UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended
OR
| | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number
Hovnanian Enterprises, Inc. (Exact Name of Registrant as Specified in Its Charter)
N/A (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
| Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| | | |
| | N/A | |
| Depositary Shares each representing 1/1,000th of a share of 7.625% Series A Preferred Stock | | |
(1) Each share of Common Stock includes an associated Preferred Stock Purchase Right. Each Preferred Stock Purchase Right initially represents the right, if such Preferred Stock Purchase Right becomes exercisable, to purchase from the Company one ten-thousandth of a share of its Series B Junior Preferred Stock for each share of Common Stock. The Preferred Stock Purchase Rights currently cannot trade separately from the underlying Common Stock.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ☐ | | Nonaccelerated Filer ☐ | Smaller Reporting Company | Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
FORM 10-Q
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
| July 31, | October 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Homebuilding: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash and cash equivalents | ||||||||
| Inventories: | ||||||||
| Sold and unsold homes and lots under development | ||||||||
| Land and land options held for future development or sale | ||||||||
| Consolidated inventory not owned | ||||||||
| Total inventories | ||||||||
| Investments in and advances to unconsolidated joint ventures | ||||||||
| Receivables, deposits and notes, net | ||||||||
| Property, plant and equipment, net | ||||||||
| Prepaid expenses and other assets | ||||||||
| Total homebuilding | ||||||||
| Financial services | ||||||||
| Deferred tax assets, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Homebuilding: | ||||||||
| Nonrecourse mortgages secured by inventory, net of debt issuance costs | $ | $ | ||||||
| Accounts payable and other liabilities | ||||||||
| Customers’ deposits | ||||||||
| Liabilities from inventory not owned, net of debt issuance costs | ||||||||
| Senior notes and credit facilities (net of discounts, premiums and debt issuance costs) | ||||||||
| Accrued Interest | ||||||||
| Total homebuilding | ||||||||
| Financial services | ||||||||
| Income taxes payable | ||||||||
| Total liabilities | ||||||||
| Equity: | ||||||||
| Hovnanian Enterprises, Inc. stockholders' equity: | ||||||||
| Preferred stock, $ par value - authorized shares; issued and outstanding shares with a liquidation preference of $ at July 31, 2022 and October 31, 2021 | ||||||||
| Common stock, Class A, $ par value - authorized shares; issued shares at July 31, 2022 and shares at October 31, 2021 | ||||||||
| Common stock, Class B, $ par value (convertible to Class A at time of sale) - authorized shares; issued shares at July 31, 2022 and shares at October 31, 2021 | ||||||||
| Paid in capital - common stock | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock - at cost – shares of Class A common stock and shares of Class B common stock at July 31, 2022 and October 31, 2021 | ( | ) | ( | ) | ||||
| Total Hovnanian Enterprises, Inc. stockholders’ equity | ||||||||
| Noncontrolling interest in consolidated joint ventures | ||||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
| Three Months Ended July 31, | Nine Months Ended July 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues: | ||||||||||||||||
| Homebuilding: | ||||||||||||||||
| Sale of homes | $ | $ | $ | $ | ||||||||||||
| Land sales and other revenues | ||||||||||||||||
| Total homebuilding | ||||||||||||||||
| Financial services | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Expenses: | ||||||||||||||||
| Homebuilding: | ||||||||||||||||
| Cost of sales, excluding interest | ||||||||||||||||
| Cost of sales interest | ||||||||||||||||
| Inventory impairment loss and land option write-offs | ||||||||||||||||
| Total cost of sales | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total homebuilding expenses | ||||||||||||||||
| Financial services | ||||||||||||||||
| Corporate general and administrative | ||||||||||||||||
| Other interest | ||||||||||||||||
| Other operations | ||||||||||||||||
| Total expenses | ||||||||||||||||
| Loss on extinguishment of debt | ( | ) | ( | ) | ( | ) | ||||||||||
| Income from unconsolidated joint ventures | ||||||||||||||||
| Income before income taxes | ||||||||||||||||
| State and federal income tax provision (benefit): | ||||||||||||||||
| State | ( | ) | ||||||||||||||
| Federal | ( | ) | ||||||||||||||
| Total income taxes | ( | ) | ||||||||||||||
| Net income | ||||||||||||||||
| Less: preferred stock dividends | ||||||||||||||||
| Net income available to common stockholders | $ | $ | $ | $ | ||||||||||||
| Per share data: | ||||||||||||||||
| Basic: | ||||||||||||||||
| Net income per common share | $ | $ | $ | $ | ||||||||||||
| Weighted-average number of common shares outstanding | ||||||||||||||||
| Assuming dilution: | ||||||||||||||||
| Net income per common share | $ | $ | $ | $ | ||||||||||||
| Weighted-average number of common shares outstanding | ||||||||||||||||
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Nine MONTH PERIOD ENDED July 31, 2022
(In Thousands Except Share Amounts)
(Unaudited)
| A Common Stock | B Common Stock | Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Shares | Shares | ||||||||||||||||||||||||||||||||||||||||||
| Issued and | Issued and | Issued and | Paid-In | Accumulated | Treasury | Noncontrolling | ||||||||||||||||||||||||||||||||||||||
| Outstanding | Amount | Outstanding | Amount | Outstanding | Amount | Capital | Deficit | Stock | Interest | Total | ||||||||||||||||||||||||||||||||||
| Balance, October 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||
| Stock options, amortization and issuances | ||||||||||||||||||||||||||||||||||||||||||||
| Preferred dividend declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Restricted stock amortization, issuances and forfeitures | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Conversion of Class B to Class A common stock | ( | ) | - | |||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest in consolidated joint ventures | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||
| Stock options, amortization and issuances | ||||||||||||||||||||||||||||||||||||||||||||
| Preferred dividend declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Restricted stock amortization, issuances and forfeitures | ||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class B to Class A common stock | ( | ) | - | |||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest in consolidated joint ventures | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, April 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||
| Stock options, amortization and issuances | ||||||||||||||||||||||||||||||||||||||||||||
| Preferred dividend declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Restricted stock amortization, issuances and forfeitures | ||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class B to Class A common stock | ( | ) | - | |||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest in consolidated joint ventures | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, July 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
