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HOVNANIAN ENTERPRISES DEF 14A 2009 Documents found in this filing:SCHEDULE 14A (Rule 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section
14(a) of the Filed by the Registrant
[x] 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): 1) Title of each class of
securities to which transaction applies:
February 4, 2009 Dear Shareholder: You are cordially invited to attend the Annual Meeting of Shareholders, which will be held on Thursday, March 19, 2009, at the offices of Simpson Thacher & Bartlett LLP, 425 Lexington Avenue, New York, New York 10017. The meeting will start promptly at 10:30 a.m. In accordance with the Securities and Exchange Commission rule allowing companies to furnish proxy materials to their shareholders over the Internet, the Company is primarily furnishing proxy materials to our shareholders of Class A Common Stock and registered shareholders of Class B Common Stock on the Internet, rather than mailing paper copies of the materials (including our Annual Report to Shareholders for fiscal 2008) to each of those shareholders. We believe that this e-proxy process will expedite our shareholders’ receipt of proxy materials, lower costs, and reduce the environmental impact of our annual meeting. If you received only a Notice Regarding the Availability of Proxy Materials (the “Notice”) by mail or electronic mail, you will not receive a paper copy of the proxy materials unless you request one. Instead, the Notice will instruct you as to how you may access and review the proxy materials on the Internet. The Notice will also instruct you as to how you may access your proxy card to vote over the Internet, by telephone or by mail. If you received a Notice by mail or electronic mail and would like to receive a paper copy of our proxy materials, free of charge, please follow the instructions included in the Notice. We anticipate that the Notice will be mailed to our shareholders on or about February 4, 2009, and will be sent by electronic mail to our shareholders who have opted for such means of delivery on or about February 4, 2009. 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. As in the past, shareholders of record of Class B Common Stock held in nominee name will only be able to vote by returning the enclosed proxy card in the envelope provided for this purpose or by voting in person at the Company’s 2009 Annual Meeting. Attached to this letter is a Notice of Annual Meeting of Shareholders and Proxy Statement, which describes 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 2009 Annual Meeting. We welcome the opportunity to meet with many of you and give you a firsthand report on the progress of your Company.
PROXY VOTING METHODS If at the close of business on January 22, 2009, you were a shareholder of record or held shares through a broker or bank, you may vote your shares as described below or you may vote in person at the Annual Meeting. To reduce our administrative and postage costs, we would appreciate if shareholders of Class A Common Stock and registered shareholders of Class B Common Stock would please vote through the Internet or by telephone, both of which are available 24 hours a day. You may revoke your proxies at the times and in the manners described on page 1 of the Proxy Statement. If you are a shareholder of record or hold shares through a broker or bank and are voting by proxy, your vote must be received by 11:59 p.m. (Eastern Daylight Time) on March 18, 2009 to be counted unless otherwise noted below. To vote by proxy: Shareholders of Class A Common Stock and Registered Shareholders of Class B Common Stock:
YOUR VOTE IS IMPORTANT. THANK YOU FOR VOTING. HOVNANIAN ENTERPRISES, INC. _____________________
HOVNANIAN ENTERPRISES,
INC. ______________________ GENERAL VOTING RIGHTS AND SECURITY
OWNERSHIP OF The record date
for the determination of shareholders entitled to vote at the meeting was the
close of business on January 22, 2009. As of that date, the outstanding voting
securities of the Company consisted of 62,526,271 shares of Class A Common
Stock, each share entitling the holder thereof to one vote, and 14,639,746
shares of Class B Common Stock, each share entitling the holder thereof to ten
votes. 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.
2 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 and
Class B Common Stock. The dividend was paid to stockholders of record on August
15, 2008. Subject to the terms, provisions and conditions of the Rights Plan, if
the Preferred Stock Purchase Rights become exercisable, each Preferred Stock
Purchase Right would initially represent the right to purchase from the Company
one ten-thousandth of a share of Series B Junior Preferred Stock for a purchase
price of $35.00. 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 held by each such Director, nominee, executive officer or
holder.
(3) Each Depositary
Share represents 1/1,000th of a share of 7.625% Series A Preferred
Stock.
(4) Includes 190,000
shares of Class A Common Stock held in the name of Sirwart Hovnanian and over
which Ms. Hovnanian has sole power to dispose of and vote shares. Mr. Hovnanian
disclaims beneficial ownership of such shares.
(5) Includes
223,587, shares of Class B Common Stock held in a grantor retained annuity trust
(the “AKH GRAT”) for which Ara K. Hovnanian is trustee, 372,116 shares of Class
A Common Stock and 431,394 shares of Class B Common Stock held in family related
trusts as to which Ara K. Hovnanian has shared voting power and shared
investment power and 37,374 shares of Class A Common Stock and 142,274 shares of
Class B Common Stock held by Mr. Hovnanian’s wife and children.
Ara K. Hovnanian disclaims beneficial
ownership of such shares, except to the extent of his potential pecuniary
interest in the AKH GRAT and such other accounts and trusts.
(6) Includes 52,481
shares of Class A Common Stock that are held jointly with Mr. Buchanan’s spouse,
Gail R. Buchanan. Paul W. Buchanan and Gail R. Buchanan share voting and
investment power with respect to such shares.
(7) Includes
4,833,826 shares of Class B Common Stock held by the Kevork S. Hovnanian Family
Limited Partnership, a Connecticut limited partnership (the “Limited
Partnership”). Peter S. Reinhart, as trustee of the Sirwart Hovnanian 1994
Marital Trust (the “Marital Trust”), is the managing general partner of the
Limited Partnership and as such has the sole power to vote and dispose of the
shares of Class B Common Stock held by the Limited Partnership, as well as of
the 376,265 shares of Class B Common Stock held directly by the Marital Trust.
Mr. Reinhart disclaims beneficial ownership of the shares held by the Limited
Partnership and the Marital Trust.
(8) Based solely
upon information contained in a statement on Schedule 13G filed with the
Securities and Exchange Commission on February 1, 2008. As of December 31, 2007,
Capital Group International, Inc., as the parent holding company of a group of
investment management companies that hold investment power and, in some cases,
voting power over the securities, had sole voting power with respect to
3,291,600 shares and sole investment power with respect to 3,903,900 shares of
Class A Common Stock. Capital International Limited, as the investment manager
of various institutional accounts, had sole voting power with respect to
2,963,700 shares and sole investment power with respect to 3,374,000 shares of
Class A Common Stock. Address: 11100 Santa Monica Blvd., Los Angeles, California
90025.
(9) Based solely
upon information contained in a statement on Schedule 13G/A filed with the
Securities and Exchange Commission on January 31, 2008. As of December 31, 2007,
EARNEST Partners, L.L.C. had sole voting power with respect to 1,824,199 shares,
shared voting power with respect to 1,440,581 shares and sole investment power
with respect to 5,352,802 shares of Class A Common Stock. Address: 1180
Peachtree Street NE, Suite 2300, Atlanta, Georgia 30309.
(10) Based solely upon
information contained in a statement on Schedule 13G filed with the Securities
and Exchange Commission on February 13, 2008. As of December 31, 2007, T. Rowe
Price Associates, Inc. had sole voting power with respect to 1,222,450 shares,
shared voting power with respect to zero shares, sole dispositive power with
respect to 4,753,880 shares and shared dispositive power with respect to zero
shares of Class A Common Stock. Address: 100 E. Pratt Street, Baltimore,
Maryland 21202.
SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING
COMPLIANCE 3 (1) ELECTION OF DIRECTORS The
Company’s Restated By-laws provide that the Board of Directors shall consist of
up to eleven Directors who shall be elected annually by the shareholders. The
Company’s Amended 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. Board of Directors
Board of Directors — Nominees’ Biographies
4
5
MEETINGS OF THE BOARD OF DIRECTORS
AND COMMITTEES OF THE BOARD OF
DIRECTORS Audit
Committee Compensation
Committee 6 Corporate
Governance VOTE REQUIRED The election
of the nominees to the Company’s Board of Directors for the ensuing year, to
serve until the next Annual Meeting of Shareholders of the Company, and until
their respective successors may be elected and qualified, requires that each
director be elected by 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 2009 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 votes
cast. 7 (2) RATIFICATION OF THE
SELECTION OF AN INDEPENDENT On January
5, 2009, the Audit Committee of the Board of Directors of the Company dismissed
Ernst & Young LLP as the independent registered public accounting firm for
the Company. Ernst & Young LLP’s reports on the financial statements of the
Company for the fiscal years ended October 31, 2007 and 2008 did not contain any
adverse opinion or a disclaimer of opinion, nor were such reports qualified or
modified as to uncertainty, audit scope or accounting principle. During the
fiscal years ended October 31, 2007 and 2008, and through January 5, 2009, (1)
there were no disagreements with Ernst & Young LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved to the satisfaction of Ernst &
Young LLP, would have caused Ernst & Young LLP to make reference thereto in
its reports on the financial statements of the Company for such years, and (2)
there have been no “reportable events” as defined in Item 304(a)(1)(v) of
Regulation S-K. 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, 2009, requires the majority of the votes cast by
the shareholders of Class A Common Stock and Class B Common Stock, voting
together, present in person or by proxy at the 2009 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 votes
cast. 8 THE COMPENSATION
COMMITTEE Areas of
Responsibility
These areas of responsibilities are discussed in more detail below under “Compensation Discussion and Analysis.” During the fiscal year ended October 31, 2008, the members of the Committee were all independent, non-employee directors and the Committee met on four occasions and held four telephonic meetings. Compensation Review Process
for the Named Executive
Officers Outside Compensation
Consultant 9 The
Committee’s primary objective for engaging PM&P is to obtain advice and
feedback related to maintaining programs that provide compensation opportunities
within the median range of the Peer Group for comparable financial performance.
The Committee may also instruct PM&P 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 in the context of a challenging
business environment. The Company also periodically participates in a
homebuilding industry group compensation survey that is conducted by PM&P
and which provides valuable information to the Committee in assessing its
competitive pay levels. Board
Communication Compensation Committee
Report
Compensation Committee
Interlocks and Insider
Participation 10 COMPENSATION DISCUSSION AND ANALYSIS I. COMPENSATION PHILOSOPHY
AND OBJECTIVES The Company’s primary objectives for compensating its executives are as follows:
Tailored
Compensation
Variable Incentive
Compensation & Discretionary
Awards 11 consider discretionary bonus awards. Discretionary awards may be appropriate, for example, to reward progress toward strategic objectives or to reflect strong leadership while addressing industry-wide market conditions or to serve as a retention bonus for valued executives. Peer Group
Considerations Market Conditions
Considerations II. FISCAL YEAR 2008 COMPENSATION ELEMENTS AND COMPENSATION MIX Compensation Elements
at a Glance
12 Compensation
Mix Total Variable Compensation as a Percentage of Total Direct Compensation*
* Computed as the sum of total bonus (whether paid in
cash or restricted share units in lieu of cash (computed upon the closing
price of Class A Common Stock on the New York Stock Exchange on the date of
grant) and the value of stock option grants based on the Black-Scholes options
calculation model on the date of grant divided by the sum of base salary, total
bonus, and stock option grants.
The intent of the Committee is to maintain variable compensation opportunity as the most significant percentage of Total Direct Compensation for all NEOs for fiscal 2008 and to maintain its approximate level from year to year. In addition, the level of variable compensation is intended to align with the Peer Group in years when the Company performs at median levels compared to the Peer Group. In fiscal 2007 and 2008, the percentage of variable compensation has declined from historical levels because total bonus amounts were zero for fiscal 2007 and significantly lower than historical amounts for fiscal 2008. Consistent with the Committee’s philosophy to maintain variable compensation levels similar to the Peer Group, the Committee awarded stock grants to each of the NEOs in fiscal 2008, with the exception of Mr. K. Hovnanian as discussed below, which were intended to result in Total Direct Compensation opportunity that falls within the median comparable Peer Group range for executives. Long-Term vs. Short-Term Compensation. An important portion of each NEO’s Total Direct Compensation is long-term compensation, which includes both stock options and restricted share unit awards granted in lieu of cash for a portion of total bonus amounts. Short-term compensation consists of base salary and the cash portion of annual bonus amounts. Restricted share unit and stock option awards are intended to foster long-term commitment by the executive, employee-shareholder alignment, and improved long-term shareholder value. The average long-term compensation amounts as a percent of Total Direct Compensation for fiscal years 2005 through 2008 for the CEO and CFO were 60% and 49%, respectively. The Company’s Chairman of the Board and founder, Mr. K. Hovnanian, does not typically receive any stock options or restricted share unit awards as part of his overall compensation as he currently holds a significant equity interest in the Company. Mr. Buchanan and Mr. Reinhart’s average long-term compensation percentages for the same period were 24% and 22%, respectively, reflecting the Committee’s belief that while it is important for these executives to be compensated in part based on the long-term performance of the Company, they have less direct influence on the long-term financial success of the Company as compared to the other NEOs. 13 III. DETAILS OF COMPENSATION ELEMENTS Base
Salaries
Bonuses Regular
Bonuses 14 Historically, bonuses for the Chairman of the Board, CEO and CFO were
linked solely to a measure of the Company’s return on equity (ROACE, as the
current example), a common industry practice. For fiscal 2008, bonus formulas
for these NEOs were reoriented by including a net debt reduction component. In
light of prevailing market conditions, the Committee, in consultation with
PM&P, determined that adding this additional bonus measure based on the
reduction of the Company’s net debt better aligns with the Company’s focus on
cash flow and liquidity. Specifically, the bonus formulas for the Chairman of
the Board, CEO, and CFO for fiscal 2008 provide that bonuses are equal to the
greater of (a) the executive’s bonus formula based on the Company’s ROACE and
(b) the new bonus formula based on the Company’s net debt reduction. Net debt
reduction is defined as the difference in balances in bank debt, senior notes,
and senior subordinated notes (“total debt”) from the first day of fiscal 2008
to the last day of fiscal 2008, net of any unrestricted cash and cash
equivalents, as of the last day of fiscal 2008.
THE GREATER OF:
* The bonus is interpolated between the
points shown in the table, and may be extrapolated beyond the maximum ROACE
percentage shown at a rate of $100,000 per percentage point increase in ROACE,
which is the rate applied between the last two tiers of the above chart, but is
subject to the maximum bonus payable under the Short-Term Incentive
Plan.
AND
* Net Debt Reduction is defined as the
differences in balances in bank debt, Senior Notes and Senior Subordinated Notes
(“total debt”) from the first day of fiscal 2008 to the last day of fiscal 2008,
net of any unrestricted cash and cash equivalents as of the last day of
fiscal 2008. The bonus will not be extrapolated above $1,250,000 if net debt
reduction exceeds $700,000,000. Bonus will be interpolated between levels shown
in the table.
15
THE GREATER OF:
* The bonus is interpolated between the points shown in the table,
and may be extrapolated beyond the maximum ROACE percentage shown at a rate of
0.10% of pre-tax income per percentage point increase in ROACE, which is the
rate applied between the last two tiers of the above chart, but is subject to
the maximum bonus payable under the Short-Term Incentive Plan.
AND
* Net Debt Reduction is defined as the differences in balances in
bank debt, Senior Notes and Senior Subordinated Notes (“total debt”) from the
first day of fiscal 2008 to the last day of fiscal 2008, net of any unrestricted
cash and cash equivalents as of the last day of fiscal 2008. The bonus will not
be extrapolated above $2,000,000 if net debt reduction exceeds $700,000,000.
Bonus will be interpolated between levels shown in the table.
Based on the bonus formula above, Mr. A. Hovnanian earned a bonus of $1,482,943 which was entirely attributed to the net debt reduction calculation method of his bonus formula. This bonus was paid 70% in cash and 30% in the form of deferred shares, with an incremental 20% in additional deferred shares.
16
* The bonus is interpolated between the points shown in the
table, and may be extrapolated beyond the maximum ROACE percentage shown at a
rate of $100,000 per percentage point increase in ROACE, which is the rate
applied between the last two tiers of the above chart, but is subject to the
maximum bonus payable under the Short-Term Incentive Plan.
* Net Debt Reduction is defined as the differences in balances in
bank debt, Senior Notes and Senior Subordinated Notes (“total debt”) from the
first day of fiscal 2008 to the last day of fiscal 2008, net of any unrestricted
cash and cash equivalents as of the last day of fiscal 2008. The bonus will not
be extrapolated above $750,000 if net debt reduction exceeds $700,000,000. Bonus
will be interpolated between levels shown in the table.
