Table of Contents

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  ☒

 

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.

 

 

 

 

 

(1)

Title of each class of securities to which transaction applies:

 

 

 

 

 

 

(2)

Aggregate number of securities to which transaction applies:

 

 

 

 

 

 

(3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

 

 

 

 

(4)

Proposed maximum aggregate value of transaction:

 

 

 

 

 

 

(5)

Total fee paid:

 

 

 

 

 

 

 

 

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.

 

 

 

 

 

 

(1)

Amount Previously Paid:

 

 

 

 

 

 

 

 

 

 

(2)

Form, Schedule or Registration Statement No.:

 

 

 

 

 

 

 

 

 

 

(3)

Filing Party:

 

 

 

 

 

 

 

 

 

 

(4)

Date Filed:

 

 

 

 

 

 

LOGO01.JPG

 

  

HOVNANIAN ENTERPRISES, INC.

  

90 Matawan Road, Fifth Floor, Matawan, N.J. 07747 (732) 747-7800

 

February    , 2021

Dear Shareholder:

 

You are cordially invited to attend the 2021 Annual Meeting of Shareholders, which will be held on Tuesday, March 30, 2021, at the offices of Bilzin Sumberg Baena Price & Axelrod LLP, 1450 Brickell Avenue, 23rd Floor, Miami, FL 33131. The meeting will start promptly at 10:30 a.m., Eastern Time.

 

In accordance with the Securities and Exchange Commission’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 over the Internet, rather than mailing paper copies of the materials (including our Annual Report to Shareholders for fiscal 2020) to those shareholders. 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. A request for a paper copy must be made by March 16, 2021 in order to facilitate a timely delivery.

 

We anticipate that the Notice will first be mailed to our shareholders on or about February 12, 2021. All shareholders of record of Class B Common Stock who hold in nominee name have been sent a full set of proxy materials, including a proxy card.

 

Attached to this letter are a Notice of Annual Meeting of Shareholders and a Proxy Statement, which describe 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 2021 Annual Meeting of Shareholders. We welcome the opportunity to meet with many of you and give you a firsthand report on the progress of your Company.

 

  

Sincerely yours,

  

SIG01.JPG

  

Ara K. Hovnanian

Chairman of the Board

 

 

PROXY VOTING METHODS

 

If at the close of business on February 1, 2021, 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 of Shareholders. 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 over 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 Time) on March 29, 2021 to be counted unless otherwise noted below.

 

To vote by proxy:

 

Shareholders of Class A Common Stock and Shareholders of Class B Common Stock:

 

BY INTERNET

 

 

Go to the website at www.proxyvote.com and follow the instructions, 24 hours a day, seven days a week.

 

 

You will need the 16-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 16-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 29, 2021 to be counted for the 2021 Annual Meeting of Shareholders.

 

Additional Information for Shareholders of Class B Common Stock Held in Nominee Name:

 

 

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 are properly completed, mailed and received not less than three nor more than 20 business days prior to March 30, 2021.

 

YOUR VOTE IS IMPORTANTTHANK 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 30, 2021, at the offices of Bilzin Sumberg Baena Price & Axelrod LLP, 1450 Brickell Avenue, 23rd Floor, Miami, FL 33131 at 10:30 a.m., Eastern Time, 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, 2021;

 

3.

The approval of the Amended and Restated 2020 Hovnanian Enterprises, Inc. Stock Incentive Plan;

 

4.

The approval of the compensation of the Company’s named executive officers in a non-binding, advisory vote;

 

5.

The approval of an amendment to the Company’s stockholder rights plan; 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 and FOR proposals 2, 3, 4 and 5.

 

Only shareholders of record at the close of business on February 1, 2021 are entitled to notice of, and to vote at, the Annual Meeting of Shareholders. 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, 2020.

 

To ensure your shares are voted, you may vote your shares over the Internet, by telephone or by requesting a paper proxy card to complete, sign and return by mail. 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 are properly completed, mailed and received not less than three nor more than 20 business days prior to March 30, 2021. These voting procedures are described on the preceding page and on the proxy card.

 

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 in the preceding page and the proxy card.

 

  

By order of the Board of Directors,

  

SIG02.JPG

  

ELIZABETH TICE

Secretary

February , 2021

 

If you are a shareholder of record and you plan to attend the Annual Meeting of Shareholders, 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., 90 Matawan Road, Fifth Floor, Matawan, New Jersey 07747, Attention: Elizabeth Tice, 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 of Shareholders, you will need a form of personal identification (such as a driver’s license) along with your Notice Regarding the Availability of Proxy Materials, 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 of Shareholders, 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(s) 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

 

 

Page

GENERAL

1

VOTING RIGHTS AND SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

2

PROPOSAL 1 — ELECTION OF DIRECTORS

4

MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD OF DIRECTORS

7

PROPOSAL 2 — RATIFICATION OF THE SELECTION OF AN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

9

PROPOSAL 3 — APPROVAL OF THE AMENDED AND RESTATED 2020 HOVNANIAN ENTERPRISES, INC. STOCK INCENTIVE PLAN

9

PROPOSAL 4 — ADVISORY VOTE ON EXECUTIVE COMPENSATION

17

PROPOSAL 5 — APPROVAL OF AN AMENDMENT TO THE COMPANY’S STOCKHOLDER RIGHTS PLAN

18

THE COMPENSATION COMMITTEE

22

COMPENSATION DISCUSSION AND ANALYSIS

24

Executive Summary

24

Compensation Philosophy and Objectives

28

Fiscal 2020 Compensation Elements and Compensation Mix

31

Details of Compensation Elements

32

Actions for Fiscal 2021

40

Tax Deductibility and Accounting Implications

41

Timing and Pricing of Equity Awards

41

Stock Ownership Guidelines

41

EXECUTIVE COMPENSATION

42

Summary Compensation Table

42

Grants of Plan-Based Awards in Fiscal 2020

45

Outstanding Equity Awards at Fiscal 2020 Year-End

 47

Option Exercises and Stock Vested in Fiscal 2020

52

Nonqualified Deferred Compensation for Fiscal 2020

53

Potential Payments Upon Termination or Change-in-Control Table

55

Pay Ratio Disclosure

58

NON-EMPLOYEE DIRECTOR COMPENSATION

59

THE AUDIT COMMITTEE

61

THE AUDIT COMMITTEE REPORT

62

FEES PAID TO PRINCIPAL ACCOUNTANT

62

PRINCIPAL ACCOUNTANT INDEPENDENCE

63

CORPORATE GOVERNANCE

63

BOARD OVERSIGHT OF RISK MANAGEMENT

64

LEADERSHIP STRUCTURE

64

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

65

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON MARCH 30, 2021

66

GENERAL

66

SHAREHOLDER PROPOSALS FOR THE 2022 ANNUAL MEETING

67

 

Appendix A — Amended and Restated 2020 Hovnanian Enterprises, Inc. Stock Incentive Plan

Appendix B-1 —Stockholder Rights Plan

Appendix B-2 —Stockholder Rights Plan Amendment

 

 

 

HOVNANIAN ENTERPRISES, INC.

90 MATAWAN ROAD

FIFTH FLOOR

MATAWAN, NEW JERSEY 07747

 


 

PROXY STATEMENT

 


 

GENERAL

 

The accompanying proxy is solicited on behalf of the Board of Directors (the “Board”) of Hovnanian Enterprises, Inc. (the “Company”, “we”, “us” or “our”) for use at the 2021 Annual Meeting of Shareholders (the “2021 Annual Meeting”) referred to in the foregoing Notice 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 provided 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 (1) for the Board of Directors’ slate of directors, (2) 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, 2021, (3) for the approval of the Amended and Restated 2020 Hovnanian Enterprises, Inc. Stock Incentive Plan, (4) for the approval, in a non-binding, advisory vote, of the compensation of the Company’s named executive officers, (5) for the approval of an amendment to the Company’s stockholder rights plan and (6) 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 (1) delivering written notice of revocation to Elizabeth Tice, Secretary, provided such notice of revocation is received no later than March 29, 2021, (2) voting again by Internet or telephone at a later time before the closing of voting facilities at 11:59 p.m. (Eastern Time) on March 29, 2021, (3) submitting a properly signed proxy card with a later date that is received no later than March 29, 2021 or (4) revoking your proxy and voting in person at the 2021 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 2021 Annual Meeting if you obtain a signed proxy from the record holder (bank, broker or other nominee) giving you the right to vote the applicable shares. Please note that attendance at the 2021 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, the “Common Stock”). We are initially soliciting these proxies by mail and electronic 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.

  

 

VOTING RIGHTS AND SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The Board of Directors has set February 1, 2021 as the record date for the 2021 Annual Meeting. As of the close of business on the record date, the outstanding voting securities of the Company consisted of              shares of Class A Common Stock, each share entitling the holder thereof to one vote, and            shares of Class B Common Stock, each share entitling the holder thereof to ten votes if 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 February 1, 2021, (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” beginning on page 42 (the “named executive officers”) and all Directors and executive officers as a group.

 

 

 

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)

 

 

                                         

 

Robert B. Coutts

 

 

                                         

 

Edward A. Kangas

 

 

                                         

 

Joseph A. Marengi

 

 

                                         

 

Brad G. O’Connor

 

 

                                         

 

Vincent Pagano Jr.

 

 

                                         

 

Robin Stone Sellers

 

 

                                         

 

Lucian T. Smith III

 

 

                                         

 

J. Larry Sorsby

 

 

                                         

 

All Directors and executive officers as a group (8 persons)

 

 

                                         

 

 

 

 

                                         

 

Holders of More Than 5%

 

 

                                         

 

Kevork S. Hovnanian Family Limited Partnership (5)

 

 

                                         

 

Hovnanian Family 2012 L.L.C. (6)

 

 

                                         

 

Trusts for Kevork S. Hovnanian’s Family (7)

 

 

                                           

 

(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 share-for-share basis to Class A Common Stock. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the “SEC”), which generally attribute ownership to persons who have or share voting or investment power with respect to the relevant securities. Shares of Common Stock that may be acquired within 60 days upon exercise of outstanding stock options are deemed to be beneficially owned. Securities not outstanding, but included in the beneficial ownership of each such person, are deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person, but are not deemed to be outstanding for the purpose of computing the percentage of the class owned by any other person. Except as indicated in these footnotes, and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all securities shown as beneficially owned by them. Shares of Class A Common Stock subject to options currently exercisable or exercisable within 60 days of February 1, 2021, whether or not in-the-money, include the following: A. Hovnanian (   ), R. Coutts ( ), E. Kangas (   ), J. Marengi (   ), B. O’Connor (   ), V. Pagano (   ), R. Sellers (   ), L. Smith (   ), J. Sorsby (     ) and all Directors and executive officers as a group (   ). Shares of Class B Common Stock subject to options currently exercisable or exercisable within 60 days of February 1, 2021, whether or not in-the-money, include the following: A. Hovnanian (    ).

 

 

 

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 (which ratio of rights to shares is subject to adjustment in accordance with the Amended Stockholder Rights Plan (as defined in Proposal 5). The dividend was paid to stockholders of record on August 15, 2008. Subject to the terms, provisions and conditions of the Company’s Amended Stockholder 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 1/10,000th of a share of Series B Junior Preferred Stock for a per share purchase price as specified in the Amended Stockholder Rights Plan. 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 February 1, 2021, held by the applicable Director, nominee, named executive officer, group or other holder.

 

 

(3)

Each Depositary Share represents 1/1,000th of a share of 7.625% Series A Preferred Stock.

 

 

(4)

Includes      shares of Class A Common Stock and     shares of Class B Common Stock held in family-related trusts as to which Ara Hovnanian has shared voting power and shared investment power and     shares of Class A Common Stock and     shares of Class B Common Stock held by Mr. Hovnanian’s wife. Ara Hovnanian disclaims beneficial ownership of such shares, except to the extent of his potential pecuniary interest in such other accounts and trusts. Of the shares of Class A Common Stock and Class B Common Stock beneficially held by Mr. Hovnanian,     and     shares, respectively, have been pledged as collateral for a loan with Alex Brown, which remains outstanding. Also, of the Class A Common Stock beneficially held by Mr. Hovnanian,       shares have been pledged as collateral for a loan with Morgan Stanley, which also remains outstanding.

 

 

(5)

Represents       shares of Class B Common Stock held by the Kevork S. Hovnanian Family Limited Partnership, a Connecticut limited partnership (the “Limited Partnership”).  Ara Hovnanian is the managing general partner of the Limited Partnership, and accordingly, the shares held by the Limited Partnership 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 Family Limited Partnership is 90 Matawan Road, Fifth Floor, Matawan, New Jersey 07747.

 

 

(6)

Represents       shares of Class A Common Stock and      shares of Class B Common Stock held by the Hovnanian Family 2012 L.L.C. (the “2012 LLC”). Ara Hovnanian is the special purpose manager with respect to investments in the Company, and 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 90 Matawan Road, Fifth Floor, Matawan, New Jersey 07747.

 

 

(7)

Represents     shares of Class A Common Stock and      shares of Class B Common Stock held by the various trusts for the benefit of members of the family of Kevork S. Hovnanian. Ara Hovnanian is the special purpose trustee with respect to investments in the Company and, accordingly, the shares held by these trusts 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 trusts is 90 Matawan Road, Fifth Floor, Matawan, New Jersey 07747.

 

 

PROPOSAL 1 — ELECTION OF DIRECTORS

 

The Company’s Amended and Restated By-laws (the “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 Restated Certificate of Incorporation (the “Restated 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”), listed companies of 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, members of the family of Kevork S. Hovnanian (the “Hovnanian Family”) and various trusts and entities established for the benefit of the Hovnanian Family 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 currently 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 Restated Certificate of Incorporation as well as the rules of the NYSE. The Board of Directors has also determined that Messrs. Coutts, Kangas, Marengi and Pagano and Ms. Sellers are independent as defined under the Restated Certificate of Incorporation and the NYSE rules. The Restated Certificate of Incorporation may be found on the Company’s website at www.khov.com under “Investor Relations”, “Corporate Governance.”

 

The following individuals have 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

63

President, Chief Executive Officer, Chairman of the Board & Director

  

1981

  

Robert B. Coutts

70

Director

  

2006

  

Edward A. Kangas

76

Director

  

2002

  

Joseph A. Marengi

67

Director

  

2006

  

Vincent Pagano Jr.

70

Director

  

2013

  

Robin Stone Sellers

68

Director

 

2018

 

J. Larry Sorsby

65

Executive Vice President, Chief Financial Officer & Director

  

1997

  

 

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 8, 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 determine if the candidate is eligible for recommendation by the Corporate Governance and Nominating Committee to the full Board of 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 members of the Board of Directors 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 identified in connection with the self-assessments described below under “Corporate Governance and Nominating Committee” beginning on page 8, (2) the requisite expertise and diverse backgrounds of the Board of Directors’ overall membership composition, (3) the independence of non-employee Directors and 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 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 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 6 to 7. In particular, the Corporate Governance and Nominating Committee and the Board of Directors considered, with regard to:

 

 

Mr. Coutts, his strong background in the manufacturing sector and technology and program experience, 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’s operations;

 

 

Mr. Kangas, his significant experience, expertise and background in accounting matters, including the broad perspective brought by his experience in advising clients in many diverse industries;

 

 

Mr. Marengi, his strong background in the technology sector, because new technologies and their cost and benefit analyses and vigilance in the areas of cybersecurity and data protection are important to the Company;

 

 

Mr. Pagano, his significant experience, expertise and background in 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;

  

 

Ms. Sellers, her strong background in the real estate and home sales industries and her broad perspective brought by experience in advising clients in real estate and other industries and her experience managing and advising worldwide residential marketing and sales businesses;

 

 

Mr. Hovnanian, our Chief Executive Officer and Chairman of the Board, his more than forty years of experience with the Company; and

 

 

Mr. Sorsby, our Chief Financial Officer, his more than thirty years of experience with the Company.

 

 

Board of Directors — Nominees’ Biographies

 

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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, 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.