Nine MONTH PERIOD ENDED July 31, 2021
(In Thousands Except Share Amounts)
(Unaudited)
| A Common Stock | B Common Stock | Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Shares | Shares | ||||||||||||||||||||||||||||||||||||||||||
| Issued and | Issued and | Issued and | Paid-In | Accumulated | Treasury | Noncontrolling | ||||||||||||||||||||||||||||||||||||||
| Outstanding | Amount | Outstanding | Amount | Outstanding | Amount | Capital | Deficit | Stock | Interest | Total | ||||||||||||||||||||||||||||||||||
| Balance, October 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||
| Stock options, amortization and issuances | ||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock amortization, issuances and forfeitures | ||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class B to Class A common stock | ( | ) | - | |||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest in consolidated joint ventures | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||
| Stock options, amortization and issuances | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Restricted stock amortization, issuances and forfeitures | ||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class B to Class A common stock | ( | ) | - | |||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest in consolidated joint ventures | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, April 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||
| Stock options, amortization and issuances | ||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock amortization, issuances and forfeitures | ||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class B to Class A common stock | ( | ) | - | |||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest in consolidated joint ventures | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, July 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| Nine Months Ended | ||||||||
| July 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Compensation from stock options and awards | ||||||||
| Amortization of bond discounts, premiums and deferred financing costs | ( | ) | ||||||
| Gain on sale and retirement of property and assets | ( | ) | ( | ) | ||||
| Income from unconsolidated joint ventures | ( | ) | ( | ) | ||||
| Distributions of earnings from unconsolidated joint venture | ||||||||
| Loss on extinguishment of debt | ||||||||
| Noncontrolling interest in consolidated joint ventures | ||||||||
| Inventory impairment and land option write-offs | ||||||||
| (Increase) decrease in assets: | ||||||||
| Origination of mortgage loans | ( | ) | ( | ) | ||||
| Sale of mortgage loans | ||||||||
| Receivables, prepaids, deposits and other assets | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Deferred tax assets | ( | ) | ||||||
| Increase (decrease) in liabilities: | ||||||||
| State income tax payable | ( | ) | ||||||
| Customers’ deposits | ||||||||
| Accounts payable, accrued interest and other accrued liabilities | ||||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale of property and assets | ||||||||
| Purchase of property, equipment, and other fixed assets and acquisitions | ( | ) | ( | ) | ||||
| Investment in and advances to unconsolidated joint ventures | ( | ) | ( | ) | ||||
| Distributions of capital from unconsolidated joint ventures | ||||||||
| Net cash (used in) provided by investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from mortgages and notes | ||||||||
| Payments related to mortgages and notes | ( | ) | ( | ) | ||||
| Proceeds from model sale leaseback financing programs | ||||||||
| Payments related to model sale leaseback financing programs | ( | ) | ( | ) | ||||
| Proceeds from land bank financing programs | ||||||||
| Payments related to land bank financing programs | ( | ) | ( | ) | ||||
| Proceeds from partner distributions to consolidated joint venture | ||||||||
| Payments for partner distributions to consolidated joint venture | ( | ) | ( | ) | ||||
| Net (payments) proceeds related to mortgage warehouse lines of credit | ( | ) | ||||||
| Payments related to senior secured notes | ( | ) | ( | ) | ||||
| Preferred dividends paid | ( | ) | ||||||
| Deferred financing costs from land banking financing programs and note issuances | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net decrease in cash and cash equivalents, and restricted cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, and restricted cash and cash equivalents balance, beginning of period | ||||||||
| Cash and cash equivalents, and restricted cash and cash equivalents balance, end of period | $ | $ | ||||||
| Supplemental disclosures of cash flows: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest, net of capitalized interest (see Note 3 to the Condensed Consolidated Financial Statements) | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Reconciliation of Cash, cash equivalents and restricted cash | ||||||||
| Homebuilding: Cash and cash equivalents | $ | $ | ||||||
| Homebuilding: Restricted cash and cash equivalents | ||||||||
| Financial Services: Cash and cash equivalents, included in Financial services assets | ||||||||
| Financial Services: Restricted cash and cash equivalents, included in Financial services assets | ||||||||
| Total cash, cash equivalents and restricted cash shown in the statement of cash flows | $ | $ | ||||||
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - Unaudited)
(Continued)
Supplemental disclosure of noncash investing and financing activities:
In the third quarter of fiscal 2021, we acquired the remaining assets of one of our unconsolidated joint ventures, resulting in a $
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
| 1. | Basis of Presentation |
Hovnanian Enterprises, Inc. (“HEI”) conducts all of its homebuilding and financial services operations through its subsidiaries (references herein to the “Company,” “we,” “us” or “our” refer to HEI and its consolidated subsidiaries and should be understood to reflect the consolidated business of HEI’s subsidiaries). HEI has reportable segments consisting of
The accompanying unaudited Condensed Consolidated Financial Statements include HEI's accounts and those of all of its consolidated subsidiaries after elimination of all of its significant intercompany balances and transactions. Noncontrolling interest represents the proportionate equity interest in a consolidated joint venture that is not 100% owned by the Company. One of HEI's subsidiaries owns a
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021. In the opinion of management, all adjustments for interim periods presented have been made, which include normal recurring accruals and deferrals necessary for a fair presentation of our condensed consolidated financial position, results of operations and cash flows. The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and these differences could have a significant impact on the Condensed Consolidated Financial Statements. Results for interim periods are not necessarily indicative of the results which might be expected for a full year.