Based on the bonus formula above, Mr. Sorsby earned a bonus of $540,177 which was entirely attributed to the net debt reduction calculation method of his bonus formula. This bonus was paid 70% in cash and 30% in the form of deferred shares, with an incremental 20% in additional deferred shares. Mr. Sorsby also received a discretionary bonus as discussed below.
* The bonuses are interpolated between the points shown in the
table, and may be extrapolated beyond the maximum ROACE percentage shown at a
rate of 6% of base salary per percentage point increase in ROACE for Mr.
Buchanan and at a rate of 8% of base salary per percentage point increase in
ROACE for Mr. Reinhart, which are the rates applied between the last two tiers
of the above chart, but are subject to the maximum bonus payable under the
Short-Term Incentive Plan and Stock Incentive Plan, as
applicable.
17
Mr.
Buchanan’s fiscal 2008 objectives included management of special projects and
customized financial reporting in support of the Company’s ongoing review and
modification of its credit facilities as well as the redesign and simplification
of key financial and accounting information systems across business units of the
Company, and Mr. Reinhart’s fiscal 2008 objectives were primarily related to the
management and satisfactory resolution of certain active litigation matters and
managing the collateralization of the Company’s credit
line. Discretionary
Bonuses
Stock
Grants 18 Because the ultimate value received by stock option holders is directly
tied to increases in the Company’s stock price, stock options serve to link the
interests of management and shareholders and to motivate executive officers to
make decisions that will increase the long-term total return to shareholders.
Additionally, grants under the Stock Incentive Plan include vesting and
termination provisions that the Committee believes will encourage stock option
holders to remain long-term employees of the
Company. Fiscal 2008 Stock Option Awards
Other Employee
Benefits
For the reasons discussed under “Discretionary Bonuses” above,
in December of 2007, the Committee approved a $175,000 cash contribution in the
name of Mr. Sorsby to the Children’s Hospital of Philadelphia, payable in three
installments as follows: $50,000 in 2008, $50,000 in 2009, and $75,000 in
2010.
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. 19 IV. ACTIONS FOR FISCAL 2009 Base Salary & Bonus Compensation
Cancellation of Certain
Out-of-the-Money Options and Reduction in Equity Plans
Reserves: 20 As part of a program to reduce the equity reserve “overhang” under the Stock Incentive Plan, the Committee:
In keeping with its desire to reduce “overhang,” the Committee
determined that any shares relating to these cancelled options would not become
available again for future equity grants and these shares are not included above
in the number of shares available for future
issuance.
(1) Includes the CEO, CFO and non-employee
Director forfeitures. Shares available for issuance under the Stock Incentive
Plan after total reduction: 12,121,312.
(2) Shares available for issuance under the
Short-Term Incentive Plan after total reduction: 2,559,324.
(3) “Other Plans” include the Company’s
pre-existing 1983 Stock Option Plan (reserve reduction total: 512,938) and the
Washington Homes Option Plan (reserve reduction: 88,960) under which no new
awards can be granted.
(4) Excludes amounts under Other Plans
(reserve reduction: 601,898) because no new awards may be issued under these plans. The total
number of shares remaining available for future issuance under all equity
compensation plans after total reduction is equal to 15,552,636 (includes
842,000 shares that remain in reserve under Other Plans for issuance upon the
exercise or vesting of outstanding options and other rights).
V. TAX DEDUCTIBILITY AND ACCOUNTING
IMPLICATIONS 21 under Section 162(m) of the Internal Revenue Code. The Committee approved bonus formulas for fiscal 2009 in accordance with the Company’s employee benefit plans and, where applicable, were intended to be consistent with the performance-based compensation exception under Section 162(m). VI. TIMING AND PRICING OF
STOCK OPTIONS VII. STOCK OWNERSHIP
GUIDELINES Senior Executive
Officers Non-Employee
Directors 22 EXECUTIVE COMPENSATION (I) SUMMARY COMPENSATION
TABLE Summary Compensation Table
(1)
The “Bonus”
Column. In accordance with
SEC rules, the “Bonus” column discloses discretionary cash bonus awards.
Discretionary cash retention awards were awarded in December 2007 for the CFO in
the cash amount of $150,000 and for the Chief Accounting Officer and General
Counsel in the cash amount of $100,000 respectively, that vested and became
payable 50% in July 2008 and 50% in January 2009 as discussed under
“Discretionary Bonuses” in the “Compensation Discussion and Analysis”. Only 50%
of the total amounts are represented in the above Summary Compensation Table for
fiscal 2008 since the remaining portion was earned in fiscal 2009. The cash
portion of bonuses earned based on the NEOs meeting either financial
performance-based measures or personal objective portions of their regular bonus
programs for fiscal 2008 are reflected in the Summary Compensation Table as
“Non-Equity Incentive Plan Compensation” and described under footnote (4)
below. (2) The “Stock Awards” Column.
This column reflects deferred share awards earned and
restricted stock and restricted stock units granted both in the fiscal year
indicated and in prior years and is based on amortization of the grant date fair
value of the stock awards in accordance with Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payments (“FAS 123R”), which addresses the expensing of equity
awards (including restricted stock, restricted stock units, and stock options)
for financial statement purposes. The majority of these stock awards represent
the deferred share portion of performance-based bonuses awarded to NEOs.
Assumptions used in the calculation of these amounts are set forth in footnotes
3 and 15 to the Company’s audited financial statements for the fiscal year
indicated in the Company’s Annual Report on Form 10-K for the fiscal year ended
October 31, 2008.
23 Grant Date Fair Value vs. Market Value of “Stock Awards”. Due to the decline in the Company’s stock price, if the stock awards for which expenses are shown under the “Stock Awards” column for fiscal 2008 were valued in accordance with the market value of the Company’s shares as of October 31, 2008 rather than the grant date fair value reflected in the Summary Compensation Table, their valuations would differ as follows: Value of Stock Awards for Fiscal 2008 (Supplemental Table)
(a) Reflects values under “Stock Awards” column of
Summary Compensation Table for fiscal 2008. Mr. Sorsby was not fully vested in
the stock awards granted in prior years and therefore the $632,433 amount
represents the accounting expense related to grants made in prior years; the
other applicable NEOs became fully vested in their stock awards on January 15 of the year after the end of the fiscal year they were earned, therefore, the related accounting expense was
recognized in the fiscal year the stock awards were earned.
(b) Mr. K. Hovnanian is not generally awarded any
equity awards related to his annual bonus or otherwise because of his existing
high stock ownership interest in the Company. Vesting of Deferred Share Awards. Deferred shares generally vest in four equal annual installments beginning on the second November 1st following the fiscal year during which the service giving rise to the deferred share award was performed, subject to rounding and continued employment with the Company. Deferred share award recipients who have reached age 58 or who have completed at least 20 years of service for the Company, however, will be fully vested in all shares relating to a deferred share award on the later of (1) the January 15th following the fiscal year during which the service giving rise to the deferred share award is performed or (2) the date on which age 58 is reached or 20 years of service is completed. All of the named executive officers now meet these requirements. Mr. Sorsby met this requirement in fiscal 2008 upon completing 20 years of service. “Stock Awards” Expense vs.
Total Bonus Awards Earned for Fiscal 2008 Performance
Only. Fiscal 2008 Total Bonuses (Supplemental Table)*
(a) Equals the values
provided in the “Bonus” column of the Summary Compensation Table; represents 50%
of the cash retention bonuses awarded in December 2007 since 50% of the total
award was paid in fiscal 2008 and the remaining portion was paid in fiscal
2009. (b) Equals the values provided in the “Non-Equity
Incentive Compensation” column of the Summary Compensation Table (see also
footnote (4) below for additional information).
