exercised shall be paid to the Company in full not later than at the time that the Shares being purchased are delivered to or at the direction of the Participant, in each case at the election of the Participant to the extent permitted by law and as designated by the Committee, (i) in cash, (ii) in Shares having a Fair Market Value equal to the aggregate Option Price for the Shares being purchased and satisfying such other requirements as may be imposed by the Committee; provided, that such Shares have been held by the Participant for no less than six months (or such other period as established from time to time by the Committee in order to avoid adverse accounting treatment applying generally accepted accounting principles), (iii) partly in cash and partly in such Shares, (iv) through the delivery of irrevocable instruments to a broker to deliver promptly to the Company an amount equal to the aggregate Option Price for the Shares being purchased or (v) through net settlement in Shares. No Participant shall have any rights to dividends or other rights of a shareholder with respect to Shares subject to an Option until the Participant has given written notice of exercise of the Option, paid in full for such Shares and, if applicable, has satisfied any other conditions imposed by the Committee pursuant to the Plan. (d) ISOs. The Committee may grant Options under the Plan that are intended to be ISOs. Such ISOs shall comply with the requirements of Section 422 of the Code (or any successor section thereto). No ISO may be granted to any Participant who at the time of such grant, owns more than 10% of the total combined voting power of all classes of stock of the Company or of any Subsidiary, unless (i) the Option Price for such ISO is at least 110% of the Fair Market Value of a Share on the date the ISO is granted and (ii) the date on which such ISO terminates is a date not later than the day preceding the fifth anniversary of the date on which the ISO is granted. Any Participant who disposes of Shares acquired upon the exercise of an ISO either (i) within two years after the date of grant of such ISO or (ii) within one year after the transfer of such Shares to the Participant, shall notify the Company of such disposition and of the amount realized upon such disposition. All Options granted under the Plan are intended to be nonqualified stock options, unless the applicable Award agreement expressly states that the Option is intended to be an ISO. If an Option is intended to be an ISO, and if for any reason such Option (or portion thereof) shall not qualify as an ISO, then, to the extent of such nonqualification, such Option (or portion thereof) shall be regarded as a nonqualified stock option granted under the Plan; provided that such Option (or portion thereof) otherwise complies with the Plan’s requirements relating to nonqualified stock options. In no event shall any member of the Committee, the Company or any of its Affiliates (or their respective employees, officers or directors) have any liability to any Participant (or any other Person) due to the failure of an Option to qualify for any reason as an ISO. (e) Attestation. Wherever in this Plan or any agreement evidencing an Award a Participant is permitted to pay the exercise price of an Option or taxes relating to the exercise of an Option by delivering Shares, the Participant may, subject to procedures satisfactory to the Committee, satisfy such delivery requirement by presenting proof of beneficial ownership of such Shares, in which case the Company shall treat the Option as exercised without further payment and/or shall withhold such number of Shares from the Shares acquired by the exercise of the Option, as appropriate. (f) Repricing of Options. Notwithstanding any other provisions under the Plan, no action shall be taken under the Plan to (i) lower the exercise prices of any Company stock options after they are granted, (ii) exchange stock options for stock options with lower exercise prices or cancel an Option when the Option Price exceeds the Fair Market Value in exchange for cash or other Awards (other than pursuant to Section 9 hereof) or (iii) take any other action that is treated as a “repricing” of stock options under generally accepted accounting principles. Any such approved action shall be treated as a grant of a new Award to the extent required under Sections 162(m), 422 or 424 of the Code (for individuals who are “covered employees” under Section 162(m) of the Code at the time of such action, or for stock options that are intended to retain their status as ISOs).