| 2. | Stock Compensation |
For the three and nine months ended July 31, 2022, the Company’s total stock-based compensation expense was $
| 3. | Interest |
Interest costs incurred, expensed and capitalized were:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| (In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Interest capitalized at beginning of period | $ | $ | $ | $ | ||||||||||||
| Plus interest incurred(1) | ||||||||||||||||
| Less cost of sales interest expensed | ||||||||||||||||
| Less other interest expensed(2)(3) | ||||||||||||||||
| Less interest contributed to unconsolidated joint venture(4) | ||||||||||||||||
| Plus interest acquired from unconsolidated joint venture(5) | ||||||||||||||||
| Interest capitalized at end of period(6) | $ | $ | $ | $ | ||||||||||||
| (1) | Data does not include interest incurred by our mortgage and finance subsidiaries. |
| (2) | Other interest expensed includes interest that does not qualify for interest capitalization because our assets that qualify for interest capitalization (inventory under development) do not exceed our debt, which amounted to $ |
| (3) | Cash paid for interest, net of capitalized interest, is the sum of other interest expensed, as defined above, and interest paid by our mortgage and finance subsidiaries adjusted for the change in accrued interest on notes payable, which is calculated as follows: |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| (In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Other interest expensed | $ | $ | $ | $ | ||||||||||||
| Interest paid by our mortgage and finance subsidiaries | ||||||||||||||||
| Increase in accrued interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Cash paid for interest, net of capitalized interest | $ | ( | ) | $ | $ | $ | ||||||||||
| (4) | Represents capitalized interest which was included as part of the assets contributed to joint ventures, as discussed in Note 18. There was no impact to the Condensed Consolidated Statement of Operations as a result of these transactions. |
| (5) | Represents capitalized interest which was included as part of the assets purchased from joint ventures, as discussed in Note 18. There was no impact to the Condensed Consolidated Statement of Operations as a result of these transactions. |
| (6) | Capitalized interest amounts are shown gross before allocating any portion of impairments, if any, to capitalized interest. |
| 4. | Reduction of Inventory to Fair Value |
We record impairment losses on inventories related to communities under development and held for future development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash flows are less than the carrying amount, then the community is written down to its fair value. We estimate the fair value of each impaired community by determining the present value of the estimated future cash flows at a discount rate commensurate with the risk of the respective community. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments.
During the nine months ended July 31, 2022 and 2021, we evaluated inventories of all
The Condensed Consolidated Statement of Operations line entitled “Homebuilding: Inventory impairment loss and land option write-offs” also includes write-offs of options and approval, engineering and capitalized interest costs that we record when we redesign communities and/or abandon certain engineering costs and we do not exercise options in various locations because the communities' pro forma profitability is not projected to produce adequate returns on investment commensurate with the risk. Total aggregate write-offs related to these items were $
We decide to mothball (or stop development on) certain communities when we determine that the current performance does not justify further investment at the time. When we decide to mothball a community, the inventory is reclassified on our Condensed Consolidated Balance Sheets from “Sold and unsold homes and lots under development” to “Land and land options held for future development or sale.” During the first three quarters of fiscal 2022, we did not mothball any additional communities, nor sell any previously mothballed communities. We re-activated previously mothballed communities. As of July 31, 2022 and October 31, 2021, the net book value associated with our and total mothballed communities was $
We sell and lease back certain of our model homes with the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease. As a result of our continued involvement, for accounting purposes in accordance with ASC 606-10-55-68, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Condensed Consolidated Balance Sheets, at July 31, 2022 and October 31, 2021, inventory of $
We have land banking arrangements, whereby we sell our land parcels to the land bankers and they provide us an option to purchase back finished lots on a predetermined schedule. Because of our options to repurchase these parcels, for accounting purposes, in accordance with ASC 606-10-55-70, these transactions are considered a financing rather than a sale. For purposes of our Condensed Consolidated Balance Sheets, at July 31, 2022 and October 31, 2021, inventory of $
| 5. | Variable Interest Entities |
The Company enters into land and lot option purchase contracts to procure land or lots for the construction of homes. Under these contracts, the Company will fund a stated deposit in consideration for the right, but not the obligation, to purchase land or lots at a future point in time with predetermined terms. Under the terms of the option purchase contracts, many of the option deposits are not refundable at the Company's discretion. Under the requirements of ASC 810, certain option purchase contracts may result in the creation of a variable interest in the entity (“VIE”) that owns the land parcel under option.
In compliance with ASC 810, the Company analyzes its option purchase contracts to determine whether the corresponding land sellers are VIEs and, if so, whether the Company is the primary beneficiary. Although the Company does not have legal title to the underlying land, ASC 810 requires the Company to consolidate a VIE if the Company is determined to be the primary beneficiary. In determining whether it is the primary beneficiary, the Company considers, among other things, whether it has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. Such activities would include, among other things, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. The Company also considers whether it has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. As a result of its analyses, the Company determined that, as of July 31, 2022 and October 31, 2021, it was not the primary beneficiary of any VIEs from which it is purchasing land under option purchase contracts.