(c) Represents the deferred share bonus awards
earned in fiscal 2008; shown here as the market value on the grant date of the
stock award (October 31, 2008) and not the FAS 123R expense valuation that is
reflected in the “Stock Awards” column of the Summary Compensation Table. The
total amounts represented also include the additional 20% gross-up of the
deferred share portion of the bonus award earned in fiscal 2008 as described
under footnote (4) below. 24 (3)
The “Option Awards”
Column. Similar to the “Stock
Awards” column, this column reflects stock options awarded both in the fiscal
year indicated and in prior years and is based on amortization of the grant date
fair value of the option awards in accordance with FAS 123R for financial
statement purposes. Assumptions used in the calculation of these amounts are set
forth in footnotes 3 and 15 to the Company’s audited financial statements for
the fiscal year indicated included in the Company’s Annual Report on Form 10-K
for the fiscal year ended October 31, 2008.
The FAS 123R expenses for option
awards shown in the Summary Compensation Table are based on the Black-Scholes
valuations of stock options granted in both the fiscal year indicated and in
prior years and are based on the value of the Company’s stock at higher levels
than its market value as of fiscal 2008 year-end.
Due to the decline in the Company’s
stock, if the valuation for the same options were based on their intrinsic value
(calculated as the difference between the value of the option based upon the
Company’s share price as of the market close on October 31, 2008 and the option
exercise price) rather than the FAS 123R expense, a significant percentage of
the same options would be “out of the money” and have no intrinsic value as
reflected in the table below. For example, as shown below, the total valuation
of options for Mr. Ara Hovnanian if based on “intrinsic” valuation would amount
to zero value instead of the FAS 123R expense valuation amount of
$7,343,608.
Intrinsic Expensed Value
(Positive or Negative) of Unexercised Stock Options vs. FAS 123R Expense in
Fiscal 2008
(b) The
options identified by an “X” under this footnote were subsequently cancelled in
December 2008 as part of a program to reduce the equity reserve “overhang” under
the Stock Incentive Plan. As discussed in more detail above in “Actions For
Fiscal 2009” under “Compensation Discussion and Analysis,” the Committee
requested the cancellation of a number of “underwater” options that Mr. Ara
Hovnanian (options to purchase 870,834 shares 25 of Class B
Common Stock and 600,000 shares of Class A Common Stock) and Mr. J. Larry Sorsby
(options to purchase 135,417 shares of Class A Common Stock) held under the
Stock Incentive Plan. The Company made no commitment to provide either Mr.
Hovnanian or Mr. Sorsby with any other form of consideration in respect of the
cancelled options.
(c) The
option grant date fair value per share is based on the Black-Scholes option
pricing model, using assumptions in the calculation of these amounts as set
forth in footnotes 3 and 15 to the Company’s audited financial statements for
fiscal 2008 included in the Company’s Annual Report on Form 10-K for the fiscal
year ended October 31, 2008.
(e) The
2008 expense in accordance with FAS 123R is calculated as follows: Total options
multiplied by the option grant date fair value per share and divided by the
number of months for the full vesting period = expense per month. For grants in
fiscal 2008, the expense commenced on the grant date of June 13,
2008.
(4) “Non-Equity Incentive Plan Compensation”
Column. This column represents the
cash portion of the performance bonus awards earned by the NEOs in fiscal 2008.
As stated above in the “Compensation Discussion and Analysis” under
“Bonuses,” 70% of the earned bonuses for
the NEOs is paid in cash and the remaining 30% is paid in the form of deferred
share awards, with the exception of the Chairman of the Board, who receives 100%
of his regular bonus in cash. A NEO receives an incremental 20% in additional
deferred shares to reflect the shift from a cash bonus award to a deferred share
award with vesting restrictions. Fiscal 2008 Total Performance Bonuses (Supplemental Table)
(a) These
amounts are shown in the “Non-Equity Incentive Plan Compensation” column of the
Summary Compensation Table. Mr. Kevork
Hovnanian’s total bonus amount earned for fiscal 2008 ($889,402), payable 100%
in cash, is also shown in the “Non-Equity Incentive Plan Compensation” column of
the Summary Compensation Table.
(b) These
amounts reflect the total fiscal 2008 bonus attributed to deferred stock
including the additional 20% gross-up and not the 2008 FAS 123R expense
valuation that is reflected in the “Stock Awards” column of the Summary
Compensation Table.
26 (5) “All Other Compensation” Column. This column discloses all other compensation for the fiscal year, including reportable perquisites and other personal benefits. For fiscal 2008, 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: Fiscal 2008 Perquisites (Supplemental Table)
(a) (1)
Personal use of Company’s aircraft; (2) Personal use of the Company’s
automobiles; (3) Perquisites related to executive’s use of their own vehicle;
(4) Subsidized medical premiums for the remainder of the NEO’s employment with
the Company; (5) Use of the Company’s Annual Executive Physical Exam Program;
(6) Golf/country club membership fees; and (7) Personal tax
preparation. (b) The
incremental costs of personal use of the Company’s aircraft are calculated as
(1) the total operating costs (including trip-based management fees) directly
associated with personal trips, plus (2) the allocable share of all other costs
of the aircraft for the fiscal year (including depreciation or lease payments)
based upon the percentage of total hours flown during the fiscal year
represented by personal trips. No “deadhead” flights occurred in fiscal
2008.
(c) 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) 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 2008: Fiscal 2008 All Other Compensation Other Than Perquisites (Supplemental Table)
(a) Mr.
J. Larry Sorsby received a periodic years of service award in fiscal 2008 for
long-term service to the Company.
(b) In
December of 2007, the Compensation Committee approved a $175,000 cash
contribution in the name of Mr. Sorsby to the Children’s Hospital of
Philadelphia, payable in three installments as follows: $50,000 in 2008, $50,000
in 2009, and $75,000 in 2010.
(c) Mr.
K. Hovnanian does not participate in the Company’s executive deferred
compensation plan (“EDCP”). (6) “Total” Compensation Column. This column reflects the sum of all the columns (the Salary, Bonus, Stock Awards, Option Awards, Non-Equity Incentive Plan Compensation, Change in Pension Value and Nonqualified Deferred Compensation Earnings, and All Other Compensation columns) of the Summary Compensation Table. Fiscal 2008 Total Compensation (Supplemental Table). The Fiscal 2008 Total Compensation (Supplemental Table) below includes the same amounts as the “Salary,” “Bonus,” “Non-Equity Incentive Plan Compensation,” “Change in Pension Value and Nonqualified Deferred Compensation Earnings,” and “All Other Compensation” columns of the Summary Compensation Table for fiscal 2008, but values stock awards and option awards for the fiscal year differently, as explained in footnote (a) below. 27 The table below is intended to provide additional, supplemental compensation disclosure and not as a replacement for the Summary Compensation Table. Fiscal 2008 Total Compensation (Supplemental Table)
(II) GRANTS OF PLAN-BASED
AWARDS IN FISCAL 2008 Grants of Plan-Based Awards in Fiscal 2008
(1) Estimated Possible Payments for Chairman, CEO, and CFO. As stated above under “Regular Bonuses” in “Compensation Discussion and Analysis,” the fiscal 2008 bonus formulas for Mr. K. Hovnanian, Mr. A. Hovnanian, and J. Larry Sorsby are based on the greater of the ROACE calculation method and Net Debt Reduction calculation method. For purposes related to the above presentation table, these NEOs would not earn any bonus under the Net Debt Reduction calculation method if the “net debt reduction” (as defined above under “Regular Bonuses” in the “Compensation 28 Discussion and Analysis”) was zero or
below and would not earn any bonus under the ROACE calculation method if the
ROACE percentage at the end of the fiscal year was zero or below (as was the
case in fiscal 2008). Therefore, no values have been disclosed at the
“threshold” level for purposes of the above presentation
table for these NEOs. (2) Estimated Possible Payments for the General
Counsel and Chief Accounting Officer. As stated above under
“Regular Bonuses” of the “Compensation Discussion and Analysis,” the fiscal 2008
bonus formula for Mr. Paul Buchanan and Mr. Peter Reinhart is based on both the ROACE calculation method
and “Meeting Personal Objectives”
method. 29 For purposes of this table presentation, the
“Maximum” level is defined as the maximum award earned under the ROACE
calculation method and if all or an “outstanding” percentage of the personal
objectives established for Mr. Buchanan and Mr. Reinhart at
the beginning of the fiscal year were achieved. The maximum bonus payable under
the ROACE calculation method for these NEOs is capped at a “maximum” 25% ROACE
level, in which Mr. Buchanan and Mr. Reinhart would have earned 90% and 80%,
respectively, of their base salaries. In addition, these NEOs
would also have
earned 60% and 40%, respectively, of their base salaries by achieving an
“outstanding” percentage of their personal objectives under the “Meeting
Personal Objectives” method. For fiscal 2008, based on these “Maximum” levels
and distribution of payment as described below, Mr. Buchanan would have earned a
total bonus of $445,200 of which $294,000 would have been earned in cash and
$151,200 would have been earned in deferred share awards. For fiscal 2008, based
on these “Maximum” levels, Mr. Reinhart would have earned a total bonus of
$381,600 of which $252,000 would have been earned in cash and $129,600 would have
been earned in deferred share awards. As discussed under “Regular Bonuses” under “Compensation
Discussion and Analysis,” at the discretion of the Compensation Committee, the
bonus payable under the ROACE calculation may be extrapolated beyond the maximum
ROACE level. (3) “All Other Stock Awards: Number of Shares of Stock or Units” Column. This column discloses the number of restricted stock units (not tied to any financial or personal objectives performance measure) awarded to an NEO of which none were granted in fiscal 2008. (4) “All Other Option Awards: Number of Securities Underlying Options” Column. This column discloses the number of stock options (not tied to any financial or personal objectives performance measure) awarded to an NEO in fiscal 2008. (5) “Exercise or Base Price of Option Awards” Column. The methodology for calculating the option exercise price is the closing price per share of the Company’s Class A Common Stock on the day of the option grant on June 13, 2008 (which was $6.46). (6) “Grant Date Fair Value of Stock and Option Awards” Column. The grant date fair value of the restricted stock unit or stock option awards was computed in accordance with FAS 123R. This value for options was calculated based on the Black-Scholes option pricing model in which the option fair value as of the grant date (June 13, 2008) was determined to be $3.35. 30 (III) OUTSTANDING EQUITY
AWARDS AT FISCAL 2008
YEAR-END Outstanding Equity Awards at Fiscal 2008 Year-End
(1) The
amounts in these columns represent the deferred stock portion, including the additional 20% gross-up,
of the NEOs’ total performance-based awards for fiscal 2008 that become fully vested on January 15, 2009.