 

 

 

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Mr. Coutts retired from the position of Executive Vice President of Lockheed Martin Corporation (NYSE), which he held from 2000 to 2008. Previously, Mr. Coutts was President and Chief Operating Officer of the former Electronics Sector of Lockheed Martin from 1998 to 2000. He was elected an officer by the Board of Directors of Lockheed Martin in December 1996. Mr. Coutts held management positions with General Electric Corporation (NYSE) from 1972 to 1993 and was with GE Aerospace when it became part of Lockheed Martin in 1993. Mr. Coutts is the retired Chairman of Sandia Corporation, a subsidiary of Lockheed Martin Corporation, and serves on the Compensation Committee and Corporate Governance Committee of Stanley Black and Decker (NYSE) and the Board of Directors of Siemens Government Technologies, Inc., where he serves as Chairman of the Compensation Committee. Mr. Coutts is a member of the Board of Overseers, College of Engineering, Tufts University; a member of the Board of Wesley Theological Seminary; and a member of the Board of the Baltimore Symphony Orchestra. He was elected as a Director of Hovnanian Enterprises, Inc. in March 2006 and is a member of the Company’s Audit Committee and Compensation Committee.

 

 

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Mr. Kangas was the Global Chairman and Chief Executive Officer of Deloitte from December 1989 to May 2000, when he retired. He serves as the Chairman of the Board of Deutsche Bank USA Corporation and on the Boards of IntelSat (NYSE) and Vivus, Inc. (Nasdaq). He served as Lead Director at United Technologies from 2010 to 2018. He was on the Board of Directors of Tenet Healthcare Corporation (NYSE) from 2003 to 2019, Intuit from 2007 to 2016 and AllScripts, Inc. (Nasdaq) from 2008 to 2012. Mr. Kangas is a former Chairman of the Board of the National Multiple Sclerosis Society. Mr. Kangas was elected as a Director of Hovnanian Enterprises, Inc. in September 2002, is Chairman of the Company’s Audit Committee and a member of the Company’s Compensation Committee and Corporate Governance and Nominating Committee.

 

 

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Mr. Marengi, from July 2007 to March 2012, served as a Venture Partner for Austin Ventures. Prior to that, Mr. Marengi served as senior vice president for the Commercial Business Group of Dell Inc. (Nasdaq). In this role, Mr. Marengi was responsible for the Dell units serving medium business, large corporate, government, education and healthcare customers in the United States. Mr. Marengi joined Dell in July 1997 from Novell Inc. (Nasdaq), where he was president and chief operating officer. Mr. Marengi also served on the Boards of Directors of Quantum Corporation (NYSE) from 2008 to 2013 and Entorian Technologies, Inc. (formerly, the OTC Markets) from 2008 to 2012. Mr. Marengi was elected to the Board of Directors of Hovnanian Enterprises, Inc. in March 2006 and is the Chairman of the Company’s Compensation Committee and a member of the Company’s Audit Committee and Corporate Governance and Nominating Committee.

 

 

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Mr. Pagano was a partner at the law firm of 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 serves on the Board of Directors of Cheniere Energy Partners GP, LLC, the general partner of Cheniere Energy Partners (NYSE MKT), and also served on the Board of Directors of L3 Technologies, Inc. (NYSE) from 2013 until L3’s merger with Harris Corporation in 2019. Mr. Pagano was elected to the Board of Directors of Hovnanian Enterprises, Inc. in March 2013, is the Chairman of the Company’s Corporate Governance and Nominating Committee and is a member of the Company’s Audit Committee.

 

 

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Ms. Sellers most recently served as Chief Executive Officer of Christie’s International Real Estate from 2012 through 2014. As CEO of Christie’s, Ms. Sellers was responsible for all aspects of the company’s business, including its global sales, marketing strategy, new development projects and finance groups. Ms. Sellers was CEO of Crossroads Property Strategies from 2008 to 2012 and a partner and head of real estate at McKinsey & Company from 1989 through 2007. From 1978 through 1989, Ms. Sellers practiced law in the real estate departments of two major New York City law firms. Ms. Sellers is a member of the Board of Overseers of the Weitzman School of Design at the University of Pennsylvania, is chair of the Board of Forbes Global Properties, a private real estate marketing firm, and is the founder of First Chance, an organization that pays bail for indigent women in Palm Beach County, Florida. Ms. Sellers was appointed to the Board of Directors of Hovnanian Enterprises, Inc. in June 2018 and is a member of the Company’s Audit Committee and Corporate Governance and Nominating Committee.

 

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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. He is Chairman of the Board of Visitors for Urology at The Children’s Hospital of Philadelphia (“CHOP”) and also serves on the Foundation Board of Overseers at CHOP.

 

MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD OF DIRECTORS

 

During the year ended October 31, 2020, the Board of Directors held six meetings. 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, 2020, each current Director attended 100% of the meetings of the Board of Directors and at least 88% of the meetings of the committees on which such Director served. The Company’s Corporate Governance Guidelines (“Governance Guidelines”) provide that directors are expected to attend the Annual Meeting of Shareholders. All of the current members of the Board of Directors attended the Annual Meeting of Shareholders held on March 24, 2020.

 

 Audit Committee

 

The members of the Audit Committee of the Board of Directors during the fiscal year ended October 31, 2020 were Messrs. Kangas, Coutts, Marengi and Pagano and Ms. Sellers and, until his retirement in March 2020, Stephen Weinroth. The Board of Directors has determined that all of the members of the Audit Committee meet the standards for independence in our Governance Guidelines, which are available on the Company’s website at www.khov.com under “Investor Relations”, “Corporate Governance”, and the independence requirements mandated by the NYSE listing standards. During the fiscal year ended October 31, 2020, the Audit Committee met on twelve occasions.

 

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 is available at www.khov.com under “Investor Relations”, “Corporate Governance.” The Audit Committee is also responsible for the oversight of the Company’s 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. For additional information related to the Audit Committee, see “The Audit Committee” beginning on page 61.

 

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 during the fiscal year ended October 31, 2020 were Messrs. Marengi, Coutts and Kangas and, until his retirement in March 2020, Stephen Weinroth. The Board of Directors has determined that all of the members of the Compensation Committee meet the standards for independence in our Governance Guidelines and the independence requirements mandated by the rules of the NYSE and SEC. In addition, all members of the Compensation Committee qualify as “Non-Employee Directors” for purposes of Rule 16b-3 under the Exchange Act. The duties and responsibilities of the Compensation Committee are set forth in its charter, which is available at www.khov.com under “Investor Relations”, “Corporate Governance.” During the fiscal year ended October 31, 2020, the Compensation Committee met on four occasions.

    

 

The Compensation Committee is currently chaired by Mr. Marengi and is responsible for reviewing salaries, bonuses and other forms of 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. 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.

 

Corporate Governance and Nominating Committee

 

The Company has 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. Pagano, Kangas and Marengi and Ms. Sellers. 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 Governance Guidelines and the independence requirements mandated by the NYSE listing standards. During the fiscal year ended October 31, 2020, the Corporate Governance and Nominating Committee met on three occasions.

 

The Corporate Governance and Nominating Committee is currently chaired by Mr. Pagano. The Corporate Governance and Nominating Committee is responsible for corporate governance matters, reviewing and recommending nominees for the Board of Directors, succession planning and other Board-related policies. The Corporate Governance and Nominating Committee also oversees the annual performance evaluation of the Board of Directors and its committees, the Board of Directors’ periodic review of the Governance Guidelines and compliance with the Company’s Related Person Transaction Policy.

 

The Governance Guidelines require that each Director annually prepares an assessment of each Board committee on which such Director serves as well as of the full Board of Directors as to the effectiveness of each such 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 is available at www.khov.com under “Investor Relations”, “Corporate Governance”, and the Governance Guidelines are available at the same website address under “Investor Relations”, “Corporate Governance/Guidelines.”

 

In conducting its nomination function, among other factors, the Corporate 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 non-employee directors and possible conflicts of interest of existing and potential members of the Board of Directors, as more fully described under “Proposal 1—Election of Directors—Board of Directors—Composition” above.

 

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 2022 Annual Meeting” below. The Corporate Governance and Nominating Committee will consider director candidates recommended by 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’s charter contains a provision stating that it shall consider all factors it considers appropriate, including the benefits of racial and gender diversity. 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 each 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.

 

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 are elected and qualified, requires that each director be elected by the affirmative vote of 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 2021 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.

 

 

Mr. Hovnanian and others with voting power over the shares held by the Hovnanian Family and various trusts and entities established for the benefit of the Hovnanian Family have informed the Company that they intend to vote in favor of the nominees named in this proposal. Because of their collective voting power, these nominees are assured election.

 

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.

 

PROPOSAL 2 — RATIFICATION OF THE SELECTION OF AN INDEPENDENT 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, 2021 is submitted to this 2021 Annual Meeting 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 if the Audit Committee determines that such a change would be in the best interests of the Company and its shareholders.

 

The Company has been advised that representatives of Deloitte & Touche LLP will attend the 2021 Annual Meeting to respond to appropriate questions and will be afforded the opportunity to make a statement if the representatives so desire.

 

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, 2021 requires the affirmative vote of 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 2021 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.

 

Mr. Hovnanian and others with voting power over the shares held by the Hovnanian Family and various trusts and entities established for the benefit of the Hovnanian Family 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 the ratification of the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the year ending October 31, 2021.

 

PROPOSAL 3 — APPROVAL OF THE AMENDED AND RESTATED 2020 HOVNANIAN ENTERPRISES, INC. STOCK INCENTIVE PLAN

 

Shareholders are being asked to consider and approve a proposal to amend and restate the 2020 Hovnanian Enterprises, Inc. Stock Incentive Plan (as proposed to be amended, the “Amended Plan”). The Amended 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 shareholders. The Company has been granting equity-based incentive awards under the existing 2020 Hovnanian Enterprises, Inc. Stock Incentive Plan (the “Existing Plan” or the “2020 Plan”), however, the Company presently has insufficient shares of Common Stock (“Shares”) remaining available for future grants under the Existing Plan to make equity grants at a level that would be commensurate with the Company’s past practices and performance. As of the February 1, 2021 record date for the 2021 Annual Meeting, approximately          Shares (the “Remaining Reserve”) remained available for future grants of awards under the Existing Plan. The proposed Amended Plan will have a reserve of up to          Shares for future grants, which represents an increase of          Shares above the current Remaining Reserve and an increase of          Shares above the initial reserve of 565,000 Shares that had been previously approved under the Existing Plan. The Amended Plan is substantially identical to the Existing Plan, except for the contemplated Share reserve increase. No awards or contingent awards have been or will be granted under the Amended Plan prior to obtaining shareholder approval for the Amended Plan.

  

The principal purpose of the proposed Amended Plan is to facilitate the ability to grant contemplated long-term performance awards to key employees, directors and consultants of the Company. As 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 those 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.

 

 

The Company’s Board of Directors has approved the adoption of the Amended Plan and, if the Amended Plan is approved by shareholders at the 2021 Annual Meeting, it will become immediately effective as of the date of the 2021 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 Remaining Reserve) under the Existing Plan.

 

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 Company’s 2012 Amended and Restated Stock Incentive Plan (the “2012 Plan”) and the Existing Plan, as a percentage of our annual weighted average Shares outstanding (commonly referred to as the “burn rate”), has been on average 2.83% over the last three completed fiscal years. As applicable for the award, this calculation is based on the amount of Shares issuable at the actual level of performance under awards as of the dates they were vested, except for MSU grants that are not subject to financial performance conditions in addition to the stock price performance conditions and which are included at target as of the dates they were granted. In addition to burn rate, many investors look at the economic effect of dilution. Assuming all Shares of the Company being requested to be included as the share reserve under the Amended Plan pursuant to this proposal were fully dilutive as of February 1, 2021, the dilutive effect of the increased number of shares above the Remaining Reserve on all outstanding Shares would be       %.

 

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.

 

Our Board of Directors recommends that shareholders vote FOR the approval of the Amended Plan.

 

Material Features of the Amended Plan

 

The following is a brief summary of the material features of the Amended Plan. Because this is only a summary, it does not contain all the information about the Amended Plan that may be important to you and is qualified in its entirety by the full text of the Amended Plan as set forth in Appendix A hereto.

 

Purpose

 

The purpose of the Amended 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 Amended Plan. All employees, directors and consultants of the Company and its affiliates are eligible to participate in the Amended Plan if they are selected by the Compensation Committee of the Board of Directors (the “Committee”) to participate in the Amended Plan (any such individual, a “Participant”). For the fiscal year ended October 31, 2020, approximately 45 employees, 5 directors (includes non-employee directors only) and no consultants were selected by the Committee to participate in the Existing Plan. The Company anticipates that future participation by employees and directors under the Amended Plan will be similar to their historical participation under the Existing Plan.

  

Administration

 

The Amended 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” within the meaning of Rule 16b-3 under the Exchange Act 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; 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 Chief Executive Officer is serving as a member of the Board of Directors, the Board of Directors may by specific resolution constitute the Chief Executive Officer as a “committee of one” with the authority to grant Awards covering up to 40,000 Shares per fiscal year to certain non-executive officer Participants.

 

Awards

 

Awards are determined (“granted”) by the Committee and are subject to the terms and conditions stated in the Amended Plan and to such other terms and conditions, not inconsistent therewith, as the Committee shall determine. Under the terms of the Amended Plan, vesting of (or lapsing of restrictions on) an Award at the time of grant may not occur any more rapidly than on the first anniversary of the grant date for such Award (or the date of commencement of employment or service, in the case of a grant made in connection with a Participant’s commencement of employment or service), other than (i) in connection with a Change in Control or (ii) as a result of a Participant’s death, retirement, disability or involuntary termination of employment without cause; provided, that such minimum vesting condition will not be required on Awards covering, in the aggregate, a number of Shares not to exceed 5% of the Absolute Share Limit, as described below under “Limitations.” However, the Committee retains the ability under the Amended Plan to waive terms and conditions applicable to an Award after the time of grant (including with respect to the ability to accelerate or waive vesting conditions) in connection with a Participant’s death or disability. 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 awards on the date an award is granted (other than in the case of awards granted in substitution of previously granted awards). The maximum term for stock options and stock appreciation rights granted under the Amended Plan is ten years from the initial date of grant.

  

 

Effect of Certain Events on Amended 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 Amended Plan or pursuant to outstanding Awards, (2) the exercise 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 Amended Plan), (1) outstanding Awards will be subject to “double-triggered” vesting protection in the event that the Participant is involuntarily terminated without “cause” or terminates for “good reason” within the two year period following such Change in Control, (2) any service-based vesting condition will be deemed fully satisfied if the Company’s Shares cease to be publicly traded on a national securities exchange and (3) performance-based vesting conditions with respect to Awards will be deemed achieved based on the Share price in effect immediately prior to the Change in Control (in the case of vesting conditions linked to Share price) or based on deemed target level performance achievement (in the case of other performance-vesting conditions). Additionally, in the event that the Company or other surviving entity following the Change in Control will not be assuming outstanding Awards following the Change in Control, vesting of outstanding Awards will be automatically accelerated and such Awards will then be canceled in exchange for a payment in cash or other property equal to the value thereof as determined by the Committee 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 of Common Stock of the Company 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 of Common Stock of the Company subject to such options or stock appreciation rights) over the aggregate exercise price of such options or stock appreciation rights.

  

 Limitations

 

The Amended Plan provides that the total number of Shares of Common Stock of the Company that may be issued under the Amended Plan is          (the “Absolute Share Limit”). The number of Shares covered by Awards granted under the Amended Plan and awards that were outstanding under the 2012 Plan as of the date the Existing Plan was initially approved by shareholders that terminate or lapse without the payment of consideration will be available for future grants under the Amended Plan.  The Amended Plan also provides that 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).

 

No Award may be granted under the Amended Plan after the tenth anniversary of January 24, 2020 (i.e., the date when the Board of Directors initially adopted the Existing 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 Awards unless and until the corresponding Award has vested in accordance with its terms.