We will continue to secure land and lots using options, some of which are with VIEs. Including deposits on our unconsolidated VIEs, at July 31, 2022, we had total cash deposits amounting to $
| 6. | Warranty Costs |
General liability insurance for homebuilding companies and their suppliers and subcontractors is very difficult to obtain. The availability of general liability insurance is limited due to a decreased number of insurance companies willing to underwrite for the industry. In addition, those few insurers willing to underwrite liability insurance have significantly increased the premium costs. To date, we have been able to obtain general liability insurance but at higher premium costs with higher deductibles. Our subcontractors and suppliers have advised us that they have also had difficulty obtaining insurance that also provides us coverage. As a result, we have an owner controlled insurance program for certain of our subcontractors whereby the subcontractors pay us an insurance premium (through a reduction of amounts we would otherwise owe such subcontractors for their work on our homes) based on the risk type of the trade. We absorb the liability associated with their work on our homes as part of our overall general liability insurance at no additional cost to us because our existing general liability and construction defect insurance policy and related reserves for amounts under our deductible covers construction defects regardless of whether we or our subcontractors are responsible for the defect. For the three and nine months ended July 31, 2022 and 2021, we received $
We accrue for warranty costs that are covered under our existing general liability and construction defect policy as part of our general liability insurance deductible. This accrual is expensed as selling, general and administrative costs. For homes to be delivered in fiscal 2022 and previously delivered in 2021, our deductible under our general liability insurance is or was a $
| Three Months Ended | Nine Months Ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| (In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Additions – Selling, general and administrative | ||||||||||||||||
| Additions – Cost of sales | ||||||||||||||||
| Charges incurred during the period | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Changes to pre-existing reserves | ( | ) | ( | ) | ||||||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||||
Warranty accruals are based upon historical experience. We engage a third-party actuary that uses our historical warranty and construction defect data to assist our management in estimating our unpaid claims, claim adjustment expenses and incurred but not reported claims reserves for the risks that we are assuming under the general liability and construction defect programs. The estimates include provisions for inflation, claims handling and legal fees.
Insurance claims paid by our insurance carriers, excluding insurance deductibles paid, were $
| 7. | Commitments and Contingent Liabilities |
We are involved in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position, results of operations or cash flows, and we are subject to extensive and complex laws and regulations that affect the development of land and home building, sales and customer financing processes, including zoning, density, building standards and mortgage financing. These laws and regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding. The significant majority of our litigation matters are related to construction defect claims. Our estimated losses from construction defect litigation matters, if any, are included in our construction defect reserves.
We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of health and the environment, including those regulating the emission or discharge of materials into the environment, the management of storm water runoff at construction sites, the handling, use, storage and disposal of hazardous substances, impacts to wetlands and other sensitive environments, and the remediation of contamination at properties that we have owned or developed or currently own or are developing (“environmental laws”). The particular environmental laws that apply to a site may vary greatly according to the community site, for example, due to the community, the environmental conditions at or near the site, and the present and former uses of the site. These environmental laws may result in delays, may cause us to incur substantial compliance, remediation and/or other costs, and can prohibit or severely restrict development and homebuilding activity. In addition, noncompliance with these laws and regulations could result in fines and penalties, obligations to remediate or take corrective action, permit revocations or other sanctions; and contamination or other environmental conditions at or in the vicinity of our developments may result in claims against us for personal injury, property damage or other losses.
We anticipate that increasingly stringent requirements will continue to be imposed on developers and homebuilders in the future. In addition, some of these laws and regulations that significantly affect how certain properties may be developed are contentious, attract intense political attention, and may be subject to significant changes over time. For example, regulations governing wetlands permitting under the federal Clean Water Act have been the subject of extensive rulemakings for many years, resulting in several major joint rulemakings by the EPA and the U.S. Army Corps of Engineers that have expanded and contracted the scope of wetlands subject to regulation; and such rulemakings have been the subject of many legal challenges, some of which remain pending. It is unclear how these and related developments, including at the state or local level, ultimately may affect the scope of regulated wetlands where we operate. Although we cannot reliably predict the extent of any effect these developments regarding wetlands, or any other requirements that may take effect, may have on us, they could result in time-consuming and expensive compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations. In addition, our ability to obtain or renew permits or approvals and the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which are beyond our control, such as changes in policies, rules and regulations and their interpretations and application.