(a) Grants. The Committee also may grant (i) a Stock Appreciation Right independent of an Option or (ii) a Stock Appreciation Right in connection with an Option, or a portion thereof. A Stock Appreciation Right granted pursuant to clause (ii) of the preceding sentence (A) may be granted at the time the related Option is granted or at any time prior to the exercise or cancellation of the related Option, (B) shall cover the same number of Shares covered by an Option (or such lesser number of Shares as the Committee may determine) and (C) shall be subject to the same terms and conditions as such Option except for such additional limitations as are contemplated by this Section 7 (or such additional limitations as may be included in an Award agreement). (b) Terms. The exercise price per Share of a Stock Appreciation Right shall be an amount determined by the Committee but in no event shall such amount be less than the greater of (i) the Fair Market Value of a Share on the date the Stock Appreciation Right is granted or, in the case of a Stock Appreciation Right granted in conjunction with an Option, or a portion thereof, the Option Price of the related Option and (ii) an amount permitted by applicable laws, rules, restated By-laws or policies of regulatory authorities or stock exchanges. Each Stock Appreciation Right granted independent of an Option shall entitle a Participant upon exercise to an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one Share over (B) the exercise price per Share, times (ii) the number of Shares covered by the Stock Appreciation Right. Each Stock Appreciation Right granted in conjunction with an Option, or a portion thereof, shall entitle a Participant to surrender to the Company the unexercised Option, or any portion thereof, and to receive from the Company in exchange therefor an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one Share over (B) the Option Price per Share, times (ii) the number of Shares covered by the Option, or portion thereof, which is surrendered. The date a notice of exercise is received by the Company shall be the exercise date. Payment shall be made in Shares or in cash, or partly in Shares and partly in cash (any such Shares valued at such Fair Market Value), all as shall be determined by the Committee. Stock Appreciation Rights may be exercised from time to time upon actual receipt by the Company of written notice of exercise stating the number of Shares with respect to which the Stock Appreciation Right is being exercised. No fractional Shares will be issued in payment for Stock Appreciation Rights, but instead cash will be paid for a fraction or, if the Committee should so determine, the number of Shares will be rounded downward to the next whole Share. (c) Limitations. The Committee may impose, in its discretion, such conditions upon the exercisability or transferability of Stock Appreciation Rights as it may deem fit. (d) Repricing of Stock Appreciation Rights. Notwithstanding any other provisions under the Plan, no action shall be taken under the Plan to (i) lower the exercise prices of any Company stock appreciation right after they are granted, (ii) exchange stock appreciation rights for stock appreciation rights with lower exercise prices or cancel a stock appreciation right when the exercise price exceeds the Fair Market Value in exchange for cash or other Awards (other than pursuant to Section 9 hereof) or (iii) take any other action that is treated as a "repricing" of stock appreciation rights under generally accepted accounting principles. Any such approved action shall be treated as a grant of a new Award to the extent required under Section 162(m) of the Code (for individuals who are "covered employees" under Section 162(m) of the Code at the time of such action).
(a) Generally. The Committee, in its sole discretion, may grant or sell Awards of Shares, Awards of restricted Shares and Awards that are valued in whole or in part by reference to, or are otherwise based on the Fair Market Value of, Shares (“Other Stock-Based Awards”). Such Other Stock-Based Awards shall be in such form, and dependent on such conditions, as the Committee shall determine, including, without limitation, the right to receive one or more Shares (or the equivalent cash value of such (b) Performance-Based Awards. Notwithstanding anything to the contrary herein, certain Other Stock-Based Awards granted under this Section 8 may be granted in a manner which is intended to be deductible by the Company under Section 162(m) of the Code (or any successor section thereto) (“Performance-Based Awards”). A Participant’s Performance-Based Award shall be determined based on the attainment of written performance goals approved by the Committee for a performance period established by the Committee (i) while the outcome for that performance period is substantially uncertain and (ii) no more than 90 days after the commencement of the performance period to which the performance goal relates or, if less, the number of days which is equal to 25 percent of the relevant performance period. The performance goals, which must be objective, shall be based upon one or more of the following criteria: (i) earnings before or after taxes (including earnings before interest, taxes, depreciation and amortization); (ii) net income; (iii) operating income; (iv) earnings per Share; (v) book value per Share; (vi) return on shareholders’ equity; (vii) total shareholder return; (viii) expense management; (ix) return on Table Of Contents
Notwithstanding any other provisions in the Plan to the contrary, the following provisions shall apply to all Awards granted under the Plan: (a) Generally. In the event of any change in the outstanding Shares after the Effective Date by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of Shares or other corporate exchange or change in capital structure, any distribution to shareholders (b) Change in Control. Except as otherwise provided in an Award agreement, in the event of a Change in Control, the Committee in its sole discretion and without liability to any person may take such actions, if any, as it deems necessary or desirable with respect to any Award (including, without limitation, (i) the acceleration of an Award, (ii) the payment of a cash amount in exchange for the cancellation of an Award which, in the case of Options and Stock Appreciation Rights, may equal the excess, if any, of value of the consideration to be paid in the Change in Control transaction to holders of the same number of Shares subject to such Options or Stock Appreciation Rights (or, if no consideration is paid in any such transaction, the Fair Market Value of the Shares subject to such Options or Stock Appreciation Rights) over the aggregate exercise price of such Options or Stock Appreciation Rights and/or (iii) the requiring of the issuance of substitute Awards that will substantially preserve the value, rights and benefits of any affected Awards previously granted hereunder) as of the date of the consummation of the Change in Control.