 

Amendment and Termination

 

The Committee may amend, alter or discontinue the Amended 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 Amended 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 Amended 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 Amended Plan; provided, however, that the Committee may amend the Amended Plan in such manner as it deems necessary to permit the granting of Awards meeting the requirements of the Internal Revenue Code of 1986, as amended (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 Amended 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 Amended Plan, a Participant may transfer an option (other than an option that is also an incentive stock option granted pursuant to the Amended Plan) or stock appreciation right in whole or in part by gift or domestic relations order to a family member of the Participant. Under no circumstances will the Committee permit the transfer of an Award for value.

 

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 (a) 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 (b) 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 (a) 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 (b) 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 (“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 Amended Plan may constitute “deferred compensation” within the meaning of and subject to Section 409A. While the Committee intends to administer and operate the Amended 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 Amended Plan and outstanding Awards to preserve the intended benefits of Awards granted under the Amended Plan and to avoid the imposition of an additional tax under 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.

 

 

Awards under the Amended Plan

 

The following table sets forth information on the awards that have been received by or allocated to each of the following as of February 1, 2021 under the Existing Plan. The closing price of the Class A Common Stock on the NYSE on February 1, 2021 (the record date for the 2021 Annual Meeting) was $  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

 

   

190,000

   

190,000

 

J. Larry Sorsby, Executive Vice President, Chief Financial Officer and Director

 

   

95,000

   

95,000

 

Lucian T. Smith III, Former Chief Operating Officer

 

   

   

 

Brad G. O’Connor, Senior Vice President, Chief Accounting Officer and Treasurer

 

   

7,000

   

7,000

 

Current Executive Officers as a Group

 

   

292,000

   

292,000

 

Robert B. Coutts, Director

 

   

6,949

   

6,949

 

Edward A. Kangas, Director

 

   

7,942

   

7,942

 

Joseph A. Marengi, Director

 

   

7,942

   

7,942

 

Vincent Pagano Jr., Director

 

   

6,949

   

6,949

 

Robin Stone Sellers, Director

 

   

6,949

   

6,949

 

Current Non-Executive Directors as a Group

 

   

36,731

   

36,731

 

All Employees, including All Current Officers who are not Executive Officers, as a Group

 

   

98,500

   

98,500

 

 

(1)

Includes full value shares granted in fiscal 2020, which consist of restricted stock units (RSUs) and the maximum number of shares that are potentially issuable under the Performance Share Units (the “PSUs”).

 

 

Equity Compensation Plan Information

 

The following table provides information as of October 31, 2020 with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance.

 

 

 

Number of Class A Common Stock securities to be issued upon exercise of outstanding options, warrants and rights (1)(4)

 

Number of Class B Common Stock securities to be issued upon exercise of outstanding options, warrants and rights (1)(4)

 

Weighted average exercise price of outstanding Class A Common Stock options, warrants and rights (2)

 

Weighted average exercise price of outstanding Class B Common Stock options, warrants and rights (3)

 

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in columns (a)) (5)

Plan Category

 

(a)

 

(a)

 

(b)

 

(b)

 

(c)

Equity compensation plans approved by security holders:

 

709,852

 

 

546,472

 

 

$41.54

   

$56.95

 

 

203,082

 

Equity compensation plans not approved by security holders:

 

 

 

 

 

       

 

 

 

Total

 

709,852

 

 

546,472

 

 

$41.54

   

$56.94

 

 

203,082

 

 

 

(1)

Includes the maximum number of shares that are potentially issuable under the MSUs granted in fiscal years 2016 through 2019 under the 2012 Plan and the actual number of shares for which performance has been met that are issuable under both the 2016 and 2018 Long-Term Incentive Programs under the 2012 Plan, subject to vesting. Also includes the maximum number of shares that are potentially issuable under the PSUs granted in fiscal 2020 under the 2020 Plan.

 

 

 

 

(2)

Does not take into account 442,437 shares that may be issued upon the vesting of restricted stock and performance-based awards discussed in (1) above, nor 30,361 shares of restricted stock vested and deferred at the associates' election nor 50,763 shares of restricted stock deferred due to mandatory hold requirements, in each case, because they have no exercise price.

 

 

 

 

(3)

Does not take into account 441,359 shares that may be issued upon the vesting of the performance-based awards discussed in (1) above nor 2,013 shares of restricted stock vested but not yet issued, in each case, because they have no exercise price.

 

 

 

 

(4)

These shares include 6,399 shares of Class A Common Stock and 12,000 shares of Class B Common Stock that may be issued upon exercise of outstanding options with exercise prices greater than $150.00 per share.

 

 

 

 

(5)

Under the Company’s equity compensation plans, securities may be issued in either Class A Common Stock or Class B Common Stock.

 

 

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 February 1, 2021, for all of the Company’s existing equity compensation plans, as well as certain other information relating to outstanding awards under the plans:

 

 

Stock options outstanding:

 

 

 

 

Weighted average exercise price of outstanding stock options:

 

 

 

 

Weighted average remaining contractual term of outstanding stock options:   years

 

 

 

 

Full value stock awards outstanding (including performance-based stock awards based on achieving the actual outcome, where known, or the maximum potential outcome, where the performance period has not ended):

 

 

 

 

Shares available for future grants of awards:

 

 

 

 

Total Shares of Common Stock outstanding:

  

The following table sets forth the number of stock options and time-based RSU awards granted by the Company in the years ended October 31, 2020, 2019 and 2018. In addition, the table provides the number of Shares of Common Stock vested related to performance-based awards and the weighted average number of Shares of Common Stock outstanding in the year indicated. 

 

Fiscal

Year

 

Number of

Stock

Options

Granted

(#)

 

Number of

Time-

Based

RSUs

Granted

(#)

 

Number of

Shares of

Common

Stock

Vested

Related to

Performance-

Based

Awards

(#) (1)

 

Weighted

Average

Number of

Shares of

Common Stock

Outstanding

(#) (2)

2020

 

 

 

142,231

 

 

4,284

 

 

 6,188,627

 

2019

 

110,975

 

 

164,050

 

 

8,655

 

 

5,968,321

 

2018

 

37,825

 

 

37,888

 

 

5,390

 

 

5,940,594

 

 

 

(1)

Includes the actual number of shares that vested under the 2016 Long-Term Incentive Program under the 2012 Plan and the actual MSUs subject to additional performance conditions that vested during each fiscal year.

  

 

(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.  

 

Registration with the SEC

 

If the Amended Plan as described in this Proposal 3 is approved by shareholders, the Company will file a Registration Statement on Form S-8 with the SEC with respect to the Shares of the Company’s Common Stock to be registered pursuant to the Amended Plan prior to the granting of any additional awards above the Remaining Reserve under the Existing Plan.

 

VOTE REQUIRED

 

Adoption of the Amended 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 2021 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 Amended 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 Hovnanian Family and various trusts and entities established for the benefit of the Hovnanian Family 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 the approval of the Amended Plan.

 

PROPOSAL 4 — 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 advisory vote, the compensation of our named executive officers, as disclosed on pages 24 to 60.

 

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 (“NEOs”) presented in “Compensation Discussion and Analysis” on pages 24 to 41, as well as the discussion regarding the Compensation Committee on pages 22 to 23.

  

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 to the achievement of key performance factors the Board of Directors believes are critical to the Company’s success during that period. For fiscal year 2019, the Chairman of the Board, President and Chief Executive Officer’s (the “CEO”) total direct compensation was at the eighteenth percentile when ranked against the Peer Group (as defined below) and 38.28% below the Peer Group median based on the target outcome for the performance criteria. No comparison is shown for fiscal 2020 because complete Peer Group chief executive officer compensation data was not available at the time of filing this Proxy Statement.

 

The Committee seeks to motivate management to achieve improved financial performance of the Company through bonus plans that reward higher performance with increased bonuses and hold management accountable for financial performance that falls below targeted levels by paying reduced bonuses. In addition, the periodic long-term incentive programs adopted by the Company have conditioned payouts on the achievement of targets for increasing profitability and earnings before interest and taxes (“EBIT”) Return on Inventory and lowering or refinancing debt and reducing interest expense over multi-year performance periods. Moreover, in recent years, equity awards for the CEO and the Executive Vice President and Chief Financial Officer (the “CFO”) have been in the form of performance share units (“PSUs”), market share units (“MSUs”) and options, which are tied to financial performance and/or stock price performance. One hundred percent of the PSU awards are tied to a financial performance condition (for 2020, revenue levels) and half of the MSU awards have been subject to financial performance conditions in addition to the stock price performance conditions applicable to all of the MSU awards. The rigor of the performance conditions related to the long-term incentive programs and MSU awards is demonstrated by the fact that the 2016 LTIP payout, determined in 2018, was only 11.24% of target and certain portions of MSU awards either have been permanently forfeited or have paid out below target as discussed in the “Compensation Discussion and Analysis” section.

 

In recent years, the Compensation Committee has determined to weight the Company’s variable compensation programs toward rigorous performance conditions with metrics such as liquidity, shareholder value preservation, debt reduction, alternative capital raises, adjusted EBIT Return on Inventory, gross margin and new communities opened. As context for basing the Company’s compensation programs on these metrics, the Committee considered that, at the point at which housing starts were at the lowest levels during the great housing recession in 2009, the Company had written off over $2.5 billion of asset value and as a result, was significantly overleveraged. During this period, many homebuilders declared bankruptcy and certain others significantly diluted shareholders via new equity issuances or by selling their companies at extremely low valuations. Hovnanian’s management chose to preserve shareholder value by managing the Company for growth and taking creative steps to refinance and pay down its heavy debt load. From the beginning of 2009, the Company has reduced its debt by about $1.1 billion. Despite this reduction, the Company is still overleveraged, with interest rates on debt instruments significantly above its lower leveraged peers. Accordingly, the Company continues to have a large interest expense burden which causes profitability to be extremely difficult to achieve and makes it difficult to compare the Company with its peers on profitability alone. In fiscal 2020, even with an extraordinarily high interest burden compared to its peers, the Company achieved over $50 million of profit as a result of its growth in deliveries; however, additional growth is needed to sustain substantive profitability. When measuring pure operating performance by the ratio of adjusted EBIT to inventory, the Company has performed in the top half of its Peer Group for each of the three years ending with fiscal 2020 even though profitability has been a challenge. In addition, the Company ranks second highest among its Peer Group in inventory turns. Given the alternative choices of significant shareholder dilution or higher interest expense which reduces profitability, until the Company achieves a profitability level sufficient enough to allow it to further reduce debt, the Committee continues to believe it is in its shareholders’ best interest to have management focus on preserving equity value.

 

 

The Compensation Committee’s policies and actions have included the following:

 

 

Selection of bonus metrics that correspond to the financial and strategic operational needs of the Company during the relevant period.

 

 

Focus on increasing profitability and EBIT Return on Inventory and lowering or refinancing debt and reducing interest expense over multi-year performance periods through periodic long-term incentive awards for all NEOs.

 

 

Practice of tying portions of equity awards to performance criteria. For example, in fiscal 2020, the CEO and CFO were granted PSUs which are tied to a revenue performance condition. Additional details are described below under “Compensation Discussion and Analysis—Details of Compensation Elements—Stock Grants.”

 

 

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 30, 2021, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby approved.”

 

VOTE REQUIRED

 

The approval of the compensation paid to the Company’s named executive officers requires the affirmative vote of 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 2021 Annual Meeting. In determining whether the proposal 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.

 

Mr. Hovnanian and others with voting power over the shares held by the Hovnanian Family and various trusts and entities established for the benefit of the Hovnanian Family 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 the approval of this resolution.

 

PROPOSAL 5 APPROVAL OF AN AMENDMENT TO THE COMPANY’S STOCKHOLDER RIGHTS PLAN

 

We are seeking the approval by our stockholders of an amendment to the Company’s Rights Agreement with Computershare Trust Company, N.A., as successor rights agent, effective August 14, 2008 (the “Original Stockholder Rights Plan”), as amended by Amendment No. 1 to Rights Agreement, effective January 11, 2018 (“Amendment No. 1”, and the Original Stockholder Rights Plan as amended by Amendment No. 1, the “Stockholder Rights Plan”). On January 18, 2021, the Board approved a second amendment, effective January 18, 2021, to the Stockholder Rights Plan (the “Stockholder Rights Plan Amendment”, and the Stockholder Rights Plan, as amended by the Stockholder Rights Plan Amendment, the “Amended Stockholder Rights Plan”) as further described below. Stockholder approval of the Stockholder Rights Plan Amendment is required by August 14, 2022 or the Amended Stockholder Rights Plan will automatically expire on that date.

 

In 2008, the Company, with stockholder approval, took action designed to protect stockholder value by attempting to preserve the Company’s ability to use its net operating losses and built-in losses (“NOLs”) within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). These actions included:

 

 

adopting an amendment to the Company’s Restated Certificate of Incorporation (the “NOL Protective Amendment”) which limits direct or indirect transfers of Class A Common Stock (see Paragraph Eighth of the Company’s Restated Certificate of Incorporation, filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 29, 2019). The transfer restrictions contained in the NOL Protective Amendment are intended to prevent “ownership changes” as defined in Section 382 of the Code which could jeopardize the Company’s ability to use its NOLs; and

 

 

 

entering into the Original Stockholder Rights Plan. Because the transfer restrictions of the NOL Protective Amendment may not be enforceable in all circumstances, the Board believed it was in the best interest of the Company and its stockholders to also adopt the Original Stockholder Rights Plan to further protect the Company’s NOLs. The Original Stockholder Rights Plan was subsequently approved by the Company’s stockholders at a special stockholders meeting on December 5, 2008.

 

In 2018, the Company entered into Amendment No. 1, which, among other things, extended the initial expiration date to August 14, 2021. Amendment No. 1 was subsequently approved by the Company’s stockholders at its annual meeting on March 13, 2018.

 

By its terms, the Stockholder Rights Plan would have expired on August 14, 2021 unless action was taken to extend its term. The Board has concluded that it is still in the best interest of the Company and its stockholders to prevent limitations on the Company’s ability to use its approximately $1.4 billion (pre-tax) federal net operating losses as of October 31, 2020 which expire between 2028 and 2038. Because the amount and timing of the Company’s future taxable income, if any, cannot be accurately predicted, the Company cannot estimate the exact amount of the NOLs that it can ultimately use to reduce its income tax liability. Although the Company is unable to quantify an exact value, it believes the NOLs are a valuable asset. The Board believes that the provisions of the NOL Protective Amendment and the Stockholder Rights Plan are important tools in avoiding adverse impacts from Section 382 limitations and protecting stockholder value. Therefore, on January 18, 2021, the Board approved the Stockholder Rights Plan Amendment, which:

 

 

extends the expiration date of the Stockholder Rights Plan until the earliest of (1) August 14, 2024, (2) the time at which the rights are redeemed pursuant to the Amended Stockholder Rights Plan, (3) the time at which the rights are exchanged pursuant to the Amended Stockholder Rights Plan, (4) the Board’s determination that the Amended Stockholder Rights Plan is no longer necessary for the preservation of the NOLs because of the repeal of Section 382 of the Code or any successor statute, (5) the beginning of a taxable year of the Company to which the Board determines that no tax benefits may be carried forward and (6) August 14, 2022 if stockholder approval of the Stockholder Rights Plan Amendment has not been obtained;

 

 

changes the “Purchase Price” for each one ten-thousandth of a share of our Series B Junior Preferred Stock as described below under “−Summary Description of Amended Stockholder Rights Plan” from $16.60 to $171.85 (subject to adjustment as set forth in the Amended Stockholder Rights Plan) in light of the decrease in the trading price of the Company’s Class A Common Stock since the adoption of Amendment No. 1 (after giving effect to the 1-for-25 reverse stock split effected on March 29, 2019 (the “Reverse Stock Split”));

 

 

modifies the Stockholder Rights Plan to provide that rights certificates that are distributed in the event the Amended Stockholder Rights Plan is triggered do not need to be affixed with a corporate seal and may be signed by electronic signature; and

 

 

clarifies that, notwithstanding any prior adjustments, following the effectiveness of the Stockholder Rights Plan Amendment, each share of Class A Common Stock and Class B Common Stock entitles the holder thereof to one right, representing the right to purchase from us one ten-thousandth of a share of our Series B Junior Preferred Stock at the Purchase Price (subject to adjustment as set forth in the Amended Stockholder Rights Plan) and makes conforming changes to the exhibits of the Stockholder Rights Plan to incorporate the above amendments.