In March 2013, we received a letter from the Environmental Protection Agency (“EPA”) requesting information about our involvement in a housing redevelopment project in Newark, New Jersey that a Company entity undertook during the 1990s. We understand that the development is in the vicinity of a former lead smelter and that tests on soil samples from properties within the development conducted by the EPA showed elevated levels of lead. We also understand that the smelter ceased operations many years before the Company entity involved acquired the properties in the area and carried out the re-development project. We responded to the EPA’s request. In August 2013, we were notified that the EPA considers us a potentially responsible party (or “PRP”) with respect to the site, that the EPA will clean up the site, and that the EPA is proposing that we fund and/or contribute towards the cleanup of the contamination at the site. We began preliminary discussions with the EPA concerning a possible resolution. The EPA requested additional information in April 2014 and again in March 2017 and the Company responded to the information requests. On May 2, 2018 the EPA sent a letter to the Company entity demanding reimbursement for
In 2015, the condominium association of the Four Seasons at Great Notch condominium community (the “Great Notch Plaintiff”) filed a lawsuit in the Superior Court of New Jersey, Law Division, Passaic County (the “Court”) alleging various construction defects, design defects, and geotechnical issues relating to the community. The operative complaint (“Complaint”) asserts claims against Hovnanian Enterprises, Inc. and several of its affiliates, including K. Hovnanian at Great Notch, LLC, K. Hovnanian Construction Management, Inc., and K. Hovnanian Companies, LLC. The Complaint also asserts claims against various other design professionals and contractors. The Great Notch Plaintiff has also filed a motion, which remains pending, to permit it to pursue a claim to pierce the corporate veil of K. Hovnanian at Great Notch, LLC to hold its alleged parent entities liable for any damages awarded against it. To date, the Hovnanian-affiliated defendants have reached a partial settlement with the Great Notch Plaintiff as to a portion of the Great Notch Plaintiff’s claims against them for an amount immaterial to the Company. On its remaining claims against the Hovnanian-affiliated defendants, the Great Notch Plaintiff has asserted damages of approximately $
In December 2020, the NJDEP and the Administrator of the New Jersey Spill Compensation Fund (the “Spill Fund”) filed a lawsuit in the Superior Court of New Jersey, Law Division, Union County against Hovnanian Enterprises, Inc. in addition to other unrelated parties, in connection with contamination at Hickory Manor, a residential condominium development. Alleged predecessors of certain defendants had used the Hickory Manor property for decades for manufacturing purposes. In 1998, NJDEP confirmed that groundwater at this site was impacted from an off-site source. The site was later remediated, resulting in the NJDEP issuing an unconditional site-wide No Further Action determination letter and Covenant Not to Sue in 1999. Subsequently, one of our affiliates was involved in redeveloping the property as a residential community. The complaint asserts claims under the New Jersey Spill Act and other state law claims and alleges that the NJDEP and the Spill Fund have incurred over $
| 8. | Cash and Cash Equivalents, Restricted Cash and Cash Equivalents and Customer's Deposits |
Cash represents cash deposited in checking accounts. Cash equivalents include certificates of deposit, Treasury bills and government money–market funds with maturities of 90 days or less when purchased. Our cash balances are held at a few financial institutions and may, at times, exceed insurable amounts. We believe we help to mitigate this risk by depositing our cash in major financial institutions. At July 31, 2022 and October 31, 2021, $
Homebuilding - Restricted cash and cash equivalents on the Condensed Consolidated Balance Sheets totaled $
Financial services restricted cash and cash equivalents, which are included in Financial services assets on the Condensed Consolidated Balance Sheets, totaled $
Total Homebuilding Customers’ deposits are shown as a liability on the Condensed Consolidated Balance Sheets. These liabilities are significantly more than the applicable periods’ restricted cash balances because, in some states, the deposits are not restricted from use and, in other states, we are able to release the majority of these customer deposits to cash by pledging letters of credit and surety bonds.
| 9. | Leases |
We lease certain office space for use in our operations. We assess each of these contracts to determine whether the arrangement contains a lease as defined by ASC 842 “Leases” ("ASC 842"). In order to meet the definition of a lease under ASC 842, the contractual arrangement must convey to us the right to control the use of an identifiable asset for a period of time in exchange for consideration. We recognize lease expense for these leases on a straight-line basis over the lease term and combine lease and non-lease components for all leases. Our office lease terms are generally from to years and generally contain renewal options. In accordance with ASC 842, our lease terms include those renewals only to the extent that they are reasonably certain to be exercised. The exercise of these lease renewal options is generally at our discretion. In accordance with ASC 842, the lease liability is equal to the present value of the remaining lease payments while the right of use (“ROU”) asset is based on the lease liability, subject to adjustment, such as for lease incentives. Our leases do not provide a readily determinable implicit interest rate and therefore, we must estimate our incremental borrowing rate. In determining the incremental borrowing rate, we consider the lease period and our collateralized borrowing rates.
Our lease population at July 31, 2022 is comprised of operating leases where we are the lessee, and these leases are primarily real estate for office space for our corporate office, division offices and design centers. As allowed by ASC 842, we adopted an accounting policy election to not record leases with lease terms of twelve months or less on our Condensed Consolidated Balance Sheets.
Lease cost included in our Condensed Consolidated Statements of Operations in Selling, general and administrative expenses and payments on our lease liabilities are presented in the table below. Our short-term lease costs and sublease income are de minimis.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| (In thousands) | July 31, 2022 | July 31, 2021 | July 31, 2022 | July 31, 2021 | ||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Cash payments on lease liabilities | $ | $ | $ | $ | ||||||||||||
ROU assets are classified within Prepaids and other assets on our Condensed Consolidated Balance Sheets, while lease liabilities are classified within Accounts payable and other liabilities on our Condensed Consolidated Balance Sheets. During the three and nine months ended July 31, 2022, the Company recorded an additional $
| (In thousands) | At July 31, 2022 | At October 31, 2021 | ||||||
| ROU assets | $ | $ | ||||||
| Lease liabilities | $ | $ | ||||||
| Weighted-average remaining lease term (in years) | ||||||||
| Weighted-average discount rate (incremental borrowing rate) | % | % | ||||||
Maturities of our operating lease liabilities as of July 31, 2022 are as follows:
| Year ending October 31, | (in thousands) | |||
| 2022 (excluding the nine months ended July 31, 2022) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total payments | ||||
| Less: imputed interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
| 10. | Mortgage Loans Held for Sale |
Our wholly owned mortgage banking subsidiary, K. Hovnanian American Mortgage, LLC (“K. Hovnanian Mortgage”), originates mortgage loans, primarily from the sale of our homes. Such mortgage loans are sold in the secondary mortgage market within a short period of time of origination. Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. We have elected the fair value option to record loans held for sale, and therefore these loans are recorded at fair value with the changes in the value recognized in the Condensed Consolidated Statements of Operations in “Revenues: Financial services.” We currently use forward sales of mortgage-backed securities (“MBS”), interest rate commitments from borrowers and mandatory and/or best efforts forward commitments to sell loans to third-party purchasers to protect us from interest rate fluctuations. These short-term instruments, which do not require any payments to be made to the counterparty or purchaser in connection with the execution of the commitments, are recorded at fair value. Gains and losses on changes in the fair value are recognized in the Condensed Consolidated Statements of Operations in “Revenues: Financial services.”