The granting of an Award under the Plan shall impose no obligation on the Company or any Subsidiary to continue the employment of a Participant and shall not lessen or affect the Company’s or Subsidiary’s right to terminate the employment of such Participant. Table Of Contents
The Plan shall be binding on all successors and assigns of the Company and a Participant; including without limitation, the estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant’s creditors.
Unless otherwise determined by the Committee, an Award shall not be transferable or assignable by the Participant otherwise than by will or by the laws of descent and
The Committee may amend, alter or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which, (a) without the approval of the shareholders of the Company, would (except as is provided in the Plan for adjustments in certain events), increase the total number of Shares reserved for the purposes of the Plan or change the maximum number of Shares for which Awards may be granted to any Participant or amend the repricing prohibitions under Sections 6(f) and 7(d) or (b) without the consent of a Participant, would materially impair any of the rights or obligations under any Award theretofore granted to such Participant under the Plan; provided, however, that the Committee may amend the Plan in such manner as it deems necessary to permit the granting of Awards meeting the requirements of the Code or other applicable laws. Notwithstanding anything to the contrary herein, the Committee may not amend, alter or discontinue the provisions relating to Section 9(b) of the Plan after the occurrence of a Change in Control. Without limiting the generality of the foregoing, to the extent applicable, notwithstanding anything herein to the contrary, this Plan and Awards issued hereunder shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretative guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the Effective Date. Notwithstanding any provision of the Plan to the contrary, in the event that the Committee determines that any amounts payable hereunder will be taxable to a Participant under Section 409A of the Code and related Department of Treasury guidance prior to payment to such Participant of such amount, the Company may (a) adopt such amendments to the Plan and Awards and appropriate policies and procedures, including amendments and policies with retroactive effect, that the Committee determines necessary or appropriate to preserve the intended tax treatment of the benefits provided by the Plan and Awards hereunder and/or (b) take such other actions as the Committee determines necessary or appropriate to avoid the imposition of an additional tax under Section 409A of the Code.
With respect to Participants who reside or work outside the United States of America and who are not (and who are not expected to be) “covered employees” within the meaning of Section 162(m) of the Code, the Committee may, in its sole discretion, amend the terms of the Plan or Awards with respect to such Participants in order to conform such terms with the requirements of local law or to obtain more favorable tax or other treatment for a Participant, the Company or an Affiliate. Table Of Contents
The Plan shall be governed by and construed in accordance with the laws of the State of Delaware.
The Plan The Plan as amended and restated was approved by the Board on January 16, 2014, subject to the approval of the Company's shareholders.
Notwithstanding other provisions of the Plan or any Award agreements thereunder, no Award shall be granted, deferred, accelerated, extended, paid out or modified under this Plan in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon a Participant. In the event that it is reasonably determined by the Committee that, as a result of Section 409A of the Code, payments or deliveries of shares in respect of any Award under the Plan may not be made at the time contemplated by the terms of the Plan or the relevant Award agreement, as the case may be, without causing the Participant holding such Award to be subject to taxation under Section 409A of the Code, the Company will make such payment or delivery of shares on the first day that would not result in the Participant incurring any tax liability under Section 409A of the Code. In the case of a Participant who is a “specified employee” (within the meaning of Section 409A(a)(2)(B)(i) of the Code), payments and/or deliveries of shares in respect of any Award subject to Section 409A of the Code that are linked to the date of the Participant’s separation from service shall not be made prior to the date which is six (6) months after the date of such Participant’s separation from service from the Company and its affiliates, determined in accordance with Section 409A of the Code and the regulations promulgated thereunder. The Company shall use commercially reasonable efforts to implement the provisions of this Section 17 in good faith; provided that neither the Company, the Committee nor any of the Company’s employees, directors or representatives shall have any liability to Participants with respect to this Section 17.