(2) The
options identified by an “X” under this footnote were subsequently cancelled in
December 2008 as part of a program to reduce the equity reserve “overhang” under
the Stock Incentive Plan. As discussed in more detail above in “Actions
For Fiscal 2009” under “Compensation
Discussion and Analysis,” the Committee requested the cancellation of a number
of “underwater” options that Mr. Ara Hovnanian (options to purchase 870,834
shares of Class B Common Stock and 600,000 shares of Class A Common Stock) and
Mr. J. Larry Sorsby (options to purchase 135,417 shares of Class A Common Stock)
held under the Stock Incentive Plan. The Company made no commitment to provide
either Mr. Hovnanian or Mr. Sorsby with any other form of consideration in
respect of the cancelled options.
(3) All
options vest 25% per year beginning on the third anniversary of the date of
grant except for options granted on June 8, 2007 and June 13, 2008, which vest
25% per year beginning on the second anniversary of the date of
grant.
31 (IV) OPTION EXERCISES AND
STOCK VESTED IN FISCAL
2008 Option Exercises and Stock Vested in Fiscal 2008
(1) Based on the difference between the market
price of the Company’s Class A Common Stock on the NYSE at the time of exercise
of the option and the exercise price of the option.
(2) Upon vesting, 21,099 shares of the Company’s
Class A Common Stock were deferred into the Company’s nonqualified deferred
compensation plan for executives (“EDCP”) in accordance with Mr. Sorsby’s prior
election.
(3) Upon vesting, 5,320 shares of the Company’s
Class A Common Stock were deferred into the Company’s nonqualified deferred
compensation plan for executives (“EDCP”) in accordance with Mr. Buchanan’s
prior election.
(4) Upon vesting, 3,800 shares of the Company’s
Class A Common Stock were deferred into the Company’s nonqualified deferred
compensation plan for executives (“EDCP”) in accordance with Mr. Reinhart’s
prior election.
(V) NONQUALIFIED DEFERRED
COMPENSATION FOR FISCAL
2008 Nonqualified Deferred Compensation for Fiscal 2008
(1) “Executive Contributions in Last
Fiscal Year” Column. This column represents (A) any deferrals of
cash compensation by the NEO (including deferrals in excess of an NEO’s maximum
401(k) contribution amount (“401(k) excess” amount)), and (B) any deferred stock
award which may have become vested in fiscal 2008 and was elected by the NEO to
be deferred further under the EDCP. For fiscal 2008, Mr. Sorsby, Mr. Buchanan,
and Mr. Reinhart, deferred 21,099 shares, 5,320 shares, and 3,800 shares,
respectively, with the market values of $194,302, $31,547, and $22,534,
respectively, as of the vesting date. The other NEOs’ contributions here
principally represent 401(k) excess amounts which were deferred under the EDCP
and which were included in the “Salary” column of the Summary Compensation
Table. In addition, contributions under the EDCP also included deferrals of cash
bonus amounts included in the “Bonus” column of the Summary Compensation
Table. (2) “Registrant Contributions in Last Fiscal Year” Column. This column represents the Company’s matching contributions to the accounts of the NEOs in fiscal 2008 in respect of the executive’s contributions. These values are also reflected in the “All Other Compensation” column of the Summary Compensation Table. See footnote (5) to the Summary Compensation Table. (3) “Aggregate Earnings in Last Fiscal Year” Column. This column represents the unrealized earnings/(losses) of the EDCP’s total “account balance” as described in the narrative below. No such earnings are considered above-market or preferential and, accordingly, are not included in the Summary Compensation Table. (4) “Aggregate Withdrawals/Distribution” Column. This column represents the payouts or distributions to the NEOs of vested amounts of deferred compensation pursuant to their elections. 32 (5) “Aggregate Balance at Last Fiscal Year” Column. This column represents the net balance of the NEOs’ EDCP accounts as of 10/31/08 based on an aggregation of all sub-accounts (discussed below). The majority of such balances reflects executive and Company contributions that were included in Summary Compensation tables in previous years. Narrative to the Non-Qualified Deferred Compensation Table for Fiscal 2008 Total Account
Balances EDCP’s Election
Options
33 (VI) POTENTIAL PAYMENTS UPON
TERMINATION OR CHANGE-IN-CONTROL
TABLE Potential Payments Upon Termination Or Change-In-Control Table
(1) Accelerated vesting of cash retention awards. The retention bonuses discussed above under “Discretionary Bonuses” in the “Compensation Discussion and Analysis” were awarded in December 2007, with 50% earned and paid during fiscal 2008 and the remaining 50% subject to vesting and payment after the date of the table presentation. Such bonuses would have only been payable if the NEO had remained continuously employed by the Company through the applicable vesting date; however, if an NEO’s termination were due to a reduction in force, position elimination, death, or disability, the NEO would have been eligible for a prorated payment through his termination date, less any amounts previously paid. 34 (2) Accelerated vesting of cash performance-based awards. According to the Company’s bonus program’s policies and procedures, the cash portion of an NEO’s total 2008 performance-based bonus award is considered earned only if he is on the payroll and employed by the Company on the scheduled date that it is paid. However, if an NEO’s termination were due to retirement on or after age 58, a reduction in force, position elimination, death or disability, the NEO would be eligible for a prorated payment through his termination date, less any amounts previously paid. The values in the table represent 100% of the cash portion of an NEO’s fiscal 2008 bonuses that were payable no later than January 15, 2009. (3) Accelerated vesting of equity awards.
(4) Contractual Disability and Death Payment.
For purposes of this table, the following programs were also considered.