 

The Board has determined that it is advisable and in the Company’s best interests, and in the best interests of the Company’s stockholders, to approve the Stockholder Rights Plan Amendment which was adopted by the Board on January 18, 2021. Under the Amended Stockholder Rights Plan, stockholder approval of the Stockholder Rights Plan Amendment is required by August 14, 2022 or the Amended Stockholder Rights Plan will automatically expire on that date.

 

 

Summary Description of Amended Stockholder Rights Plan

 

The Amended Stockholder Rights Plan is intended to act as a deterrent to any person or group acquiring 4.9% or more of our outstanding Class A Common Stock (an “Acquiring Person”) without the approval of the Board. Stockholders who owned 4.9% or more of the Company’s outstanding Class A Common Stock as of the close of business on August 15, 2008 will not trigger the Amended Stockholder Rights Plan so long as they do not (1) acquire any additional shares of Class A Common Stock or (2) fall under 4.9% ownership of Class A Common Stock and then re-acquire 4.9% or more of the Class A Common Stock. The Amended Stockholder Rights Plan does not exempt any future acquisitions of Class A Common Stock by such persons. Any rights held by an Acquiring Person are void and may not be exercised. The Board may, in its sole discretion, exempt any person or group from being deemed an Acquiring Person for purposes of the Amended Stockholder Rights Plan.

 

The Rights.     The Board authorized the issuance of one right per each outstanding share of Class A Common Stock and Class B Common Stock payable to the Company’s stockholders of record as of August 15, 2008, which ratio of rights to shares is subject to adjustment in accordance with the Amended Stockholder Rights Plan and was automatically adjusted to give effect to the Reverse Stock Split. Subject to the terms, provisions and conditions of the Amended Stockholder Rights Plan, if the rights become exercisable, each right would initially represent the right to purchase from us one ten-thousandth of a share of our Series B Junior Preferred Stock for a purchase price of $171.85 (the “Purchase Price”). If issued, each one ten-thousandth of a share of Series B Junior Preferred Stock would give the stockholder approximately the same dividend, voting and liquidation rights as does one share of Class A Common Stock. However, prior to exercise, a right does not give its holder any rights as a stockholder, including without limitation any dividend, voting or liquidation rights.

 

Exercisability.     The rights will not be exercisable until the earlier of (1) 10 business days after a public announcement by us or an Acquiring Person that a person or group has become an Acquiring Person or the earlier date that a majority of the Board becomes aware of the existence of an Acquiring Person and (2) 10 business days after the commencement of a tender or exchange offer by a person or group if upon consummation thereof, such person or group would own 4.9% or more of the then-outstanding Class A Common Stock.

 

We refer to the date that the rights become exercisable as the “Distribution Date.” Until the Distribution Date, Class A Common Stock and Class B Common Stock certificates will evidence the rights and may contain a notation to that effect. Any transfer of shares of Class A Common Stock and/or Class B Common Stock prior to the Distribution Date will constitute a transfer of the associated rights. After the Distribution Date, the rights may be transferred other than in connection with the transfer of the underlying shares of Class A Common Stock or Class B Common Stock.

 

Subject to the terms, provisions and conditions of the Amended Stockholder Rights Plan, after the Distribution Date, each holder of a right, other than rights beneficially owned by any Acquiring Person (which will thereupon become void), will thereafter have the right to receive upon exercise of such right and payment of the then-current Purchase Price, that number of shares of Class A Common Stock or Class B Common Stock, as the case may be, having a then-current market value of two times the Purchase Price.

 

Exchange.     After the Distribution Date, the Board may exchange the rights (other than rights owned by an Acquiring Person which will have become void), in whole or in part, at an exchange ratio of one share of Class A Common Stock or Class B Common Stock, as the case may be, or a fractional share of Series B Junior Preferred Stock (or of a share of a similar class or series of the Company’s preferred stock having similar rights, preferences and privileges) of equivalent value, per right (subject to adjustment).

 

Expiration.     The rights and the Amended Stockholder Rights Plan will expire on the earliest of (1) August 14, 2024, (2) the time at which the rights are redeemed pursuant to the Amended Stockholder Rights Plan, (3) the time at which the rights are exchanged pursuant to the Amended Stockholder Rights Plan, (4) the Board’s determination that the Amended Stockholder Rights Plan is no longer necessary for the preservation of the NOLs because of the repeal of Section 382 of the Code or any successor statute, (5) the beginning of a taxable year of the Company to which the Board determines that no tax benefits may be carried forward and (6) August 14, 2022 if stockholder approval of the Stockholder Rights Plan Amendment has not been obtained.

 

Redemption.     At any time prior to the time an Acquiring Person becomes such, the Board may redeem the rights in whole, but not in part, at a price of $0.01 per right, subject to adjustment in accordance with the Amended Stockholder Rights Plan (the “Redemption Price”). The redemption of the rights may be made effective at such time, on such basis and with such conditions as the Board in its sole discretion may establish. Immediately upon any redemption of the rights, the right to exercise the rights will terminate and the only right of the holders of rights will be to receive the Redemption Price.

 

 

Anti-Dilution Provisions.     The Purchase Price, the number of shares of Series B Junior Preferred Stock issuable and the number of outstanding rights are subject to adjustment to prevent dilution that may occur as a result of certain events, including among others, a stock dividend, a stock split or combination or a reclassification of the shares of Series B Junior Preferred Stock or Class A Common Stock or Class B Common Stock. No adjustments to the Purchase Price of less than 1% are required to be made.

 

Amendments.     Before the Distribution Date, the Board may amend or supplement the Amended Stockholder Rights Plan without the consent of the holders of the rights. After the time that the rights have become no longer redeemable, the Board may amend or supplement the Amended Stockholder Rights Plan only to cure an ambiguity, to alter time period provisions, to correct defective or inconsistent provisions, or to make any additional changes to the Amended Stockholder Rights Plan that the Company deems necessary or desirable, but only to the extent that those changes do not adversely affect the interests of any rights holder (other than an Acquiring Person), and no such amendment may cause the rights to again become redeemable or cause the Amended Stockholder Rights Plan to again become amendable other than in accordance with this sentence.

 

The above description of the Amended Stockholder Rights Plan is qualified in its entirety by reference to the text of the Stockholder Rights Plan and the Stockholder Rights Plan Amendment, which are attached hereto as Appendix B-1 and Appendix B-2, respectively. You are urged to read carefully each of the Stockholder Rights Plan and the Stockholder Rights Plan Amendment in its entirety.

 

VOTE REQUIRED

 

Approval of the Stockholder Rights Plan Amendment requires the affirmative vote of 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 2021 Annual Meeting. In determining whether the proposal has received the requisite number of affirmative votes, abstentions and broker non-votes will have no impact on such proposal because such shares are not considered votes cast. Mr. Hovnanian and others with voting power over the shares held by the Hovnanian Family and various trusts and entities established for the benefit of the Hovnanian Family have informed the Company that they intend to vote in favor of the proposal. Because of their collective voting power, this proposal is assured passage.

 

Our Board of Directors recommends that shareholders vote FOR the approval of the Stockholder Rights Plan Amendment.

 

 

THE COMPENSATION COMMITTEE

 

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 four times a year and consults with outside compensation consultants as needed to assess industry trends and overall compensation issues. The Committee is governed by its charter, which is available at 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 and approving, at least annually, the salaries, bonuses and other forms of compensation, including equity grants, for the Company’s senior executives (which include the CEO, the CFO, the Chief Operating Officer (the “COO”) and the SVP — Chief Accounting Officer and Treasurer (the “CAO”));

 

 

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 perquisites;

 

 

Fostering good corporate governance practices as they relate to executive compensation;

 

 

Reviewing, at least annually, as part of the Board of Directors’ oversight responsibilities, the Company’s compensation program and reports from management regarding its assessment of whether there are any compensation risks that are reasonably likely to result in a material adverse effect on the Company (see “Oversight of Risk Management” below); in addition, the Committee regularly considers business and compensation risks as part of its process for establishing performance goals and determining incentive awards for each of the NEOs;

 

 

Reviewing and discussing with management the “Compensation Discussion and Analysis” (the “CD&A”) for inclusion in the Company’s annual proxy statement and annual report on Form 10-K and, based on that review and discussion, determining whether or not to recommend to the Board of Directors that the CD&A be included in the Company’s annual proxy statement; and

 

 

Preparing the compensation committee report on executive compensation for inclusion in the Company’s annual proxy statement, in accordance with applicable rules and regulations of the NYSE, SEC and other applicable regulatory bodies.

 

The Committee’s actions and procedures are discussed in more detail next and further below under “Compensation Discussion and Analysis.”

 

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, excluding the CEO, whose compensation is determined solely by the Compensation Committee and the Board of Directors.

 

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, rather than relying solely on the Company’s financial performance measures in determining their compensation. These individuals often provide the Committee with insight on the individual performance of executives (other than with respect to themselves), 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 reviews and analyzes the compensation of the named executive officers of the Company’s peer group of 11 publicly-traded homebuilding companies (the “Peer Group”), discussed further below. The Committee may engage outside compensation consultants in relation to various compensation issues. The Committee may also instruct a compensation consultant to provide assistance in fostering an overall compensation program that aligns with its compensation philosophy to guide, motivate, retain and reward its executives for the achievement of the Company’s financial performance, strategic initiatives and individual goals, including increased long-term shareholder value during a challenging business environment. Notwithstanding any input from compensation consultants and management, the Committee has the sole discretion to make all final decisions related to NEO compensation.

  

 

Outside Compensation Consultant

 

For fiscal 2020, the Committee engaged Frederic W. Cook & Co., Inc. (“FW Cook”) as the Committee’s outside compensation consultant to provide certain services related to executive and non-employee Director compensation. In fiscal 2020, FW Cook assisted the Committee with its review of the Company’s annual bonus, long-term incentive and equity compensation plans for the CEO and other NEOs as well as its review of the compensation program for the non-employee Directors and the Compensation Committee’s compensation risk assessment. FW Cook does not provide any other services to the Company unless approved by the Committee, and no such services were provided in fiscal 2020. After considering the relevant factors, the Company determined that no conflicts of interest have been raised in connection with the services FW Cook performed for the Committee in fiscal 2020.

 

The Committee’s primary objective in engaging FW 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 homebuilder Peer Group for comparable financial performance. FW Cook also provided assistance to the Committee in fostering an overall compensation program as discussed above.

 

The Committee weighs the advice and feedback from 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 on 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 Interlocks and Insider Participation

 

During the fiscal year ended October 31, 2020, the members of the Compensation Committee were Messrs. Marengi, Coutts and Kangas and, until his retirement in March 2020, Stephen Weinroth, none of whom at any time has been an officer or employee of the Company or any of its subsidiaries and did not have any relationships requiring disclosure under Item 404(a) of Regulation S-K 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 2020.

 

Compensation Committee Report

 

The Committee has reviewed and discussed the Compensation Discussion and Analysis provided below with the Company’s management. Based on this review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2020.

 

COMPENSATION COMMITTEE

 

Joseph A. Marengi, Chair

Robert B. Coutts

Edward A. Kangas

 

 

COMPENSATION DISCUSSION AND ANALYSIS

 

1. EXECUTIVE SUMMARY

 

Background

 

In recent years, the Committee has determined to weight the Company’s variable compensation programs toward rigorous performance conditions with metrics such as liquidity, shareholder value preservation, debt reduction, alternative capital raises, adjusted EBIT Return on Inventory, gross margin and new communities opened. As context for basing the Company’s compensation programs on these metrics, the Committee considered that, at the point at which housing starts were at the lowest levels during the great housing recession in 2009, the Company had written off over $2.5 billion of asset value and as a result, was significantly overleveraged. During this period, many homebuilders declared bankruptcy and certain others significantly diluted shareholders via new equity issuances or by selling their companies at extremely low valuations. Hovnanian’s management chose to preserve shareholder value by managing the Company for growth and taking creative steps to refinance and pay down its heavy debt load. From the beginning of 2009, the Company has reduced its debt by about $1.1 billion. Despite this reduction, the Company is still overleveraged, with interest rates on debt instruments significantly above its lower leveraged peers. Accordingly, the Company continues to have a large interest expense burden which causes profitability to be extremely difficult to achieve and makes it difficult to compare the Company with its peers on profitability alone. In fiscal 2020, even with an extraordinarily high interest burden compared to its peers, the Company achieved over $50 million of profit as a result of its growth in deliveries; however, additional growth is needed to sustain substantive profitability. When measuring pure operating performance by the ratio of adjusted EBIT to inventory, the Company has performed in the top half of its Peer Group for each of the three years ending with fiscal 2020 even though profitability has been a challenge. In addition, the Company ranks second highest among its Peer Group in inventory turns. Given the alternative choices of significant shareholder dilution or higher interest expense which reduces profitability, until the Company achieves a profitability level sufficient enough to allow it to further reduce debt, the Committee continues to believe it is in its shareholders’ best interest to have management focus on preserving equity value.

 

Company Performance in Fiscal 2020 

 

During fiscal 2020, the homebuilding market continued its long-term recovery from the great housing recession with housing starts approaching previous decade averages. The homebuilding market was further boosted in the second half of fiscal 2020 by all-time low mortgage rates, low supply of resale homes as listings declined during the pandemic and consumer demand for different housing designs and more outdoor space as a result of the pandemic. As such, we remain focused on identifying, controlling by option and ultimately purchasing new land parcels, which are critical to improving our financial performance. As discussed in prior years, we were limited in our ability to invest in land purchases in fiscal 2016 and 2017 due to significant debt maturities that we were unable to refinance and therefore had to pay in full at maturity. This reduction of investment led to a decrease in community count and revenues, which impacted our overall profitability. Since that time, the Company has entered into a number of financing transactions which extended our debt maturities, but the Company continues to be overleveraged with materially higher interest rates and interest expense than its peers. These transactions provided us with the long-term capital needed to implement our strategy to invest in land to grow the business to more significant profitability. However, there is typically a significant time lag from when we first control lots until the time that we open a community for sale. This timeline can vary significantly from a few months (in a market such as Houston) to three to five plus years (in a market such as New Jersey). For seven consecutive quarters through the third quarter of fiscal 2019, our total number of lots controlled increased as compared to the same period of the prior year. This growth in lots controlled led to increased community count in fiscal 2019, which along with faster absorption pace per community, allowed us to increase fiscal 2020 deliveries by 15.0% over fiscal 2019, and increased our October 31, 2020 backlog by 55.3% over October 31, 2019. This increase in deliveries resulted in income before taxes for fiscal 2020 of $55.4 million, which is the Company’s highest income before taxes since fiscal 2006. The higher backlog as of October 31, 2020, compared to a year ago, puts the Company in position to potentially significantly improve on that profit in fiscal 2021.

 

Our cash position in fiscal 2020 allowed us to spend $624.2 million on land purchases and land development during fiscal 2020, and still have $399.1 million of liquidity, including $125 million of availability under our revolving credit facility, as of October 31, 2020. We continue to see opportunities to purchase land at prices that make economic sense in light of our current sales prices and sales pace and plan to continue actively pursuing such land acquisitions. New land purchases at pricing that we believe will generate appropriate investment returns and drive greater operating efficiencies are needed to return to higher levels of sustained profitability; however, we remain cautious and are carefully evaluating market conditions when pursuing new land acquisitions.