At July 31, 2022 and October 31, 2021, $
The activity in our loan origination reserves during the three and nine months ended July 31, 2022 and 2021 was as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| (In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Loan origination reserves, beginning of period | $ | $ | $ | $ | ||||||||||||
| Provisions for losses during the period | ||||||||||||||||
| Adjustments to pre-existing provisions for losses from changes in estimates | ( | ) | ( | ) | ||||||||||||
| Loan origination reserves, end of period | $ | $ | $ | $ | ||||||||||||
| 11. | Mortgages |
Nonrecourse. We have nonrecourse mortgage loans for certain communities totaling $
Mortgage Loans. K. Hovnanian Mortgage originates mortgage loans primarily from the sale of our homes. Such mortgage loans and related servicing rights are sold in the secondary mortgage market within a short period of time. In certain instances, we retain the servicing rights for a small amount of loans. K. Hovnanian Mortgage finances the origination of mortgage loans through various master repurchase agreements, which are recorded in "Financial services" liabilities on the Condensed Consolidated Balance Sheets.
Our secured Master Repurchase Agreement with JPMorgan Chase Bank, N.A. (“Chase Master Repurchase Agreement”), which was amended on July 29, 2022 to extend the maturity date to July 31, 2023, is a short-term borrowing facility that provides up to $
K. Hovnanian Mortgage has another secured Master Repurchase Agreement with Customers Bank (“Customers Master Repurchase Agreement”) which is a short-term borrowing facility that provides up to $
K. Hovnanian Mortgage also has a secured Master Repurchase Agreement with Comerica Bank (“Comerica Master Repurchase Agreement”) which is a short-term borrowing facility that matures on January 9, 2023. The Comerica Master Repurchase Agreement provides up to $
The Chase Master Repurchase Agreement, Customers Master Repurchase Agreement and Comerica Master Repurchase Agreement (together, the “Master Repurchase Agreements”) require K. Hovnanian Mortgage to satisfy and maintain specified financial ratios and other financial condition tests. Because of the extremely short period of time mortgages are held by K. Hovnanian Mortgage before the mortgages are sold to investors (generally a period of a few weeks), the immateriality to us on a consolidated basis of the size of the Master Repurchase Agreements, the levels required by these financial covenants, our ability based on our immediately available resources to contribute sufficient capital to cure any default, were such conditions to occur, and our right to cure any conditions of default based on the terms of the applicable agreement, we do not consider any of these covenants to be substantive or material. As of July 31, 2022, we believe we were in compliance with the covenants under the Master Repurchase Agreements.
| 12. | Senior Notes and Credit Facilities |
Senior notes and credit facilities balances as of July 31, 2022 and October 31, 2021, were as follows:
| July 31, | October 31, | |||||||
| (In thousands) | 2022 | 2021 | ||||||
| Senior Secured Notes: | ||||||||
| Senior Secured 1.75 Lien Notes due | $ | $ | ||||||
| Senior Secured 1.125 Lien Notes due | ||||||||
| Senior Secured 1.25 Lien Notes due | ||||||||
| Senior Secured 1.5 Lien Notes due | ||||||||
| Total Senior Secured Notes | $ | $ | ||||||
| Senior Notes: | ||||||||
| Senior Notes due (1) | $ | $ | ||||||
| Senior Notes due | ||||||||
| Senior Notes due | ||||||||
| Total Senior Notes | $ | $ | ||||||
| Senior Unsecured Term Loan Credit Facility due | $ | $ | ||||||
| Senior Secured 1.75 Lien Term Loan Credit Facility due | $ | $ | ||||||
| Senior Secured Revolving Credit Facility (2) | $ | $ | ||||||
| Subtotal notes payable | $ | $ | ||||||
| Net (discounts) premiums | $ | $ | ||||||
| Net debt issuance costs | $ | ( | ) | $ | ( | ) | ||
| Total notes payable, net of discounts, premiums and debt issuance costs | $ | $ | ||||||
(1) $
(2) At July 31, 2022, provides for up to $
General
Except for K. Hovnanian, the issuer of the notes and borrower under the Credit Facilities (as defined below), our home mortgage subsidiaries, certain of our title insurance subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures, we and each of our subsidiaries are guarantors of the Credit Facilities, the senior secured notes and senior notes outstanding (except for the 8.0% 2027 Notes which are not guaranteed by K. Hovnanian at Sunrise Trail III, LLC, a wholly-owned subsidiary of the Company) at July 31, 2022 (collectively, the “Notes Guarantors”).