(VII) NON-EMPLOYEE DIRECTOR COMPENSATION FOR FISCAL 2008 The Committee annually reviews the compensation program for directors who are not employees of the Company and makes recommendations to the Board of Directors for their approval. The compensation program for non-employee Directors has not changed since fiscal 2006 when the Committee reviewed a study of non-employee Director compensation involving the Company’s Peer Group prepared by PM&P. In December of 2008, the Board of Directors approved the following non-employee Director benefits for fiscal 2009, which reflected no changes since fiscal 2006:
35 For additional information related to non-employee Director compensation, please also refer to the “Non-Employee Director Compensation for Fiscal 2008” table below. In conjunction with promoting high ethical standards for the distribution of equity-based incentives, the Committee also established the second Friday in January of each year as the date for payment of the non-employee director Board retainer and the date for establishment of the stock price for purposes of calculation of the stock portion of the non-employee Director Board retainer. The following table summarizes the compensation of the Company’s Non-Employee Directors related to their services in fiscal 2008. Non-Employee Director Compensation for Fiscal 2008
(1) “Fees Earned
or Paid in Cash” Column. The
amounts in this column represent the combined value of fiscal 2008 annual
retainer and meeting fees paid in cash (including approximately 50% of the total
annual retainer fee) as shown below. The remaining approximately 50% of the
total annual retainer fee is paid in shares of the Company’s Class A Common
Stock. For a full description of the annual retainer and meeting fees, share
awards, and stock option awards to non-employee directors, see the discussion preceding this table.
Total Fees Earned or Paid in Cash (Supplemental Table)
(2) “Stock Awards”
Column. The amounts in this
column represent the remaining approximately 50% of the total annual retainer
fee paid in shares of the Company’s Class A Common Stock resulting in the total
retainer amount for fiscal 2008 as shown in the table below. The dollar amounts
in this table also represent the expense recognized for financial statement
purposes in accordance with FAS 123R. The assumptions used in the calculation of
these amounts are included in footnotes 3 and 15 to the Company’s audited
financial statements for fiscal 2008 included in the Company’s Annual Report on
Form 10-K for the fiscal year ended October 31, 2008.
Total Annual Retainer (Supplemental Table)
36 (3) “Option
Awards” Column. The amounts
in this column reflect stock options awarded both in fiscal 2008 and in prior
years and are based on amortization of the grant date fair value of the option
awards in accordance with FAS 123R for financial statement purposes. Assumptions
used in this calculation of these amounts are set forth in footnotes 3 and 15 to
the Company’s audited financial statements for fiscal 2008 included in the
Company’s Annual Report on Form 10-K for the fiscal year ended October 31,
2008.
The FAS 123R
expenses for option awards shown in this column are based on the Black-Scholes
valuations of stock granted in both fiscal 2008 and in prior years and are based
on the value of the Company’s stock at higher levels than its market value as of
fiscal year-end.
Due to the
decline the Company’s stock, if the valuation for the same options were based on
their intrinsic value (calculated as the difference between the value of the
option based upon the Company’s share price as of the market close on October
31, 2008 and the option exercise price) rather than the FAS 123R expense
valuation, a significant percentage of the same options would be “out of the
money” and have no intrinsic value as reflected in the table
below.
Intrinsic Expensed Value (Positive or Negative) of Unexercised Stock Options vs. FAS 123R Expense (Supplemental Table)
(a) The options
identified by an “X” under this footnote were subsequently cancelled in January
2009 as part of a program to reduce the equity reserve “overhang” under the
Stock Incentive Plan. As discussed in more detail above in “Actions for Fiscal
2009” under “Compensation Discussion and Analysis”, the Committee requested the
cancellation of a number of “underwater” options. The Company made no commitment
to provide any of the non-management Directors with any form of consideration in
respect of the cancelled options.
(b) Stock options vest
one-third per year beginning on the first anniversary of the date of grant. If
prior to the stock option termination date the non-management Director ceases to
be a member of the Board of Directors due to death, Disability or Retirement,
the stock option, to the extent not previously vested and exercised, immediately
becomes fully vested and exercisable and remains exercisable until the earlier
of (i) the stock option termination date and (ii) the first anniversary of the
non-management Director’s death, Disability, or Retirement.“Retirement” is defined as termination as a member of the
Board of Directors on or after age 60, or on or after age 58 with at least 15
years of “Service” to the Company immediately preceding such
termination.
(c) The option grant
date fair value per share is based on the Black-Scholes option pricing model,
using assumptions in the calculation of these amounts as set forth in footnotes
3 and 15 to the Company’s audited financial statements for fiscal 2008 included
in the Company’s Annual Report on Form 10-K for the fiscal year ended October
31, 2008.
(d) The intrinsic value
represents the difference between the market value as of October 31, 2008 and
the option exercise price multiplied by total number of shares; where negative,
this represents how much the applicable grant is
“out-of-the-money”.
(e) The 2008 expense in
accordance with FAS 123R is calculated as follows: Total options multiplied by
the option grant date fair value per share and divided by the number of months
for the full vesting period = expense per month. For grants in fiscal 2008, the
expense commenced on the grant date of June 13, 2008.
(f) The 2008 expense
assuming intrinsic value is calculated as footnote (c) above, but uses the
intrinsic value instead of the option grant date fair
value. 37
The following table
shows the total numbers of all unexercised stock options (exercisable and
unexercisable) that each of the non-employee directors held at the end of fiscal
2008:
Outstanding Option Awards at Fiscal 2008 Year-End (Supplemental Table)
38 (a) The options
identified by an “X” under this footnote were subsequently cancelled in January
2009 as part of a program to reduce the equity reserve “overhang” under the
Stock Incentive Plan. As discussed in more detail above in “Actions for Fiscal
2009” under “Compensation Discussion and Analysis”, the Committee requested the
cancellation of a number of “underwater” options. The Company made no commitment
to provide any of the non-management Directors with any form of consideration in
respect of the cancelled options.
(b) Stock options vest
one-third per year beginning on the first anniversary of the date of grant. If
prior to the stock option termination date the non-management Director ceases to
be a member of the Board of Directors due to death, Disability or Retirement,
the stock option, to the extent not previously vested and exercised, immediately
becomes fully vested and exercisable and remains exercisable until the earlier
of (i) the stock option termination date and (ii) the first anniversary of the
non-management Director’s death, Disability, or Retirement. “Retirement” is
defined as termination as a member of the Board of Directors on or after age 60,
or on or after age 58 with at least 15 years of “Service” to the Company
immediately preceding such termination. THE AUDIT
COMMITTEE
Messrs.
Kangas, as Chairman, Robbins and Weinroth are the members of the Audit
Committee. In the judgment of the Company’s Board of Directors, each member of
the Audit Committee is independent as required by both the rules of the NYSE and
regulations of the SEC, and an “audit committee financial expert” in accordance
with SEC regulations.
Responsibilities of the Audit Committee &
Charter
The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors and is governed by its Charter, which was adopted in March 2000 and last amended on February 6, 2008. The Audit Committee Charter is available on the Company’s public website, www.khov.com, under “Investor Relations/Corporate Governance.” In
accordance with SEC regulations, the Audit Committee has established procedures
for the appointment, compensation, retention and oversight of the independent
registered public accounting firm engaged to prepare or issue an audit report or
other audit, review, or attest services. The Company’s independent registered
public accounting firm will report directly to the Audit Committee, and the
Audit Committee is responsible for the resolution of disagreements between such
firm and management regarding financial reporting.
In fiscal
year 2003, the Audit Committee established whistle blowing procedures as
required by Section 301 of the Sarbanes-Oxley Act of 2002 and Section
303A.07(c)(iii) of the NYSE Corporate Governance Rules. These procedures are
discussed in the Company’s Code of Ethics (Section IV.G.) which is available on
the Company’s public website at www.khov.com under “Investor
Relations/Governance.”
Audit and Non-Audit Services Pre-Approval
Policy 39 The Audit Committee may delegate to one or more of its members the authority to approve in advance all significant audit or permitted non-audit services to be provided by the independent registered public accounting firm, so long as decisions are presented to the full Audit Committee at its next scheduled meeting. THE AUDIT COMMITTEE
REPORT
Management
has the primary responsibility for the financial statements and the reporting
process, including the systems of internal controls. In fulfilling its oversight
responsibilities, the Audit Committee has reviewed the audited financial
statements included in the Annual Report on Form 10-K with management. This
review included a discussion of the quality, not just the acceptability, of the
accounting principles, the reasonableness of significant judgments, and the
clarity of disclosures in the financial statements.