 

 

As a result of our increased community count in fiscal 2019 and the strong homebuilding market in the latter half of fiscal 2020, we were able to improve on a number of operating metrics compared to fiscal 2019, resulting in our most profitable year since 2006. More specifically:

 

 

During fiscal 2020, consolidated deliveries were 5,686 homes compared with 4,946 homes during fiscal 2019, representing a 15.0% increase;

 

 

Total revenues for fiscal 2020 were $2.34 billion, up 16.2% from $2.02 billion for fiscal 2019;

 

 

During fiscal 2020, the dollar value of net contracts, including domestic unconsolidated joint ventures, increased 29.9% to $3.25 billion compared with $2.50 billion for fiscal 2019, and the number of net contracts, including domestic unconsolidated joint ventures, increased 28.7% to 7,692 homes for fiscal 2020 compared to 5,976 homes for fiscal 2019;

 

 

Contract backlog, including unconsolidated joint ventures, as of October 31, 2020 was $1.60 billion for 3,728 homes, which was an increase of 54.0% and 52.2%, respectively, compared to October 31, 2019.

 

 

Homebuilding gross margin percentage increased from 14.2% for the year ended October 31, 2019 to 14.7% for the year ended October 31, 2020. Homebuilding gross margin percentage, before cost of sales interest expense and land charges, increased to 18.4% compared with 18.1% in fiscal 2019. Homebuilding gross margin percentage, before cost of sales interest expense and land charges, is a non-GAAP measure. See page 38 of the Company’s Annual Report on Form 10-K filed with the SEC on December 22, 2020 for a reconciliation of this measure to homebuilding gross margin percentage, the most directly comparable GAAP measure;

 

 

During fiscal 2020, total selling, general and administrative expenses were $241.8 million or 10.3% of total revenues, an improvement compared with 11.6% of revenues for fiscal 2019;

 

 

Pre-tax income for fiscal 2020 was $55.4 million, including a $13.3 million gain on extinguishment of debt compared to a pre-tax loss of $39.7 million for fiscal 2019, which included a $42.4 million loss on extinguishment of debt; and

 

 

Total liquidity as of October 31, 2020 was $399.1 million, which was composed of $262.5 million of cash and cash equivalents, $11.6 million of restricted cash required to collateralize letters of credit and $125 million of availability under our secured revolving credit facility.

 

Company Stock Price Relative to Pre-tax Income/(Loss)

 

The chart below illustrates that, while our operations have improved dramatically as demonstrated by the increase in pre-tax income, up more than $100 million in fiscal 2020 compared to fiscal 2017, our stock price has not benefited from that improvement and in fact has declined by approximately 39% during that same period.

 

H01.JPG
 
 

(1)

Reflects the average closing price of a share of Class A Common Stock of the Company for the last month of the fiscal year indicated.

 

 

Best Practices 

 

 

Pay-for-Performance: The Compensation Committee ties increases or decreases in overall compensation to the achievement of key performance factors the Board of Directors believes are critical to the Company’s success during that period. The Committee seeks to motivate management to achieve improved financial performance of the Company through bonus plans that reward higher performance with increased bonuses and hold management accountable for financial performance that falls below targeted levels by paying reduced bonuses.

 

In addition, the periodic long-term incentive programs adopted by the Company have conditioned payouts on the achievement of targets for increasing profitability and EBIT Return on Inventory and lowering or refinancing debt and reducing interest expense over multi-year performance periods. Moreover, in recent years, equity awards for the CEO and CFO have been in the form of PSUs, MSUs and options, which are tied to stock price performance. One hundred percent of the PSU awards are tied to a financial performance condition (for 2020, revenue levels) and half of the MSU awards have been subject to financial performance conditions in addition to the stock price performance conditions applicable to all of the MSU awards. The rigor of the performance conditions related to the long-term incentive programs and MSU awards is demonstrated by the fact that 87% of the target 2014 MSU grant and 66% of the target 2015 MSU grant have been permanently forfeited and the 2016, 2017 and 2018 MSU grants are expected to be realized at less than target due to the impact of the stock price performance multiplier. In addition, the 2016 LTIP payout, determined in 2018, was only 11.24% of the target award. 

 

The variability in payout relative to our Peer Group demonstrates our commitment to pay-for-performance. The following graph, for example, compares the CEO’s total direct compensation to the Peer Group chief executive officer median data for fiscal 2017 through 2019. No comparison is shown for fiscal 2020 because complete Peer Group chief executive officer median data was not available at the time of the filing of this Proxy Statement. For fiscal year 2019, the CEO’s total direct compensation was at the eighteenth percentile when ranked against the Peer Group and 38.28% below the Peer Group median based on the target outcome for the performance criteria.

 

Hovnanian CEO Total Direct Compensation vs.

Peer Group CEO Median Total Direct Compensation (1)(2)

 

G02.JPG
 
 

(1)

Reflects the sum of base salary, actual annual bonus/incentive awards and long-term incentive awards (including the annualized grant date fair value of equity awards and 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.

 

 

   

Because the Summary Compensation Table uses accounting constructs to estimate values of long-term equity incentive awards at the time of grant, the Committee does not believe that it adequately measures CEO compensation for the purpose of assessing pay-for-performance alignment. These estimated values can differ significantly from the actual value that is ultimately earned from these awards. For this reason, the Committee also considers realizable pay, which captures the impact of the Company’s current share price performance on previously granted long-term incentive awards and helps the Committee assess the alignment of the Company’s compensation programs with the interests of its shareholders.

 

 

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 their total compensation in the form of equity awards that increase or decrease in value as the Company’s financial performance and stock price improve or decline. The Committee also seeks to retain management by using compensation methods that require executives to be employed through various performance periods in order to receive financial benefits of certain equity grants.

 

 

Maintaining an Appropriate Peer Group: To develop compensation programs that retain and attract executive talent with industry-specific knowledge, 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 complexity in operations to the Company and are generally in the markets in which the Company competes. The Committee feels that it is important to compare the Company to others in the homebuilding industry, even if certain of these peers have different financial profiles, because the Company competes with homebuilding industry peers for executive talent with industry-specific knowledge and experience. Further, the Company competes directly in all of its markets with most of the Peer Group companies for customers, land and trade partners. In some markets, the Company is larger than some of the Peer Group companies even though it may be smaller nationally. 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 target total direct compensation opportunity (the sum of base salary, annual bonus/incentive awards and the annualized value of long-term incentive awards at target) 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.

   

 

No Employment Agreements with CEO or CFO: The Company does not maintain employment or other agreements for our CEO or CFO that provide contractual rights upon termination of employment (other than upon death or disability) except for the vesting of long-term incentive and equity-based awards in the case of retirement or in connection with a qualifying termination in the case of a change in control. The Company does have a change in control severance agreement with our CAO, as discussed in footnote (6) to the Potential Payments Upon Termination or Change-in-Control Table. The Company also has an agreement with the former COO which enabled the Company to retain his service through November 30, 2020 and which requires the former COO to comply with certain restrictive covenants, as discussed further below.

 

 

No Tax Gross-Ups or Defined Benefit Pension Plans for Any NEO.

 

 

Maintenance and Monitoring of Stock Ownership Guidelines: The Board of Directors has established stock ownership guidelines pursuant to which the CEO, CFO and COO are requested to achieve and maintain recommended minimum levels of stock ownership as set forth below under “Stock Ownership Guidelines.”

 

 

Clawback Policy: In addition to the statutory CEO and CFO reimbursement requirements under the Sarbanes-Oxley Act of 2002, it is the Company’s policy that, if we are required to restate our financial results due to material noncompliance by the Company with any financial reporting requirement under the securities laws as a result (directly or indirectly) of an executive officer’s misconduct, the Board of Directors will require, at its discretion and approval, the reimbursement and/or cancellation of any incentive-based compensation (including stock options awarded as compensation) in excess of the amount that would have been awarded based on the restated financial results. This policy applies to cash and equity incentive-based compensation awarded to the executive officer during the three-year period preceding the date on which the Company is required to prepare an accounting restatement based on erroneous data.

 

 

Investor Engagement: During fiscal 2020, the Company conducted proactive investor outreach programs, including having its executives attend four investor conferences as well as other meetings with the investment community and meeting by teleconference or in person with more than 115 investors either one-on-one or in small groups. As a result, the Company’s executives met with institutional holders representing approximately 58% of shares held by our top ten shareholders that are actively managed funds. From time to time, Mr. Hovnanian and Mr. Sorsby, who are also members of the Board of Directors, and/or Mr. O’Connor participated in these investor outreach programs and reported their findings from the investor feedback to the Board of Directors. None of these investors with whom the Company engaged during fiscal 2020 raised concerns about the Company’s compensation practices during such meetings.

 

 

Compensation Decisions for Fiscal 2020

 

The Committee’s compensation decisions for fiscal 2020 reflected a conservative approach to fixed pay elements (base salary), the achievement of pre-established goals (annual bonuses) and long-term awards.

 

 

Base Salaries: For fiscal 2020, in consideration of their individual performance, the Committee approved a 3.0% base salary increase for each of the NEOs, which was below the Company’s ordinary course merit-based salary and cost of living increase practices. These increases in base salary became effective December 14, 2019. In connection with his promotion to SVP, Chief Accounting Officer and Treasurer, effective April 6, 2020, the Committee approved a 10% base salary increase for Mr. O’Connor. In addition, effective April 20, 2020, the CEO, CFO and COO voluntarily agreed to a 10% base salary decrease in light of the economic uncertainty related to COVID-19. The Committee restored the CEO and CFO’s salaries to their prior amounts on September 14, 2020 but they did not receive retroactive payments for the forfeited portions of their salaries. See “Details of Compensation Elements—Base Salaries” below for additional information.

 

 

Regular Annual Bonuses: Consistent with the achievement of specified financial or personal objectives, fiscal 2020 annual bonuses were paid to all NEOs. Additional details are described under “Details of Compensation Elements—Annual Bonuses—Regular Bonuses” below.

 

 

Discretionary Bonuses: The Committee did not award discretionary bonuses to any NEO for fiscal 2020.

 

 

Long-Term Awards, including PSUs, restricted share units (“RSUs”) and participation in the Long-Term Incentive Program described below: As further described under “Details of Compensation Elements – Stock Grants”, for fiscal 2020, the Committee granted PSUs to the CEO and CFO and RSUs to the CAO. The PSUs granted will not vest unless the specific financial performance conditions described below under “Details of Compensation Elements—Stock Grants” are met. The CAO received an RSU grant. For the reasons discussed below, no equity awards were granted to the COO in fiscal 2020.

 

2. COMPENSATION PHILOSOPHY AND OBJECTIVES

 

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.

 

As context for setting the Company’s compensation programs, the Committee considered the Company’s strategic goals. As such, the Committee has weighted the Company’s variable compensation programs toward rigorous performance conditions with metrics such as liquidity, shareholder value preservation, debt reduction, alternative capital raises, adjusted EBIT Return on Inventory, gross margin and new communities opened. In setting compensation, the Committee considered that at the point at which housing starts were at the lowest levels during the great housing recession in 2009, the Company had written off over $2.5 billion of asset value and as a result, was significantly overleveraged. During this period, many homebuilders declared bankruptcy and certain others significantly diluted shareholders via new equity issuances or by selling their companies at extremely low valuations. Hovnanian’s management chose to preserve shareholder value by managing the Company for growth and taking creative steps to refinance and pay down its heavy debt load. From the beginning of 2009, the Company has reduced its debt by about $1.1 billion. Despite this reduction, the Company is still overleveraged, with interest rates on debt instruments significantly above its lower leveraged peers. Accordingly, the Company continues to have a large interest expense burden which causes profitability to be extremely difficult to achieve and makes it difficult to compare the Company with its peers on profitability alone. In fiscal 2020, even with an extraordinarily high interest burden compared to its peers, the Company achieved over $50 million of profit as a result of its growth in deliveries; however, additional growth is needed to sustain substantive profitability. When measuring pure operating performance by the ratio of adjusted EBIT to inventory, the Company has performed in the top half of its Peer Group for each of the three years ending with fiscal 2020 even though profitability has been a challenge. In addition, the Company ranks second highest among its Peer Group in inventory turns. Given the alternative choices of significant shareholder dilution or higher interest expense which reduces profitability; until the Company achieves a profitability level sufficient enough to allow it to further reduce debt, the Committee continues to believe it is in its shareholders’ best interest to have management focus on preserving equity value.

 

 

The six primary objectives that the Committee considers in making compensation decisions are discussed 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.

  

Primary Objectives for the Compensation Program

 

The Company’s primary objectives for compensating its executives are as follows:

 

 

1.

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 (as applicable);

 

 

2.

To fairly compensate its executives in a manner that is appropriate with respect to their individual performance, level of responsibilities, abilities and skills;

 

 

3.

To align the executives’ interests with the interests of our shareholders;

 

 

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 appropriately design the reward system in the context of a challenging business environment; and

 

 

6.

Not to incentivize a level of risk through its compensation plans 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 unique roles played by each of the NEOs. 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. Because the NEOs make executive decisions that influence the direction, stability and profitability of the Company, their overall compensation is intended to strongly align with the Company’s strategic goals and objective financial measures of the Company.

 

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 strategic, financial and stock performance. For the CAO, the variable incentive compensation element also includes personal performance objectives.

 

For all NEOs, the Committee retains the flexibility to adjust incentive awards downward or to consider discretionary bonus awards in special circumstances as described below under “Details of Compensation Elements—Annual Bonus—Discretionary Bonuses.”

 

Peer Group Considerations

 

As context for setting the compensation levels for the CEO, CFO and COO, the Committee considers the compensation levels and practices of its Peer Group companies. For fiscal 2020, the Company’s Peer Group included the following 11 publicly-traded homebuilding companies, which remained unchanged compared to fiscal 2019:

 

Beazer Homes USA, Inc.

M.D.C. Holdings, Inc.

Taylor Morrison Home Corporation

D.R. Horton, Inc.

Meritage Homes Corporation

Toll Brothers, Inc.

KB Home

NVR, Inc.

TRI Pointe Group, Inc.

Lennar Corporation

PulteGroup, Inc.

 

 

The Committee, in consultation with the Committee’s compensation consultant, FW Cook, and management, selected the companies in the Peer Group because of their comparable industry profiles. In particular, to retain and attract executive talent with industry-specific knowledge, in constructing the Peer Group, the Committee selected those companies that compete directly with the Company in the homebuilding industry, are of comparable complexity in operations to the Company and are generally in the markets in which the Company competes. The Committee feels that it is important to compare the Company to others in the homebuilding industry, even if certain of these peers have different financial profiles, because the Company competes with homebuilding industry peers for executive talent with industry-specific knowledge and experience. Further, the Company competes directly in all of its markets with most of the Peer Group companies for customers, land and trade partners. In some markets, the Company is larger than some of the Peer Group companies even though it may be smaller nationally. The Committee will continue to review the appropriateness of the Peer Group composition. For the CAO, 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.

 

 

The Committee relies on Peer Group comparisons for the CEO, CFO and COO and intends for Total Direct Compensation and the level of variable compensation realized to align with the median level of the Peer Group compensation in years when the Company performs at median levels compared to the Peer Group. Because of the limited compensation data reported for the chief accounting officer position by companies in the Peer Group, the Committee also reviews broad-based compensation survey data for the compensation of the CAO and considers internal pay relationships. The Committee does not consider the specific participants included in broad-based compensation survey data to be a material factor in its reviews. The Committee reviewed broad-based survey data in fiscal 2020 to assess current market trends with respect to compensation for the position held by the CAO.

 

 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 challenging market conditions. In addition, in establishing compensation levels, the Committee takes into consideration market pressures, both within and outside of the homebuilding industry.

 

As an example of the Committee’s consideration of market conditions at the time of setting bonus formulas, for the reasons discussed above in the second paragraph of “Compensation Philosophy and Objectives,” for fiscal 2020, the Committee sought to emphasize EBIT, liquidity, total revenue, the completion of alternative capital raises and the opening of new communities, each of which were components of the NEOs’ fiscal 2020 bonus formulas. In addition, the Committee determined that the PSUs granted to the CEO and CFO would be subject to financial performance conditions. Specifically, these PSUs will not vest unless the Committee determines that the Company has achieved specified total revenue levels for the four quarters ending July 31, 2021.