The credit agreements governing the Credit Facilities and the indentures governing the senior secured and senior notes (together, the “Debt Instruments”) outstanding at July 31, 2022 do not contain any financial maintenance covenants, but do contain restrictive covenants that limit, among other things, the ability of HEI and certain of its subsidiaries, including K. Hovnanian, to incur additional indebtedness, pay dividends and make distributions on common and preferred stock, repay/repurchase certain indebtedness prior to its respective stated maturity, repurchase (including through exchanges) common and preferred stock, make other restricted payments (including investments), sell certain assets (including in certain land banking transactions), incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of their assets and enter into certain transactions with affiliates. The Debt Instruments also contain customary events of default which would permit the lenders or holders thereof to exercise remedies with respect to the collateral (as applicable), declare the loans made under the Unsecured Term Loan Facility (defined below) (the “Unsecured Term Loans”), loans made under the Secured Term Loan Facility (defined below) (the “Secured Term Loans”) and loans made under the Secured Credit Agreement (as defined below) (the “Secured Revolving Loans”) or notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the Unsecured Term Loans, Secured Term Loans, Secured Revolving Loans or notes or other material indebtedness, cross default to other material indebtedness, the failure to comply with agreements and covenants and specified events of bankruptcy and insolvency, with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, material inaccuracy of representations and warranties and with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, a change of control, and, with respect to the Secured Term Loans, Secured Revolving Loans and senior secured notes, the failure of the documents granting security for the obligations under the secured Debt Instruments to be in full force and effect, and the failure of the liens on any material portion of the collateral securing the obligations under the secured Debt Instruments to be valid and perfected. As of July 31, 2022, we believe we were in compliance with the covenants of the Debt Instruments.
If our consolidated fixed charge coverage ratio is less than
Under the terms of our Debt Instruments, we have the right to make certain redemptions and prepayments and, depending on market conditions, our strategic priorities and covenant restrictions, may do so from time to time. We also continue to actively analyze and evaluate our capital structure and explore transactions to simplify our capital structure and to strengthen our balance sheet, including those that reduce leverage, interest rates and/or extend maturities, and will seek to do so with the right opportunity. We may also continue to make debt purchases and/or exchanges for debt or equity from time to time through tender offers, exchange offers, redemptions, open market purchases, private transactions, or otherwise, or seek to raise additional debt or equity capital, depending on market conditions and covenant restrictions.
Fiscal 2022
On April 29, 2022, K. Hovnanian redeemed $
On August 19, 2022, the Company, K. Hovnanian, and other subsidiaries of the Company as guarantors entered into the Second Amendment (the “Second Amendment”) to the Credit Agreement, dated as of October 31, 2019, as amended by the First Amendment, dated as of November 27, 2019, by and among K. Hovnanian, the Company, the other guarantors party thereto, Wilmington Trust, National Association, as administrative agent, and the lenders party thereto, which provides for up to $
Fiscal 2021
On July 30, 2021, K. Hovnanian redeemed in full all of the $
On August 2, 2021, K. Hovnanian redeemed in full all of the $
Secured Obligations
On October 31, 2019, K. Hovnanian, HEI, the Notes Guarantors, Wilmington Trust, National Association, as administrative agent, and affiliates of certain investment managers (the “Investors”), as lenders, entered into a credit agreement (the “Secured Credit Agreement” and, together with the Unsecured Term Loan Facility (defined below) and the Secured Term Loan Facility, the “Credit Facilities”) providing for up to $125.0 million in aggregate amount of Secured Revolving Loans to be used for general corporate purposes, upon the terms and subject to the conditions set forth therein. Secured Revolving Loans are to be borrowed by K. Hovnanian and guaranteed by the Notes Guarantors. On August 19, 2022, the maturity of the Secured Credit Agreement was extended from December 28, 2022 to June 30, 2024 and the fixed interest rate was replaced with a floating interest rate in each case, effective upon the satisfaction of customary conditions in respect of the collateral securing the borrowings thereunder. See Note 22.
The 1.125 Lien Notes have a maturity of February 15, 2026 and bear interest at a rate of
The 10.5% Senior Secured 1.25 Lien Notes due 2026 (the "1.25 Lien Notes") have a maturity of February 15, 2026 and bear interest at a rate of
The 11.25% Senior Secured 1.5 Lien Notes due 2026 (the "1.5 Lien Notes") have a maturity of February 15, 2026 and bear interest at a rate of
The 10.0% 1.75 Lien Notes due 2025 (the "1.75 Lien Notes") have a maturity of November 15, 2025 and bear interest at a rate of 10.0% per annum payable semi-annually on May 15 and November 15 of each year to holders of record at the close of business on May 1 or November 1, as the case may be, immediately preceding each such interest payment date. At any time and from time to time prior to November 15, 2022, K. Hovnanian may redeem some or all of the 1.75 Lien Notes at a redemption price equal to
On December 10, 2019, K. Hovnanian entered into a Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028 (the “Secured Term Loan Facility”). The secured term loans under the Secured Term Loan Facility (the “Secured Term Loans”) bear interest at a rate equal to 10.0% per annum and will mature on January 31, 2028, with interest payable in arrears on the last business day of each fiscal quarter. At any time and from time to time prior to November 15, 2022, K. Hovnanian may voluntarily prepay some or all of the Secured Term Loans at a prepayment price equal to
Each series of secured notes and the guarantees thereof, the Secured Term Loans and the guarantees thereof and the Secured Credit Agreement and the guarantees thereof are secured by the same assets. Among the secured debt, the liens securing the Secured Credit Agreement are senior to the liens securing all of K. Hovnanian’s other secured notes and the Secured Term Loan. The liens securing the 1.125 Lien Notes are senior to the liens securing the 1.25 Lien Notes, 1.5 Lien Notes, the 1.75 Lien Notes, the Secured Term Loans and any other future secured obligations that are junior in priority with respect to the assets securing the 1.125 Lien Notes, the liens securing the 1.25 Lien Notes are senior to the liens securing the 1.5 Lien Notes, the 1.75 Lien Notes, the Secured Term Loans and any other future secured obligations that are junior in priority with respect to the assets securing the 1.25 Lien Notes, the liens securing the 1.5 Lien Notes are senior to the liens securing the 1.75 Lien Notes, the Secured Term Loans and any other future secured obligations that are junior in priority with respect to the assets securing the 1.5 Lien Notes, the liens securing the 1.75 Lien Notes and the Secured Term Loans (which are secured on a pari passu basis with each other) are senior to any other future secured obligations that are junior in priority with respect to the assets securing the 1.75 Lien Notes and the Secured Term Loans, in each case, with respect to the assets securing such debt.