The Audit
Committee has reviewed with the independent registered public accounting firm,
which is responsible for expressing an opinion on the conformity of those
audited financial statements with generally accepted accounting
principles:
The Audit Committee, as part of its Charter, reviews quarterly
with management the Company’s financial statements prior to their being filed
with the SEC. In addition, the Audit Committee, in reliance on the reviews and
discussions referred to above, recommended to the Board of Directors that the
audited financial statements be included in the Company’s Annual Report on Form
10-K for the year ended October 31, 2008, which was filed with the SEC on
December 24, 2008.
40 FEES PAID TO PRINCIPAL ACCOUNTANT The
aggregate fees billed by Ernst & Young LLP for each of fiscal year 2008 and
fiscal year 2007 for professional services rendered for the audit of our
consolidated financial statements, for the reviews of the unaudited condensed
consolidated financial statements included in our Quarterly Reports on Form 10-Q
for the quarterly periods during fiscal years 2008 and 2007, the audit of the
effectiveness of the Company’s internal control over financial reporting as of
October 31, 2008 and 2007, or for services normally provided by our independent
registered public accounting firm in connection with statutory or regulatory
filings or engagements, including comfort and consent letters in connection with
SEC filings and financing transactions, for those fiscal years were $3,689,000
and $3,615,000, respectively.
The
aggregate fees billed by Ernst & Young LLP in each of fiscal year 2008 and
fiscal year 2007 for assurance and related services that were reasonably related
to performance of the audit or review of the Company’s consolidated financial
statements and that are not reported under “Audit Fees” above were $72,000 and
$46,500, respectively. These services consisted of employee benefit plan audits,
and accounting consultation.
Tax
Fees
The
aggregate fees billed by Ernst & Young LLP in each of fiscal year 2008 and
fiscal year 2007 for professional services rendered for tax compliance, tax
advice and tax planning were $590,000 and $56,000, respectively.
There were
no fees billed in fiscal years 2008 or 2007 for products and services provided
by Ernst & Young LLP, other than the services described above.
All of the
services covered under the captions “Audit-Related Fees”, “Tax Fees” and “All
Other Fees” were pre-approved by the Audit Committee. For a discussion of the
Audit Committee’s pre-approval policies and procedures, see “The Audit
Committee” above.
PRINCIPAL ACCOUNTANT
INDEPENDENCE
The Audit
Committee has determined that the provision of all non-audit services performed
by Ernst & Young LLP were compatible with maintaining its
independence.
CORPORATE GOVERNANCE
The
Corporate Governance Committee is primarily responsible for reviewing the
Company’s existing Corporate Governance Guidelines and further developing such
guidelines and other policies and procedures that enhance the Company’s
corporate governance.
In
accordance with promoting strong corporate governance, the Company has adopted a
Code of Ethics that applies to its principal executive officer, principal
financial officer, controller and all other associates of the Company, including
its Directors and other officers. The Company has also adopted Corporate
Governance Guidelines.
The
Company makes available to the public various corporate governance related
information on its public website (www.khov.com) under “Investor
Relations/Governance” and to any shareholder who requests such information in
writing. Information on the website includes the Company’s Code of Ethics,
Corporate Governance Guidelines (including the Related Person Transaction
Policy) and Committee Charters, including the Audit Committee Charter, the
Compensation Committee Charter, and the Corporate Governance Committee
Charter.
41 Shareholders, associates of the Company and other interested parties may communicate directly with the Board of Directors by corresponding to the address below. Correspondence will be discussed at the next scheduled meeting of the Board of Directors, or as indicated by the urgency of the matter. Attn: Board of Directors of Hovnanian
Enterprises, Inc. The Company’s non-employee Directors meet without management after each regularly scheduled meeting of the Board of Directors. The presiding Director is selected at each meeting by the directors in attendance. Shareholders, associates of the Company and other interested parties may communicate directly with non-employee Directors as a group by corresponding to the address below. Members of the non-employee Director group include: Messrs. Coutts, Kangas, Marengi, Robbins and Weinroth. All non-employee Directors are “independent” in accordance with NYSE rules. Mr. Kangas will report to all non-employee Directors any correspondence which is received by him as indicated by the urgency of the matter, or at the next scheduled meeting of non-employee Directors. Attn: Non-Employee Directors of Hovnanian
Enterprises, Inc. In addition, associates of the Company may anonymously report concerns or complaints via the K. Hovnanian Corporate Governance Hotline or by following the procedure discussed in the Company’s Code of Ethics. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
The Board
has adopted a written Related Person Transaction Policy (the “Related Person
Transaction Policy”) to assist it in reviewing, approving and ratifying related
person transactions and to assist the Company in the preparation of related
disclosures required by the SEC. This Related Person Transaction Policy
supplements the Company’s other policies that may apply to transactions with
related persons, such as the Company’s Corporate Governance Guidelines and its
Code of Ethics.
The
Related Person Transaction Policy provides that all Related Person Transactions
covered by the Related Person Transaction Policy and involving a director,
director nominees, executive officer or greater than 5% shareholder or an
immediate family member of any such person are prohibited, unless approved or
ratified by the disinterested members of the Board of Directors or the Corporate
Governance Committee. The Company’s employees, directors, director nominees,
executive officers and their immediate family members are required to provide
prompt and detailed notice of any purported Related Person Transaction (as
defined in the Related Person Transaction Policy) to the Company’s General
Counsel or Chief Financial Officer, who in turn must promptly forward such
notice and information to the Chairperson of the Board of Directors or the
Corporate Governance Committee and will advise the Corporate Governance
Committee or disinterested directors as to whether the Related Person
Transaction will be required to be disclosed in applicable regulatory filings.
The Company’s Compliance Manager will document all non-reportable and reportable
Related Person Transactions.
In
reviewing Related Person Transactions for approval or ratification, the
Corporate Governance Committee or disinterested directors will consider the
relevant facts and circumstances, including, without limitation:
42
The Corporate Governance Committee or the disinterested
directors will not approve or ratify a Related Person Transaction unless, after
considering all relevant information, it has determined that the transaction is
in, or is not inconsistent with, the Company’s best interests and the best
interests of its shareholders. Generally,
the Related Person Transaction Policy applies to any current or proposed
transaction in which:
A copy of
our Related Person Transaction Policy is available as part of our Corporate
Governance Guidelines on our website at www.khov.com under “Investors
Relations/Governance.”
Mr. K.
Hovnanian, the Chairman of the Board of Directors, is the father of Mr. A.
Hovnanian, the Chief Executive Officer and the Vice Chairman of the Board of
Directors.
The
related transactions discussed below were entered into prior to the adoption of
our Related Person Transaction Policy and were approved by the Board of
Directors.
During the
year ended October 31, 2003, we entered into an agreement to purchase land in
California for approximately $31.1 million from an entity that is owned by a
family relative of our Chairman of the Board and our Chief Executive Officer. As
of October 31, 2008, we have an option deposit of $3.2 million related to this
land acquisition agreement. In connection with this agreement, we also have
consolidated $10.3 million in accordance with FIN 46R under “Consolidated
inventory not owned” in the Consolidated Balance Sheets. Neither the Company nor
the Chairman of the Board or Chief Executive Officer has a financial interest in
the relative’s company from whom the land was purchased.
During the
year ended October 31, 2001, we entered into an agreement to purchase land from
an entity that is owned by a family relative of our Chairman of the Board and
our Chief Executive Officer, totaling $26.9 million. As of October 31, 2008, all
of this property has been purchased, and during fiscal 2008, the Company
delivered the remaining four lots that were in inventory. Neither the Company
nor the Chairman of the Board or Chief Executive Officer has a financial
interest in the relative’s company from whom the land was
purchased.
During the
year ended October 31, 2001, we entered into an agreement to purchase land in
Maryland for approximately $3.0 million from a group that consists of relatives
of Geaton Decesaris, Jr., formerly a member of our Board of Directors. We had
posted a deposit of $100,000 and purchased the property when final approvals
were in place. The property was purchased in November 2001 and there are no lots
remaining to be sold as of October 31, 2007 of an original 147 lots. During the
time he was a member of the Board of Directors, Geaton Decesaris, Jr. had no
financial interest in the relatives’ ownership and sale of land to the
Company.
During the
second quarter of 2006, an existing lease on a building occupied by one of our
companies in the Southeast was amended. The lessor is a company, whom at the
time of the transaction, was owned partly by Geaton A. Decesaris, Jr., formerly
a member of the Company’s Board of Directors. The amendment provided for an
increase in the square footage of the lease space, an increased security deposit
related to the square footage increase and an increase in the lease term. In
total, the lease is for 39,637 square feet at $18.86 per square foot per year,
with a total security deposit of $34,511.