Any Awards granted under the Plan may be subject to reduction, cancellation, forfeiture or recoupment to the extent required by applicable law or listed company rules or to the extent otherwise provided in an Award agreement at the time of grant. HOVNANIAN ENTERPRISES, INC. SENIOR EXECUTIVE SHORT-TERM INCENTIVE PLAN (AS AMENDED AND RESTATED)
The purpose of the Senior Executive Short-Term Incentive Plan (the “Plan”) is to advance the interests of Hovnanian Enterprises, Inc. (the “Company”), and its shareholders by providing incentives in the form of periodic bonus awards (“Awards”) to certain senior executive employees of the Company and its affiliates, thereby motivating such executives to attain corporate performance goals articulated under the Plan.
(a) The Plan shall be administered by two or more individuals who are each “non-employee directors” within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, or any successor thereto, “outside directors” as defined under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), and “independent directors” within the meaning of the applicable rules, if any, of any national securities exchange on which shares of common stock of the Company are listed or admitted to trading, unless otherwise determined by the Company's Board of Directors to act as the committee (the “Committee”). (b) The Committee shall have the exclusive authority to select the senior executives to be granted Awards under the Plan, to determine the size and terms of the Award (subject to the limitations imposed on Awards in Section 4 below), to modify the terms of any of the Award that has been granted (except for any modification that would increase the amount of the Award payable to an executive), to determine the time when Awards will be made and the performance period to which they relate, to establish performance objectives in respect of such performance periods, and to certify that such performance objectives were attained; provided, however, that any such action shall be intended to be consistent with the applicable provisions of Section 162(m) of the Code. The Committee is authorized to interpret the plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make any other determinations that it deems necessary or desirable for the administration of the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent the Committee deems necessary or desirable. Any decision of the Committee in the interpretation and administration of the Plan, as described herein, shall be final, conclusive and binding on all parties concerned.
Awards may be granted to senior executives of the Company and its affiliates who are “covered employees”, as defined in Section 162(m) of the Code, or who the Committee anticipates may become covered employees. An Executive to whom an Award is granted shall be a “Participant”.
(a) A Participant's Award shall be determined based on the attainment of written performance goals approved by the Committee in respect of a specified period of service (a “performance period”), which is established by the Committee (i) while the outcome for that performance period is substantially uncertain and (ii) not more than 90 days after the commencement of that performance period or, if less, the number of days which is equal to 25 percent of that performance period. The performance goals shall be based upon one or more of the following criteria: (i) earnings before or after taxes (including earnings before interest, taxes, depreciation and amortization); (ii) net income; (iii) operating income; (iv) earnings per share; (v) book value per share; (vi) return on stockholders' equity; (vii) expense management; (viii) return on investment before or after the cost of capital; (ix) improvements in capital structure; (x) profitability of an identifiable business unit or product; (xi) maintenance or improvement of profit margins; (xii) stock price; (xiii) market share; (xiv) revenues or sales; (xv) costs; (xvi) cash flow; (xvii) working capital; (xviii) changes in net assets (whether or not multiplied by a constant percentage intended to represent the cost of capital); (xix) return on assets and (xx) total shareholder return. The foregoing criteria may relate to the Company, one or more of its affiliates or one or more of its divisions or units, or any combination of the foregoing, and may be applied on an absolute basis and/or be relative to one or more peer group companies or other indices, or any combination thereof, all as the Committee shall determine. In addition, to the degree consistent with Section 162(m) of the Code, the performance goals may be calculated without regard to extraordinary items. In any event, the performance goals shall be based on an objective formula or standard. The maximum amount of an Award to any Participant with respect to a fiscal year of the Company shall be the greater of (x) $15,000,000 and (y) 2.5 percent (2.5%) of the Company's income before income taxes, as reported in the Company's audited consolidated financial statements for the year in respect of which the Award is to be payable or distributed, as applicable. (b) The Committee shall determine whether, with respect to a performance period, the specified performance goals have been met with respect to any Participant and, if such goals have been met, shall so certify and shall ascertain the amount of the applicable Award. No Awards will be paid for any performance period until such applicable certification is made by the Committee. The amount of the Award actually paid to any Participant may, at the discretion of the Committee, be less than the amount determined by the applicable performance goal formula. The amount of the Award determined by the Committee in respect of a performance period shall be paid to the Participant at such time after the end of such performance period as shall be determined by the Committee in its sole discretion; provided, however, that a Participant may, if and to the extent permitted by the Committee, elect to defer receipt of an Award in a manner consistent with Sections 162(m) and 409A of the Code. (c) The provisions of this Section 4 shall be administered and interpreted in accordance with Section 162(m) of the Code and all supporting regulations in a manner generally intended to secure the deductibility by the Company or any of its affiliates of the payment of Awards. (d) The Committee shall determine, in its discretion, whether an Award shall be payable in cash, common stock of the Company, or a combination thereof, which may include, without limitation, permitting a Participant to elect to defer receipt of all or any portion of such Award (in a manner consistent with Sections 162(m) and 409A of the Code) into a right to receive shares of common stock of the Company or cash at a future date. Any such shares or share-based awards issued in settlement of an Award shall be granted pursuant to the Company’s 2012 Amended and Restated Stock Incentive Plan (as amended from time to time) (the “Stock Plan”), or any successor plan thereto. Except as otherwise provided in an Award agreement, in the event of a Change in Control (as defined in the Stock Plan), the Committee in its sole discretion and without liability to any person may take such actions, if any, as it deems necessary or desirable with respect to any Award.