 

Say-on-Pay and Say-on-Frequency Votes

 

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 2020, the Company conducted proactive investor outreach programs, including having its executives attend four investor conferences as well as other meetings with the investment community and meeting by teleconference or in person with more than 115 investors either one-on-one or in small groups. As a result, the Company’s executives met with institutional holders representing approximately 58% of shares held by our top ten shareholders that are actively managed funds. None of these investors raised concerns about the Company’s compensation practices during such meetings. Additionally, the Company periodically engages investors to discuss specific matters of importance to shareholders. The Company will continue to proactively engage shareholders and consider their concerns.

 

In addition, the Committee considered the result of the 2020 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 2019 described in our proxy statement for the 2020 Annual Meeting of Shareholders. The Committee views this level of shareholder support as an affirmation of our current pay philosophy and, as a result, no significant substantive changes were made to the structure of our executive compensation pay programs for fiscal 2020. The Committee will continue to consider the outcome of the Company’s say-on-pay votes when making future compensation decisions for the NEOs.

 

In light of the voting results with respect to the frequency of shareholder votes on executive compensation at the 2017 Annual Meeting of Shareholders at which a substantial majority of our shareholders (99.4% 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 year, the Board of Directors decided that the Company would hold an advisory vote on the compensation of named executive officers every year. The Company will next hold an advisory vote on the frequency of future advisory votes on executive compensation at our 2023 Annual Meeting.

 

 

3. FISCAL 2020 COMPENSATION ELEMENTS AND COMPENSATION MIX

 

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 option, PSU and RSU awards);

 

 

4.

Long-Term Incentive Programs (“LTIPs”) (described below) (payable in cash or a combination of cash and stock or phantom shares); and

 

 

5.

Other employee benefits, including limited perquisites.

 

Compensation Mix

 

Hovnanian CEO Pay Mix

 

G03.JPG
 

Fixed vs. Variable Compensation. A significant portion of executives’ “Total Direct Compensation” (which includes base salary, annual bonuses, stock grants and LTIP awards) opportunity consists of variable compensation – that is, the compensation ultimately realized 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 equity awards, the ultimate realizable 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.

 

The Committee intends for variable compensation to represent a significant percentage of the Total Direct Compensation opportunity for all NEOs consistent with its pay-for-performance philosophy. For example, variable compensation represented 85.0% and 80.0% of the CEO’s Total Direct Compensation opportunity in fiscal 2020 and fiscal 2019, respectively. 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 compensation in years when the Company performs at median levels compared to the Peer Group. As further described below under “Details of Compensation Elements—Stock Grants”, for fiscal 2020, the Committee granted PSUs to the CEO and CFO and RSUs to the CAO. The Committee also determined that 100% of the PSUs would be subject to financial performance conditions. For the reasons discussed below, no equity grants were made to the COO in fiscal 2020.

 

 

Long-Term vs. Short-Term Compensation. An important portion of each NEO’s Total Direct Compensation is long-term compensation, which may include stock options, PSUs, MSUs, RSUs and/or LTIP awards. 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. In fiscal 2020, the Committee adopted a LTIP for the NEOs and other key senior executives of the Company, as discussed below.

  

4. DETAILS OF COMPENSATION ELEMENTS

 

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 set the fiscal 2020 base salaries of the NEOs at a level it believed to be necessary to retain such executive officers’ services. 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 in the Company’s Peer Group or broad-based compensation survey data if comparable data were unavailable from the Peer Group companies, as well as other factors, such as cost of living increases and internal pay relationships with other executives. In fiscal 2020, in consideration of his individual performance, each NEO received a 3.0% salary increase, which was below the Company’s ordinary course merit-based salary and cost of living increase practices. These increases in base salary became effective December 14, 2019. In connection with his promotion to SVP, Chief Accounting Officer and Treasurer, effective April 6, 2020, the Committee approved a 10% base salary increase for Mr. O’Connor. In addition, effective April 20, 2020, the CEO, CFO and COO voluntarily agreed to a 10% base salary decrease in light of the economic uncertainty related to COVID-19. The Committee restored the CEO and CFO’s salaries to their prior amounts on September 14, 2020 but they did not receive retroactive payments for the forfeited portions of their salaries. Based on discussions with FW Cook and Peer Group market data gathered by management, the Committee determined that, including these adjustments, the base salaries for the NEOs are within the competitive range necessary to retain the executive officers’ services.

  

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 for which the relevant metrics and formula are assessed annually. The fiscal 2020 bonus formula for each of the NEOs was based on EBIT, Liquidity Balances, Total Revenue, Alternative Capital Raises and New Communities Opened. In addition to these metrics, Mr. O’Connor’s annual bonus was also based on individual performance objectives.

 

The Committee has discretion to reduce or eliminate the amount of any bonus amounts payable to any participant based on performance or any other factors the Committee deems appropriate. Bonus opportunities are intended to be competitive with industry-wide practices in order to retain and attract executive talent.

  

The following description provides detail as to the components used to determine each NEO’s fiscal 2020 annual bonus and the reasons the Committee believes that the incentive compensation paid to the NEOs is appropriate. For additional context as to the Committee’s approach to setting the Company’s compensation programs, see also the above discussion under “Compensation Philosophy and Objectives”. Due to the reduced amount of realized compensation in the last several years as compared to more profitable years and the large percentage of long-term compensation paid in the form of PSUs and RSUs, all bonuses for fiscal 2020 were paid 100% in cash.

 

 

EBIT. Since fiscal 2018, the bonus formulas for the CEO and CFO have been based, in part, on the Company’s EBIT in light of the Company’s debt levels and debt restructuring activities during fiscal 2017 that resulted in higher interest expense. The COO’s bonus formula included the same EBIT measure when his bonus formula changed to mirror the CFO’s bonus formula in fiscal 2019, and the CAO’s bonus formula included the same EBIT measure when his fiscal 2020 bonus formula was changed to align with the bonus formulas of the other NEOs given his increasingly strategic role.

 

For fiscal 2020, the EBIT component of the bonus formulas for the NEOs was based on achieving targeted levels of Company EBIT for fiscal 2020. If the Company’s financial performance exceeded the levels established under the EBIT component of the NEOs’ bonus formulas for fiscal 2020, the Committee could extrapolate the amount of the bonus above these levels. For this purpose, “EBIT” is defined as income (loss) before interest and income tax expense and before income (loss) from unconsolidated joint ventures as reflected on the Company’s audited financial statements plus income (loss) before interest and income tax expense for the Company’s unconsolidated joint ventures as reflected on their respective financial statements for the twelve months ended October 31, 2020, excluding the impact of any items deemed by the Committee to be unusual or nonrecurring 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). This element directly correlates with the Company’s strategic goal of improving profitability and interest coverage.

 

 

 

Liquidity Balances. The Liquidity Balances component of the NEOs’ bonus formulas was based on the number of fiscal 2020 quarter-ends in which Liquidity Balances were at or above $200 million. “Liquidity Balances” are defined as homebuilding cash and cash equivalents plus restricted cash that collateralizes letters of credit plus the available borrowing capacity under the Company’s revolving credit facility. This element of the bonus calculation directly correlates with the Company’s strategic goal of enhancing our liquidity in order to grow the Company in light of our challenges accessing the capital markets.

 

 

Total Revenue. The Total Revenue component of the NEOs’ bonus formulas measured total revenue as reflected on the Company’s audited financial statements plus total revenue for the Company’s unconsolidated joint ventures as reflected on their respective financial statements for the twelve months ended October 31, 2020. This element of the bonus calculation directly correlates with the Company’s strategic goal of growing its operations which is expected to lead to operating leverage and improved profitability. The Total Revenue performance levels were increased in fiscal 2020 compared to the prior year, requiring higher levels of revenue in order for the CEO, CFO and COO to earn the same payouts as fiscal 2019 (the CAO’s 2019 bonus formula did not have a Total Revenue component).

 

 

Alternative Capital Raises. The Alternative Capital Raises component of the NEOs’ bonus formulas measured amounts raised by the Company or its unconsolidated joint ventures from alternative capital sources as determined by the Committee (including, but not limited to, financing by joint ventures, land banking transactions and non-recourse debt, but excluding SEC registered and 144A debt financing transactions) that were closed during fiscal 2020. This element of the bonus calculation directly correlates with the Company’s strategic goal of enhancing our liquidity through innovative sources of additional capital in order to grow the Company in light of our challenges accessing the capital markets. The Alternative Capital Raises performance levels were increased in fiscal 2020 compared to the prior year, requiring higher levels of performance in order for the CEO, CFO and COO to earn the same payouts as fiscal 2019 (the CAO’s 2019 bonus formula did not have an Alternative Capital Raises component).

 

 

New Communities Opened. The New Communities Opened component of the NEOs’ bonus formulas was based on the number of open-for-sale communities, including those for the Company’s unconsolidated joint ventures, that first opened during fiscal 2020. This element of the bonus calculation directly correlates with the Company’s strategic goal of growing its operations which is expected to lead to operating leverage and improved profitability. The New Communities Opened performance levels were increased in fiscal 2020 compared to the prior year, requiring higher levels of performance in order for the CEO, CFO and COO to earn the same payouts as fiscal 2019 (the CAO’s 2019 bonus formula did not have a New Communities Opened component).

  

 

Personal Objectives – CAO. Upon his promotion to SVP, Chief Accounting Officer and Treasurer, the Committee approved an additional bonus opportunity of 10% of base salary for Mr. O’Connor based on his achievement of Personal Objectives, which was prorated to 5.83% of base salary to reflect that his promotion occurred after the beginning of the fiscal year. Mr. O’Connor’s fiscal 2020 personal objectives included managing and overseeing the team that sources and executes non-recourse loans, land banking transactions and joint venture equity investments; overseeing asset management, corporate finance and treasury teams to improve efficiency and ensure work is done timely and accurately; and managing indenture compliance, monitoring and strategy.

 

 

 

   

The CEO, CFO, COO and CAO’s bonus formulas are illustrated by the following tables:

 

Fiscal 2020

EBIT

 

 

CEO

Bonus*

 

 

CFO and COO

Bonus*

 

 

CAO

Bonus*

 

(millions)

 

 

(thousands)

 

 

(thousands)

 

 

(thousands)

 

Less than $200.0

 

 

$       0.0

 

 

$       0.0

 

 

$      0.0 

 

$ 210.0

 

 

$   250.0

 

 

$   200.0

 

 

$    17.5 

 

$ 220.0

 

 

$   550.0

 

 

$   310.0

 

 

$    25.0 

 

$ 230.0

 

 

$   850.0

 

 

$   420.0

 

 

$    32.5 

 

$ 240.0

 

 

$1,150.0

 

 

$   530.0

 

 

$    40.0 

 

$ 250.0

 

 

$1,550.0

 

 

$   680.0

 

 

$    50.0

 

$ 260.0

 

 

$1,950.0

 

 

$   830.0

 

 

$    60.0 

 

$ 270.0

 

 

$2,350.0

 

 

$   980.0

 

 

$    70.0 

 

$ 280.0

 

 

$2,750.0

 

 

$1,130.0

 

 

$    80.0 

 

$ 290.0

 

 

$3,150.0

 

 

$1,280.0

 

 

$    90.0 

 

$ 300.0

 

 

$3,550.0

 

 

$1,430.0

 

 

$  100.0 

 

 

PLUS

 

Number of

Fiscal 2020 

Quarter-Ends

with Liquidity

Balances At or

Above

   

CEO

Bonus*

   

CFO and COO

Bonus*

   

CAO

Bonus*

 

$200 Million

   

(thousands)

   

(thousands)

   

(thousands)

 

Less than 2

   

$    0.0

   

$    0.0

   

$   0.0

 

2

   

$350.0

   

$200.0

   

$ 28.0

 

3

   

$550.0

   

$300.0

   

$ 50.0

 

4

   

$750.0

   

$450.0

   

$ 72.0

 

 

PLUS

 

Fiscal 2020

Total Revenue

   

CEO

Bonus*

   

CFO and COO

Bonus*

   

CAO

Bonus*

 

(millions)

   

(thousands)

   

(thousands)

   

(thousands)

 

Less than $2,400.0

   

$    0.0

   

$    0.0

   

$   0.0

 

$2,400.0

   

$150.0

   

$  75.0

   

$ 15.0

 

$2,450.0

   

$300.0

   

$125.0

   

$ 25.0

 

$2,500.0

   

$550.0

   

$200.0

   

$ 40.0

 

 

PLUS

 

Alternative

Capital Raises

                   

Closed During

Fiscal 2020

   

CEO

Bonus*

   

CFO and COO

Bonus*

   

CAO

Bonus*

 

(millions)

   

(thousands)

   

(thousands)

   

(thousands)

 

$   0.0

   

$    0.0

   

$    0.0

   

$   0.0

 

$ 55.0

   

$100.0

   

$  50.0

   

$ 10.0

 

$ 82.5

   

$200.0

   

$100.0

   

$ 20.0

 

$110.0

   

$450.0

   

$175.0

   

$ 35.0

 

 

 

PLUS

 

New Communities

Opened in

   

CEO

Bonus*

   

CFO and COO

Bonus*

   

CAO

Bonus*

 

Fiscal 2020

   

(thousands)

   

(thousands)

   

(thousands)

 

0

   

$    0.0

   

$    0.0

   

$    0.0

 

30

   

$250.0

   

$250.0

   

$  50.0

 

40

   

$400.0

   

$400.0

   

$  75.0

 

50

   

$550.0

   

$550.0

   

$100.0

 

 

PLUS

 

Personal

   

CEO

Bonus*

   

CFO and COO

Bonus*

   

CAO

Bonus*

 

Objectives**

   

(percent of salary)

   

(percent of salary)

   

(percent of salary)

 

Threshold

   

N/A

   

N/A

   

1.94%

 

Target

   

N/A

   

N/A

   

3.89%

 

Outstanding

   

N/A

   

N/A

   

5.83%

 

 

 

*

The bonus is interpolated on a linear basis between the points shown in the tables. If EBIT exceeds $300 million, the EBIT bonus may be extrapolated at the Committee’s discretion.

   

 

 

**

“Threshold”, “target” and “outstanding” levels are determined by the CEO and CFO, who may consult with other members of senior management, other than the CAO, and are used for internal evaluation purposes only.

 

Fiscal 2020 EBIT was between target and maximum but Liquidity Balances, Total Revenue, Alternative Capital Raises and New Communities Opened results exceeded the maximum. Specifically, fiscal 2020 EBIT as defined under the bonus formulas for the NEOs was $249.6 million, Liquidity Balances at the end of each of the four fiscal 2020 quarters were above $200 million, Total Revenue was $2,790.1 million, Alternative Capital Raises were $260.5 million and New Communities Opened were 62. As a result, Mr. Hovnanian earned a cash bonus equal to $3,835,240, which represented approximately 66% of Mr. Hovnanian’s maximum potential bonus. Messrs. Sorsby and Smith each earned a cash bonus equal to $2,049,465 which represented approximately 73% of their maximum potential bonus. Mr. O’Connor earned a cash bonus equal to $323,068, which represented approximately 87% of Mr. O’Connor’s maximum potential bonus, including his Personal Objectives bonus. Mr. O’Connor achieved his maximum Personal Objectives bonus as the Company completed a number of new non-recourse loans, land banking transactions and new joint ventures during the fiscal year, while also ensuring compliance and relationship management for all existing such agreements. In evaluating his Personal Objectives, the Committee also took into account that Mr. O’Connor effectively managed the Company’s highly complex debt compliance and transactional analyses efforts.

 

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 2020.

 

Stock Grants

 

The Committee may make grants of stock options, stock appreciation rights, MSUs, PSUs, restricted stock and RSUs, unrestricted shares of stock or stock-based awards settled in cash. In fiscal 2020, the Committee awarded PSUs to the CEO and CFO and RSUs to the CAO. Because the COO announced his intention to retire at the end of November 2020, no equity awards were granted to the COO in fiscal 2020.