43 During the
years ended October 31, 2008, 2007 and 2006, an engineering firm owned by a
relative of our Chairman of the Board and Chief Executive Officer provided
services to the Company totaling $2.6 million, $3.6 million, and $5.0 million,
respectively. Neither the Company nor Chairman of the Board or Chief Executive
Officer has a financial interest in the relative’s company from whom the
services were provided.
In
December 2005, we entered into an agreement to purchase land in New Jersey from
an entity that is owned by family relatives of our Chairman of the Board and our
Chief Executive Officer at a base price of $25 million. The land will be
acquired in four phases over a period of 3 years from the date of acquisition of
the first phase. On June 11, 2008, the parties amended the purchase agreement
and closed title to 43 of the 86 homes in phase one. The purchase of the balance
of phase one was deferred, but such purchase must occur simultaneously with the
scheduled closing of any of the three remaining phases. The purchase prices for
all phases are subject to an increase in the purchase price for the phase of not
less than 7% per annum from February 1, 2008; a deposit in the amount of
$500,000 has been made by the Company. Neither the Company nor the Chairman of
the Board or the Chief Executive Officer has a financial interest in the
relatives’ company from whom the land will be purchased.
IMPORTANT NOTICE REGARDING THE
AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON MARCH
19, 2009.
Our 2009
proxy statement, the Company’s Annual Report to Shareholders for the year ended
October 31, 2008 (which is not deemed to be part of the official proxy
soliciting materials), proxy cards (for Class A Common Stock shareholders and
registered Class B Common Stock shareholders) and any amendments to the
foregoing materials that are required to be furnished to shareholders are
available online at www.proxyvote.com.
For
information on how to obtain directions to the Company’s 2009 Annual Meeting,
please call our Investor Relations department at 1-800-815-9680.
GENERAL Solicitation
The
solicitation of proxies is being made primarily by mail, but directors,
officers, employees, and contractors retained by us may also engage in the
solicitation of proxies by telephone. The cost of soliciting proxies will be
borne by us. In addition, we may reimburse brokers, custodians, nominees and
other record holders for their reasonable out-of-pocket expenses in forwarding
proxy material to beneficial owners.
Voting
Unless
otherwise directed, the persons named in the proxy card(s) intend to vote all
shares represented by proxies received by them in favor of the election of the
nominees to the Board of Directors of the Company named herein and in favor of
the ratification of the selected independent registered public accounting firm
and as recommended by the Board of Directors. All proxies will be voted as
specified.
Each share
of Class A Common Stock entitles the holder thereof to one vote and each share
of Class B Common Stock entitles the holder thereof to ten votes. Votes of Class
A Common Stock and Class B Common Stock will be counted together without regard
to class for proposals that require the affirmative vote of the holders of a
majority in voting power of all common stock represented in person or by proxy
at the 2009 Annual Meeting, voting together. All votes will be certified by the
Inspectors of Election, who are employees of the Company. Abstentions and broker
non-votes will have no effect on the vote because such shares are not votes
cast.
Notwithstanding the foregoing, the Company’s amended Certificate of
Incorporation provides that each share of Class B Common Stock held, to the
extent of the Company’s knowledge, in nominee name by a stockbroker, bank or
otherwise will be entitled to only one vote per share unless the Company is
satisfied that such shares have been held continuously, since the date of
issuance, for the benefit or account of the same named beneficial owner of such
shares (as defined in the amended Certificate of Incorporation) or any Permitted
Transferee (as defined in the amended Certificate of Incorporation). Beneficial
owners of shares of Class B Common Stock held in nominee name wishing to cast
ten votes for each share of such stock must properly complete their voting
instruction card, which is specially designed for beneficial owners of Class B
Common Stock. The Company has also supplied nominee holders of Class B Common
Stock with instructions
44 and specially designed proxy cards to accommodate the voting of the Class B Common Stock. In accordance with the Company’s amended Certificate of Incorporation, shares of Class B Common Stock held in nominee name will be entitled to ten votes per share only if the beneficial owner voting instruction card and the nominee proxy card relating to such shares is properly completed, mailed, and received not less than 3 nor more than 20 business days prior to March 19, 2009. Proxy cards should be mailed to Hovnanian Enterprises, Inc., c/o Broadridge Financial Solutions, Inc., 51 Mercedes Way, Edgewood, N.Y., 11717. Additional
Matters
Management
does not intend to present any business at the meeting other than that set forth
in the accompanying Notice of Annual Meeting of Shareholders, and it has no
information that others will attempt to do so. If other matters requiring the
vote of shareholders properly come before the meeting and any adjournments or
postponements thereof, it is the intention of the persons named in the proxy
cards to vote the shares represented by the proxies held by them in accordance
with their judgment on such matters.
SHAREHOLDER PROPOSALS FOR THE 2010 ANNUAL MEETING Shareholder proposals for inclusion in the proxy materials related to the 2010 Annual Meeting of Shareholders must be received by the Company no later than October 7, 2009. Shareholder proposals submitted after December 21, 2009 will be considered untimely for purposes of SEC Rule 14a-4.
45
PROXY The undersigned hereby constitutes and appoints Peter S. Reinhart and Paul W. Buchanan, and each of them, his true and lawful agents and proxies with full power of substitution in each, to represent the undersigned at the Annual Meeting of Shareholders of HOVNANIAN ENTERPRISES, INC. to be held at the offices of Simpson Thacher & Bartlett LLP, 425 Lexington Avenue, New York, N.Y. 10017, at 10:30 a.m. on March 19, 2009, and at any adjournments thereof, upon the matters set forth in the Notice of Annual Meeting and Proxy Statement dated February 3, 2009 and upon all other matters properly coming before said meeting. This proxy, when properly executed, will be voted (1) FOR the election of the nominees to the Board of Directors; (2) 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, 2009; and (3) on any other matters in accordance with the discretion of the named proxies and agents, if no instructions to the contrary are indicated in items (1) and (2).
PROXY The undersigned hereby constitutes and appoints Peter S. Reinhart and Paul W. Buchanan, and each of them, his true and lawful agents and proxies with full power of substitution in each, to represent the undersigned at the Annual Meeting of Shareholders of HOVNANIAN ENTERPRISES, INC. to be held in the offices of Simpson Thacher & Bartlett LLP, 425 Lexington Avenue, New York, N.Y. 10017, at 10:30 a.m. on March 19, 2009, and at any adjournments thereof, upon the matters set forth in the notice of meeting and Proxy Statement dated February 3, 2009 and upon all other matters properly coming before said meeting. This proxy, when properly executed, will be voted (1) FOR the election of the nominees to the Board of Directors; (2) 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, 2009; and (3) on any other matters in accordance with the discretion of the named proxies and agents, if no instructions to the contrary are indicated in items (1) and (2). According to the certification of the beneficial owner of the shares represented by this proxy, such beneficial owner (A) has been the beneficial owner of _______ of such shares continuously since the date of their issuance or is a Permitted Transferee (as defined in paragraph 4(A)(i) of paragraph FOURTH of the Company's amended Certificate of Incorporation) of any such beneficial owner and (B) has not been the beneficial owner of _______ of such shares continuously since the date of their issuance nor a Permitted Transferee of any such beneficial owner. If no certification is made by the beneficial owner of the shares represented by this proxy, it will be deemed that all shares of Class B Common Stock represented by this proxy have not been held continuously, since the date of issuance, for the benefit or account of the same beneficial owner of the shares represented by this proxy or any Permitted Transferee.
PROXY The undersigned hereby constitutes and appoints Peter S. Reinhart and Paul W. Buchanan, and each of them, his true and lawful agents and proxies with full power of substitution in each, to represent the undersigned at the Annual Meeting of Shareholders of HOVNANIAN ENTERPRISES, INC. to be held at the offices of Simpson Thacher & Bartlett LLP, 425 Lexington Avenue, New York, N.Y. 10017, at 10:30 a.m. on March 19, 2009, and at any adjournments thereof, upon the matters set forth in the Notice of Annual Meeting and Proxy Statement | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