(a) The Committee may at any time, or from time to time, suspend or terminate the Plan in whole or in part or amend it in such respects as the Committee may deem appropriate. (b) Notwithstanding the foregoing, no amendment, suspension or termination of the Plan shall be made which (i) without the Participant's consent, materially impairs any of the rights or obligations under any Award theretofore granted to a Participant under the Plan or (ii) without the approval of the shareholders of the Company changes the maximum amount of any Award which may be payable or distributed to any Participant; provided, however, that the Committee may amend the Plan in such manner as it deems necessary to permit the granting of Awards meeting the requirements of the Code or other applicable laws.
(a) Determination made by the Committee under the Plan need not be uniform and may be made selectively among eligible individuals under the Plan, whether or not such eligible individuals are similarly situated. Neither the Plan nor any action taken hereunder shall be construed as giving any right to be retained as an employee of the Company or any affiliate thereof. (b) A Participant's rights or interest under the Plan may not be assigned or transferred, hypothecated or encumbered in whole or in part either directly or by operation of law or otherwise (except in the event of a Participant's death) including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner; provided, however, that, subject to applicable law, any amounts payable to any Participant hereunder are subject to reduction to satisfy any liabilities owed to the Company or any of its affiliates by the Participant. Any attempted assignment or transfer, hypothecation or encumbrance shall be void and of no effect. (c) The Company and its affiliates shall have the right to deduct from any payment made under the Plan any federal, state, local or foreign income and other taxes required by law to be withheld with respect to such payment. (d) Each person who is or at any time serves as a member of the Committee or the Company's Board of Directors shall be indemnified and held harmless by the Company against and from: (i) any loss, cost, liability or expense that may be imposed upon or reasonably incurred by such person in connection with or resulting from any claim, action, suit or proceeding to which such person may be a party or in which such person may be involved by reason of any action or failure to act under the Plan; and (ii) any and all amounts paid by such person in satisfaction of judgment in any such action, suit or proceeding relating to the Plan. Each person covered by this indemnification shall give the Company an opportunity, at its own expense, to handle and defend the same before such person undertakes to handle and defend it on such person's own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the bylaws of the Company as a matter of law, or otherwise, or any power that the Company may have to indemnify such person or hold such person harmless. (e) Each member of the Committee and the Company's Board of Directors shall be fully justified in relying or acting in good faith upon any report made by independent public accountants of, or counsel for, the Company and upon any other information furnished in connection with the Plan. In no event shall any person who is or shall have been a member of the Committee or the Company's Board of Directors be liable for any determination made or other action taken or any failure to act in reliance upon any such report or information or for any action taken, including without limitation the furnishing of information, or failure to act, if in good faith. (f) All matters relating to the Plan or to Awards granted hereunder shall be governed by and construed in accordance with the laws of the State of Delaware. (g) The Plan was originally effective as of November 1, 1999, as approved by the affirmative vote of holders of a majority of the shares of the Company then present or represented by proxy without payment therefor and entitled to vote, and the Plan was most recently re-approved by the Company’s shareholders on March 31, 2008. The Plan has been submitted for re-approval by the Company’s shareholders on March 11, 2014 (the “2014 Annual Meeting”). Assuming the Plan is re-approved at the 2014 Annual Meeting, no Award may be granted under the Plan after the date of the Company’s first shareholders’ meeting that occurs during 2019, but Awards theretofore granted may extend beyond that date.
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