 

Equity awards are intended to establish a strong commitment to maintain employment with the Company and to focus on creating long-term shareholder value. Because the ultimate value received by equity award recipients is directly tied to the Company’s stock price, such awards 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. Certain of the equity awards also include financial performance conditions, which are intended to incentivize recipients to direct the Company to achieve specified financial performance goals. Additionally, grants under the Existing Plan include vesting and termination provisions that the Committee believes will encourage equity award recipients to remain long-term employees of the Company. 

 

 

The Committee ultimately approves the size of the grants taking into account the recommendations of the CEO (other than for his own grant) and other criteria as determined by the Committee. The Committee generally targets a specific number of shares but also considers the grant date value of awards to ensure that a significant portion of NEO compensation is tied to the Company’s stock price performance and shareholder value creation. The Committee will continue to determine the appropriate mix of equity and other award types based on the objectives of the compensation program, the Company’s business needs, the potential dilution impact and the pool of shares remaining available for grant under the Company’s shareholder-approved incentive plans.  

 

Fiscal 2020 Equity Awards

 

In determining the fiscal 2020 equity awards for the NEOs, the Committee considered, without giving specific weight to any one factor, then-available information on Peer Group equity awards for the NEOs, the anticipated changes 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. As previously discussed, the Committee’s outside compensation consultant, FW Cook, also assisted the Committee with respect to its review of the Company’s compensation program for the CEO and other NEOs, including its equity awards. All equity awards granted to NEOs in fiscal 2020 were made in the form of rights to receive shares of Class A Common Stock, except for the CEO, who received his equity awards in the form of rights to receive shares of Class B Common Stock. In making such determination for the CEO, the Committee discussed the various reasons for making awards in Class B Common Stock and considered and evaluated the feedback reported to the Committee by senior human resources personnel about the diligence review thereof, which included discussions with the Company’s senior management and other associates and external parties, such as significant capital providers and joint venture partners and important suppliers and contractors. Such parties expressed that Hovnanian family ownership and control has high value in that it fosters strong engagement and it continues to be important to the Company’s business dealings and relationships and to attracting and retaining current and prospective employees. The Committee also reviewed an independent analysis and valuation of what premium or discount, if any, a Class B Common Stock share would have relative to a Class A Common Stock share, taking into account selected transactions and companies offering dual-class stock. Such analysis found, on average, no premium associated with high voting stock even when such stock retained its high vote status upon a sale, which is in contrast to Class B Common Stock which must be converted to Class A Common Stock upon a sale. After such discussion and review and analysis thereof, the Committee determined that the value to the CEO of receiving Class B Common Stock was equal to the value if he had received Class A Common Stock and that making the CEO’s equity awards in the form of rights to receive shares of Class B Common Stock best served the Company’s and its shareholders’ interests by promoting continuity of direction and management and stability in the Company’s business and employee relationships through Hovnanian family ownership and control, which has been and continues to be critical to the growth and success of the Company. There was a less than 1.5% change in the percentage of Hovnanian shareholder votes controlled by Ara Hovnanian caused by vesting, in fiscal 2020, of Class B Hovnanian Common Stock awards.

 

The Committee decided to award PSUs to the CEO and CFO in fiscal 2020 because it believes PSUs provide a clear linkage to shareholder value creation and balance retention and performance objectives. One hundred percent of the PSUs are subject to a revenue performance condition as further discussed below. This revenue metric was primarily chosen in light of the economic uncertainty in the homebuilding market resulting from the global pandemic. If the revenue performance conditions are met, the earned PSUs vest in four equal annual installments commencing on the second anniversary of the grant date. The earned PSUs are further subject to a mandatory two-year post-vesting holding period such that the PSU awards will not be completely distributed until seven years following the grant date, or June 12, 2027.

 

 

CEO: In fiscal 2020, the CEO’s equity award was limited to 95,000 target PSUs with a grant date fair value of $1,435,450. In comparison, the grant date fair value of the CEO’s fiscal 2019 equity awards, including MSUs, options and LTIP phantom shares, was $1,710,698.

 

 

CFO: In fiscal 2020, the CFO’s equity award was limited to 47,500 target PSUs with a grant date fair value of $717,725. In comparison, the grant date fair value of the CFO’s fiscal 2019 equity awards, including MSUs, options and LTIP phantom shares, was $697,252.

 

 

The number of PSUs, if any, which become earned PSUs shall equal the product of the target number of PSUs multiplied by the applicable Performance Multiplier set forth below. For this purpose, “Revenue” shall mean total revenue during the four fiscal quarters ending July 31, 2021 as reflected on the Company's audited financial statements plus total revenue for the Company's unconsolidated joint ventures as reflected on their respective financial statements for the twelve months ended July 31, 2021.

 

Revenue Amount

Performance Multiplier*

$1 billion or less

0%

 

 

$1.5 billion

100%

 

 

$2 billion or more

200%

 

* The applicable Performance Multiplier is interpolated on a linear basis between the points shown in the table.

 

 

COO: Because the COO announced his intention to retire at the end of November 2020, no equity awards were granted to COO in fiscal 2020.

 

 

CAO: In fiscal 2020, the CAO’s equity grant was limited to 7,000 RSUs with a grant date fair value of $146,580. In comparison, the grant date fair value of the CAO’s fiscal 2019 equity awards, including options and LTIP phantom shares, was $155,712. The RSUs vest in four equal annual installments, commencing on the second anniversary of the grant date, thereby providing a five-year period before becoming fully vested.

  

Long-Term Incentive Programs

 

2020 Long-Term Incentive Program

 

In fiscal 2020, the Company adopted a Long-Term Incentive Program (the “2020 LTIP”) under the Existing Plan to further aid the Company in retaining key employees and to motivate them to exert their best efforts on behalf of the Company. Specifically, the 2020 LTIP is entirely performance-based and is intended to incentivize achievement of specified pre-tax profit goals as a measure of operational improvement and specified improvements in the Company’s Average Adjusted EBIT Return on Inventory. The Committee chose these metrics to align and incentivize the NEOs to focus on gaining operating efficiencies and improving our bottom line. In particular, using Average Adjusted EBIT Return on Inventory as a financial measure can incentivize increasing EBIT or increasing inventory turns.

 

Each of the CEO, CFO and CAO is a participant in the 2020 LTIP. The COO is not a participant in the 2020 LTIP because he announced his intention to retire at the end of November 2020. Award payouts, if any, will be determined based on actual performance for the full 36-month performance period, subject to vesting requirements over an additional 24-month period, as described below. This performance period commenced on November 1, 2019 (the beginning of fiscal 2020) and will end on October 31, 2022 (that is, the performance period covers fiscal 2020, 2021 and 2022). After the performance period, the awards remain subject to vesting conditions during fiscal 2023 and 2024. Like MSU, PSU and other LTIP awards, in accordance with the Committee’s intentions, the payout under the 2020 LTIP will be determined based on the Company’s performance.

 

Award payouts, if any, will be based on a specific target multiple of the CEO and CFO’s base salary in effect on January 1, 2020 and the CAO’s base salary in effect as of his promotion to SVP — Chief Accounting Officer and Treasurer. In order to manage the potential dilutive impact to the Company’s shares outstanding of additional equity grants, the Committee determined that for the 2020 LTIP, it would issue the award entirely in cash. The following describes the target multiple of base salary and form of payout for each NEO:

 

  

  

Target Multiple

of Base Salary

  

Target Payout Method

CEO

 

1.3500

 

100% cash

CFO

 

1.0000

 

100% cash

CAO

 

0.7500

 

100% cash

 

The actual amounts earned, if any, will be reflected in the Summary Compensation Table as “Non-Equity Incentive Plan Compensation” for fiscal 2022 (which coincides with the end of the performance period) even though any payments remain subject to vesting restrictions during 2023 and 2024. 

 

 

For purposes of the 2020 LTIP, “Pre-tax Profit” is defined as income (loss) before income tax expense and before income (loss) from unconsolidated joint ventures as reflected on the Company’s audited financial statements plus income (loss) before income tax expense for the Company's unconsolidated joint ventures as reflected on their respective financial statements for the thirty-six month period ending October 31, 2022, excluding the impact of any items deemed by the Committee to be unusual or nonrecurring items and excluding losses from land impairments and gains or losses from debt repurchases/debt retirement such as call premiums and related issuance costs. “Average Adjusted EBIT Return on Inventory” is defined as the average of the quotients resulting from dividing (A) Adjusted EBIT by (B) Average Inventory for each of fiscal years 2020, 2021 and 2022. “Adjusted EBIT” is determined from the Company’s audited financial statements, excluding the impact of any items deemed by the Committee to be unusual or nonrecurring items and excluding losses from land impairments and gains or losses from debt repurchases/debt retirement such as call premiums and related issuance costs. “Average Inventory” equals the average of the ending inventory balances from the Company’s audited balance sheet, excluding capitalized interest and consolidated inventory not owned, for each of the five consecutive fiscal quarters ending with the last quarter of the fiscal year.

 

The following table illustrates the percentage 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:

 

 

 

Average Adjusted EBIT Return on Inventory for Fiscal 2020, Fiscal 2021 and Fiscal 2022

 

 

10.50%

or less

12.00%

13.50%

15.00%

16.50%

18.00%

19.50%

or more

Cumulative

Pre-tax
Profit for

Fiscal 2020 

through

Fiscal 2022
(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

225%
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

200%
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

175%
of target award

200%
of target award

$25

0%
of target award

15%
of target award

30%
of target award

45%
of target award

60%
of target award

75%
of target award

90%
of target award

Less than

$25

0%
of target award

0%
of target award

0%
of target award

0%
of target award

0%
of target award

0%
of target award

0%
of target award

 

As an additional 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 (other than in cases of death, disability, qualified retirement or specified termination following a change in control of the Company). The vesting percentages relate to the earned award value as of October 31, 2022:

 

 

1.

60% of the award will become vested on October 31, 2022 and would be payable in January 2023;

 

2.

20% of the award will become vested on October 31, 2023 and would be payable in January 2024; and

 

3.

20% of the award will become vested on October 31, 2024 and would be payable in January 2025.

 

Achievement under the 2018 Long-Term Incentive Program

 

In fiscal 2018, the Company adopted a Long-Term Incentive Program (the “2018 LTIP”) under the 2012 Plan to further aid the Company in retaining key employees and to motivate them to exert their best efforts on behalf of the Company. Specifically, the 2018 LTIP is entirely performance-based and is intended to incentivize achievement of specified pre-tax profit goals as a measure of operational improvement and specified improvements in the Company’s Average Adjusted EBIT Return on Inventory. The Committee chose these metrics to align and incentivize the NEOs to focus on gaining operating efficiencies and improving our bottom line. In particular, using Average Adjusted EBIT Return on Inventory as a financial measure can incentivize increasing EBIT or increasing inventory turns.

 

Each of the NEOs was a participant in the 2018 LTIP and their award payouts were determined based on actual performance for the full 36-month performance period, subject to vesting requirements over an additional 24-month period, as described below. This performance period commenced on November 1, 2017 (the beginning of fiscal 2018) and ended on October 31, 2020 (that is, the performance period covered fiscal 2018, 2019 and 2020). After the performance period, the awards remain subject to vesting conditions during fiscal 2021 and 2022. Like MSU, PSU and other LTIP awards, in accordance with the Committee’s intentions, the payout under the 2018 LTIP will be determined based on the Company’s performance. Prior to 2018, the Company made LTIP grants approximately every three years. In 2018 the Committee determined that it would consider LTIP grants more frequently while also reducing the amount of the grants. The Committee believed that this approach would enable it to impose rigorous performance metrics that are most relevant to the Company’s most current strategic goals. 

 

Award payouts were based on a specific target multiple of each participant’s base salary in effect on January 1, 2018. 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 increased or decreased by the time the award was determined or distributed. In order to manage the potential dilutive impact of the 2018 LTIP, the Committee required that 50% of the payout be in the form of cash. All stock awards under the 2018 LTIP were made in the form of rights to receive shares of Class A Common Stock, except that the Committee determined the CEO’s award would be in the form of rights to receive shares of Class B Common Stock for the reasons discussed above under “Details of Compensation Elements—Stock Grants.” The following describes the target multiple of base salary and form of payout for each NEO:

 

 

  

Target Multiple

  

  

 

  

of Base Salary

  

Target Payout Method

CEO

  

1.3500

  

50% cash / 50% shares

CFO

  

0.9000

  

50% cash / 50% shares

COO

  

0.9000

  

50% cash / 50% shares

CAO

  

0.5625

  

50% cash / 50% shares

 

 

Although the Committee views both the stock and cash portions of the 2018 LTIP as multi-year incentive plan awards, they are reported differently for purposes of the Summary Compensation Table. The share payout portions are reflected as “Stock Awards” in fiscal 2018 at their grant date fair value under 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 are reflected in the Summary Compensation Table as “Non-Equity Incentive Plan Compensation” for fiscal 2020 (which coincides with the end of the performance period) even though payments remain subject to vesting restrictions during 2021 and 2022. 

 

For purposes of the 2018 LTIP, “Pre-tax Profit” is defined as income (loss) before income tax expense and before income (loss) from unconsolidated joint ventures as reflected on the Company’s audited financial statements plus income (loss) before income tax expense for the Company's unconsolidated joint ventures as reflected on their respective financial statements for the thirty-six month period ending October 31, 2020, excluding the impact of any items deemed by the Committee to be unusual or nonrecurring items and excluding losses from land impairments and gains or losses from debt repurchases/debt retirement such as call premiums and related issuance costs. “Average Adjusted EBIT Return on Inventory” is defined as the average of the quotients resulting from dividing (A) Adjusted EBIT by (B) Average Inventory for each of fiscal years 2018, 2019 and 2020. “Adjusted EBIT” is determined from the Company’s audited financial statements, excluding the impact of any items deemed by the Committee to be unusual or nonrecurring items and excluding losses from land impairments and gains or losses from debt repurchases/debt retirement such as call premiums and related issuance costs. “Average Inventory” equals the average of the ending inventory balances from the Company’s audited balance sheet, excluding capitalized interest and consolidated inventory not owned, for each of the five consecutive fiscal quarters ending with the last quarter of the fiscal year.

 

The following table illustrates the percentage of the target award that would have been achieved at each performance level. Awards are interpolated on a linear basis between performance levels but are not extrapolated above the maximum performance levels listed below:

 

 

 

Average Adjusted EBIT Return on Inventory for Fiscal 2018, Fiscal 2019 and Fiscal 2020

 

 

10.50%

or less

12.00%

13.50%

15.00%

16.50%

18.00%

19.50%

or more

Cumulative

Pre-tax
Profit for

Fiscal 2018

through

Fiscal 2020
(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

225%
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

200%
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

175%
of target award

200%
of target award

$25

0%
of target award

15%
of target award

30%
of target award

45%
of target award

60%
of target award

75%
of target award

90%
of target award

Less than

$25

0%
of target award

0%
of target award

0%
of target award

0%
of target award

0%
of target award

0%
of target award

0%
of target award

 

For the period from fiscal 2018 through fiscal 2020, the Company achieved $99.0 million in cumulative pre-tax profit and average adjusted EBIT return on inventory for fiscal 2018 through fiscal 2020 was 19.36%, resulting in a payout of 247.23% of the target award. As an additional 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 (other than in cases of death, disability, qualified retirement or specified termination following a change in control of the Company). The vesting percentages relate to the earned award value as of October 31, 2020:

 

 

1.

60% of the award vested on October 31, 2020 and was paid in January 2021;

 

2.

20% of the award will become vested on October 31, 2021 and would be payable in January 2022; and

 

3.

20% of the award will become vested on October 31, 2022 and would be payable in January 2023;

 

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 provides 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 should play a major role in our executive compensation program. However, some NEOs are provided one or more of the following items:

 

 

Auto allowance, including car maintenance and fuel expense;

 

Personal use of the Company’s automobiles (including driver’s compensation) and of the Company’s fractional aircraft share (limited to the CEO);

 

Executive term life insurance;

 

Annual Executive Physical Exam Program;

 

Golf membership or country club fee reimbursement for personal use (limited to the CEO and CFO); and

 

Personal income tax preparation services (limited to the CEO).

 

There are no tax gross-ups on any of the executive perquisites. 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 takes 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 makes a matching contribution to all participants, including the NEOs, in the Company’s 401(k) plans of up to 6% of eligible employee compensation, based on tenure. The Company also makes contributions to the executive deferred compensation plan (“EDCP”) for the NEOs and certain other executives of the Company to provide up to 6% of earnings above the annual 401(k) limit for the calendar year, based on tenure. Calendar year contributions are credited in the subsequent fiscal year and reflected in the proxy statement for that year.

  

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.

 

COO Agreement

 

In the spring of 2020, Mr. Smith expressed his desire to retire from the Company. At that time, given the challenging economic environment arising from the COVID-19 pandemic, the Company was planning difficult measures to right size our organization to prepare for a further potential economic slowdown, including streamlining our organizational structure by transitioning from three homebuilding operational groups to two, consolidating several business units and gradually phasing out of the Chicago market. In light of these operational changes, for which the Company determined it was important to retain Mr. Smith’s service, the Company entered into an agreement with Mr. Smith on May 18, 2020 for a transition period which extended more than six months beyond his desired retirement date and which superseded his prior letter agreement governing the terms of his employment.

 

Pursuant to the agreement, in exchange for his agreeing to continue to serve in his Chief Operating Officer position through November 30, 2020 and to be subject to certain restrictive covenants, including non-solicitation covenants for two years following his retirement, Mr. Smith was entitled to a lump sum cash retention payment of $416,000 and his regular annual bonus determined in accordance with his existing fiscal 2020 bonus formula, provided that such bonus would be at least $1 million, or approximately 30% less than the amount of his fiscal 2019 bonus. As described above under “Regular Bonuses”, Mr. Smith earned an annual bonus of $2,049,465 for fiscal 2020 based on his bonus formula and Company performance. As his earned bonus exceeded the minimum agreed amount, no unearned bonuses were paid to Mr. Smith. Mr. Smith was paid these amounts following his November 30, 2020 retirement.

 

5. ACTIONS FOR FISCAL 2021

 

The Committee approved a 3.0% base salary increase, effective December 12, 2020, for each of Messrs. Hovnanian and Sorsby. The Committee approved a 3.25% base salary increase, effective December 12, 2020, for Mr. O’Connor, which is in line with the Company’s ordinary course merit-based salary and cost of living increase practices.

 

 

The Committee made the following changes to the NEO’s fiscal 2021 bonus formulas:

 

CEO: The performance levels for the EBIT, total revenue and alternative capital raises components of the CEO’s fiscal 2021 bonus formula were increased, requiring higher levels of performance in order for the CEO to earn the same payouts as fiscal 2020 (the bonus liquidity component remained the same as fiscal 2020). In addition, the new communities component and corresponding payouts were eliminated from the CEO’s fiscal 2021 bonus formula thereby reducing the CEO’s total payout opportunity under his fiscal 2021 bonus formula compared to fiscal 2020.

 

CFO: The CFO’s fiscal 2021 bonus formula changes were the same as the CEO’s fiscal 2021 bonus formula changes except that the CFO’s payout potential under the liquidity, total revenue and alternative capital raises components increased. Notwithstanding these increases, the CFO’s total payout opportunity under his fiscal 2021 bonus formula decreased compared to fiscal 2020 as a result of the elimination of the new communities component and corresponding payouts.

 

CAO: The Committee determined that the Personal Objectives component of the CAO’s fiscal 2020 bonus formula would be removed for fiscal 2021 and that the remaining components of his bonus formula would change in the same manner as the CEO’s fiscal 2021 bonus formula except that the CAO’s payout potential under each of the remaining bonus components increased in light of the additional responsibilities he assumed in connection with his promotion to SVP, Chief Accounting Officer and Treasurer.

 

6. TAX DEDUCTIBILITY AND ACCOUNTING IMPLICATIONS

 

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.

 

7. TIMING AND PRICING OF EQUITY AWARDS

 

With the exception of grants related to new hires and promotions, PSUs, RSUs, MSUs and options are granted on the second Friday in June for all eligible employees. 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 that is likely to result in an increase in its stock price or delay the grant of stock awards until 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 trading price per share of the Company’s Class A Common Stock on the NYSE on the date the options were granted.

 

8. STOCK OWNERSHIP GUIDELINES

 

The Board of Directors has adopted stock ownership guidelines, which set forth recommended minimum amounts of stock ownership, directly or beneficially, for the CEO, CFO, COO (if any) 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 Guidelines. The Company believes these guidelines further enhance the Company’s commitment to aligning the interests of our non-employee Directors and senior management with those of our shareholders.

 

Under the terms of the ownership guidelines, once the stock ownership guidelines are met, they are deemed satisfied for subsequent annual review periods, regardless of decreases in the Company’s stock price on the NYSE.

  

Senior Executive Officers

 

The guidelines provide that the following senior executive officers of the Company are requested to achieve and maintain minimum stock ownership amounts as follows within five years after they become subject to the guidelines:

 

CEO – 6 times current base salary

CFO – 3 times current base salary

COO (if any) – 3 times current base salary

 

As of October 31, 2020, Messrs. Hovnanian, Sorsby and Smith were in compliance with the guidelines.

 

See “Non-Employee Director Compensation” for information on the stock ownership guidelines for non-employee Directors.

 

 

EXECUTIVE COMPENSATION 

 

1. SUMMARY COMPENSATION TABLE

 

The following table summarizes the compensation for the fiscal years ended October 31, 2020, October 31, 2019 and October 31, 2018 of the CEO, CFO, COO and CAO. These four individuals compose our named executive officers (“NEOs”).

 

Summary Compensation Table

 

Name and Principal Position

 

Year

 

Salary
($) (1)

 

Bonus
($)

 

Stock

Awards
($) (2)

 

Option

Awards
($) (3)

 

Non-Equity

Incentive Plan

Compensation
($) (4)

 

Change in

Pension Value

and

Nonqualified

Deferred

Compensation

Earnings
($) (5)

 

All Other

Compen-

sation
($) (6)

 

Total
($) (7)

 

Ara K. Hovnanian,

 

2020

 

1,252,429

   

 

1,435,450

 

 

 

 

5,887,437

 

 

54,484

 

 

367,661

 

 

8,997,461

 

 

President, Chief

 

2019

 

1,266,961

 

 

 

1,579,118

 

 

131,580

 

 

2,365,200

 

 

35,388

 

 

424,183

 

 

5,802,430

 

 

Executive Officer

 

2018

 

1,229,922

 

 

 

2,507,073

 

 

250,942

 

 

3,002,850

 

 

32,517

 

 

459,335

 

 

7,482,639

 

 

and Chairman of the Board

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

J. Larry Sorsby,

 

2020

 

712,917

 

 

 

717,725

 

 

 

 

2,828,242

 

 

46,580

 

 

185,887

 

 

4,491,351

 

 

Executive Vice

 

2019

 

721,188

 

 

 

565,672

 

 

131,580

 

 

1,427,160

 

 

27,673

 

 

168,627

 

 

3,041,900

 

 

President

 

2018

 

699,558

 

 

 

790,150

 

 

250,942

 

 

1,394,687

 

 

20,594

 

 

148,815

 

 

3,304,746

 

 

and Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lucian T. Smith III,

 

2020

 

702,920

   

 

 

 

 

 

2,828,242

 

 

29,239

 

 

201,501

 

 

3,761,902

 

 

Chief Operating

 

2019

 

721,188

 

 

 

529,625

 

 

131,580

 

 

1,427,160

 

 

19,947

 

 

195,468

 

 

3,024,968

 

 

Officer (8)

 

2018

 

696,346

 

 

 

538,600

 

 

 

 

2,097,685

 

 

12,047

 

 

140,089

 

 

3,484,767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brad G. O’Connor,

 

2020

 

435,923

 

 

 

146,580

 

 

 

 

580,450

 

 

11,877

 

 

61,748

 

 

1,236,578

 

 

Sr. Vice President,

 

2019

 

397,865

 

 

 

150,003

 

 

5,709

 

 

240,000

 

 

7,316

 

 

62,736

 

 

863,629

 

 

Chief Accounting

 

2018

 

370,210

 

 

 

104,106

 

 

27,719

 

 

245,885

 

 

5,574

 

 

55,880

 

 

809,374

 

 

Officer and Treasurer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

“Salary” Column. Reflects the prorated base salary for each fiscal year since base salary changes generally occur after the beginning of the fiscal year.

 

 

(2)

“Stock Awards” Column. For fiscal 2020, this column reflects the grant date fair value of the PSU awards granted to Messrs. Hovnanian and Sorsby based upon the probable outcome of the performance condition as of the grant date and the grant date fair value of the RSUs granted to Mr. O’Connor. The PSUs included in the table above are subject to performance, and, if earned, awards are subject to vesting restrictions that extend through June 12, 2025 and a mandatory two-year post-vesting holding period that extends through June 12, 2027. The grant date fair values were, in each case, computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are set forth in footnotes (3) and (15) to the Company’s audited financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2020Assuming the highest level of achievement on performance awards as of the grant date, the aggregate grant date fair values of the PSUs granted in fiscal 2020 would have been $2,870,900 for Mr. Hovnanian and $1,435,450 for Mr. Sorsby. 

    

 

(3)

“Option Awards” Column.  This column reflects the aggregate grant date fair value of stock options awarded in the fiscal year indicated.

 

 

(4)

“Non-Equity Incentive Plan Compensation” Column.  This column represents the performance-based annual bonus awards described under “Regular Bonuses” above earned by the NEOs in the fiscal year indicated and the cash portions of the 2016 LTIP and 2018 LTIP awards earned by the NEOs in fiscal 2018 and fiscal 2020, respectively. The cash portions of the fiscal 2020 annual bonus awards for Messrs. Hovnanian, Sorsby, Smith and O’Connor were $3,835,240, $2,049,465, $2,049,465 and $323,068, respectively.

 

 

 

(5)

“Change in Pension Value and Nonqualified Deferred Compensation Earnings” Column. Represents the portions of the interest on the Company contribution amounts in the EDCP that are above the applicable federal interest rate.

 

 

(6)

“All Other Compensation” Column.  This column discloses all other compensation for the fiscal year indicated, including reportable perquisites and other personal benefits.

 

For fiscal 2020, 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 2020 Perquisites that Exceeded

the Greater of $25,000 or 10% of Total Perquisites

 

Name

 

Total

Fiscal 2020

Perquisites
($)

 

Types of

Perquisites
(a)

 

Personal Use

of the Company’s

Fractional

Aircraft Share

($) (b)

 

Auto

Allowance,

Car Maintenance

and Fuel

($) (c)

 

Personal

Income Tax

Preparation

($)

 

Ara K. Hovnanian

  104,721     (1) (2) (d) (4) (6) (7)     31,241     N/A     38,245    

J. Larry Sorsby

  51,782     (3) (4) (5) (6)     N/A     40,911     N/A    

Lucian T. Smith III

  27,193     (3) (4)     N/A     26,747     N/A    

Brad G. O’Connor

  20,914     (3) (4) (5)     N/A     N/A     N/A    

 

 

(a)

(1) Personal use of the Company’s fractional aircraft share; (2) Personal use of the Company’s automobiles; (3) Auto allowance and car maintenance and fuel expenses; (4) Company-subsidized medical premiums under grandfathered service provision and premiums for long-term disability insurance; (5) Use of the Company’s Annual Executive Physical Exam Program; (6) Golf/country club membership fees or personal use; and (7) Personal income tax preparation.

 

 

(b)

The incremental costs of personal use of the Company’s fractional aircraft share are calculated as the total operating costs (including trip-based management fees) directly associated with personal trips and any repositioning of the aircraft related to personal trips. Because the Company’s aircraft is predominantly used for business trips, other costs are not allocated between business and personal use.

  

 

(c)

Represents auto allowance and reimbursements for gas and maintenance for NEOs’ personal vehicles, including for the business use of their vehicles.

 

 

(d)

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 the Company’s driver’s salary and benefits) based upon the percentage of total miles driven during the fiscal year represented by personal trips.

 

In addition to the perquisites and other personal benefits listed above, the NEOs received the following other compensation in fiscal 2020:

 

Fiscal 2020 All Other Compensation Other Than Perquisites (Supplemental Table)

 

Name

 

Term Life

Insurance

Premiums

($)

 

Company

Contributions to
the Executive’s

Retirement Plan

(401(k))

($)

 

Company

Contributions to
the Executive

Deferred

Compensation

Plan (EDCP)

($)

Ara K. Hovnanian

  4,590     17,100     241,250  

J. Larry Sorsby

  6,552     17,100     110,453  

Lucian T. Smith III

  4,362     17,100     152,846  

Brad G. O’Connor

  1,793     17,100     21,941  

 

 

(7)

“Total” Compensation Column.  This column reflects the sum of all the columns of the Summary Compensation Table.

 

 

 

(8)

Mr. Smith retired from the Company effective November 30, 2020.

 

 

 

Cash Compensation (Supplemental Table). For each of the periods presented, the Cash Compensation (Supplemental Table) below includes salary and annual cash bonuses earned and the cash portions of LTIP awards that vested and were realized.

 

The table below is intended to provide additional, supplemental compensation disclosure and not as a replacement for the Summary Compensation Table.

 

Cash Compensation (Supplemental Table)

 

Name

Year

 

Salary

($)

 

Cash

Bonus
($)

 

LTIP

Cash

Realized
($)

 

Total of All

Columns of

Supplemental

Table
($)

Ara K. Hovnanian

2020

  1,252,429     3,835,240     1,786,019  

(a)

  6,873,688  
 

2019

  1,266,961     2,365,200     6,080  

(b)

  3,638,241  
 

2018

  1,229,922     2,813,150     183,620  

(b)

  4,226,692  
                             

J. Larry Sorsby

2020

  712,917     2,049,465     677,759  

(a)

  3,440,141  
 

2019

  721,188     1,427,160     2,293  

(b)

  2,150,641  
 

2018

  699,558     1,323,155     69,240  

(b)

  2,091,953  
                             

Lucian T. Smith III

2020

  702,920     2,049,465     677,759  

(a)

  3,430,144  
 

2019

  721,188     1,427,160     1,981  

(b)

  2,150,329  
 

2018

  696,346     2,035,878     59,826  

(b)

  2,792,050  
                             

Brad G. O’Connor

2020

  435,923     323,068     224,022  

(a)

  983,013  
 

2019

  397,865     240,000     763  

(b)

  638,628  
 

2018

  370,210     222,093     23,029  

(b)

  615,332  

 

 

(a)

Reflects the cash portions of the 2018 LTIP awards that were realized in fiscal 2020 on the basis of performance through October 31, 2020, and vesting through the end of the fiscal year, which were paid in January 2021. These amounts are included in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table along with the earned but unrealized cash portions of the 2018 LTIP awards and the performance-based annual cash bonus awards earned by the NEOs in fiscal 2020.

 

 

 

 

(b)

Reflects the cash portions of the 2016 LTIP awards that were realized in fiscal 2018 and fiscal 2019 on the basis of performance through October 31, 2018, and vesting through the end of the fiscal year, which were paid in January 2019 and 2020, respectively. These amounts are included in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table along with the performance-based annual cash bonus awards earned by the NEOs in fiscal 2018.

 

 

2. GRANTS OF PLAN-BASED AWARDS IN FISCAL 2020

 

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 2020; and

 

(2) All other plan-based awards, such as RSUs, granted in fiscal 2020.

 

Each of the following columns is described in the footnotes below the table.

 

Grants of Plan-Based Awards in Fiscal 2020

 

  Type of Grant  

Estimated Future Payouts Under

Non-Equity Incentive Plan Awards ($)