As of July 31, 2022, the collateral securing the Secured Credit Agreement, the Secured Term Loan Facility and the secured notes included (1) $
Unsecured Obligations
The
The
The Unsecured Term Loans bear interest at a rate equal to 5.0% per annum and interest is payable in arrears, on the last business day of each fiscal quarter. The Unsecured Term Loans will mature on February 1, 2027.
Other
We have certain stand-alone cash collateralized letter of credit agreements and facilities under which there was a total of $
| 13. | Per Share Calculation |
Basic earnings per share is computed by dividing net income (the “numerator”) by the weighted-average number of common shares outstanding, adjusted for nonvested shares of restricted stock (the “denominator”) for the period. Computing diluted earnings per share is similar to computing basic earnings per share, except that the denominator is increased to include the dilutive effects of options and nonvested shares of restricted stock. Any options that have an exercise price greater than the average market price are considered to be anti-dilutive and are excluded from the diluted earnings per share calculation.
All outstanding nonvested shares that contain nonforfeitable rights to dividends or dividend equivalents that participate in undistributed earnings with common stock are considered participating securities and are included in computing earnings per share pursuant to the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and participation rights in undistributed earnings in periods when we have net income. The Company’s restricted common stock (“nonvested shares”) are considered participating securities.
Basic and diluted earnings per share for the periods presented below were calculated as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| (In thousands, except per share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Numerator: | ||||||||||||||||
| Net earnings attributable to Hovnanian | $ | $ | $ | $ | ||||||||||||
| Less: preferred stock dividends | $ | ( | ) | $ | ( | ) | ||||||||||
| Less: undistributed earnings allocated to nonvested shares | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Numerator for basic earnings per share | $ | $ | $ | $ | ||||||||||||
| Plus: undistributed earnings allocated to nonvested shares | ||||||||||||||||
| Less: undistributed earnings reallocated to nonvested shares | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Numerator for diluted earnings per share | $ | $ | $ | $ | ||||||||||||
| Denominator: | ||||||||||||||||
| Denominator for basic earnings per share – weighted average shares outstanding | ||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Share based payments | ||||||||||||||||
| Denominator for diluted earnings per share – weighted average shares outstanding | ||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||
Shares related to out-of-the money stock options that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share were
| 14. | Preferred Stock |
On July 12, 2005, we issued
| 15. | Common Stock |
Each share of Class A Common Stock entitles its holder to vote per share, and each share of Class B Common Stock generally entitles its holder to votes per share. The amount of any regular cash dividend payable on a share of Class A Common Stock will be an amount equal to
On August 4, 2008, our Board of Directors adopted a shareholder rights plan (the “Rights Plan”), which was amended on January 11, 2018 and January 18, 2021, designed to preserve shareholder value and the value of certain tax assets primarily associated with net operating loss (NOL) carryforwards and built-in losses under Section 382 of the Internal Revenue Code. Our ability to use NOLs and built-in losses would be limited if there was an “ownership change” under Section 382. This would occur if shareholders owning (or deemed under Section 382 to own)
On July 3, 2001, our Board of Directors authorized a stock repurchase program to purchase up to
| 16. | Income Taxes |
The total income tax expense for the three and nine months ended July 31, 2022 was $
The total income tax expense for the three months ended July 31, 2021 was $
Our federal net operating losses of $
On August 16, 2022, the Inflation Reduction Act (IRA) was enacted and signed into U.S. law to provide additional economic relief in response to the high cost of prescription drugs, healthcare availability, climate change and inflation. We are currently evaluating the impact of the IRA on the Company's consolidated financial statements but do not expect there will be a material impact. We will continue to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and various state agencies.
The Company recognizes deferred income taxes for deferred tax benefits arising from NOL carryforwards and temporary differences between book and tax income which will be recognized in future years as an offset against future taxable income. A valuation allowance is provided to offset deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Future realization of deferred tax assets depends on the existence of sufficient taxable income of the appropriate character. Sources of taxable income include future reversals of existing taxable temporary differences, expected future taxable income, taxable income in prior carryback years if permitted under the tax law, and tax planning strategies. Management has determined that it is more likely than not that sufficient taxable income will be generated in the future to realize its deferred tax assets except for a portion related to state deferred tax assets. The Company’s deferred tax assets as of July 31, 2022 were $
As of October 31, 2020, we had a valuation allowance of $
As of July 31, 2022, we considered all available positive and negative evidence to determine whether, based on the weight of that evidence, our valuation allowance for our deferred state income tax assets ("DTAs") was appropriate in accordance with ASC 740. Overall the positive evidence, both objective and subjective, outweighed the negative evidence. The significant positive improvement in our operations in the last 36 months, coupled with our contract backlog of $
| 17. | Operating and Reporting Segments |
HEI’s operating segments are components of the Company’s business for which discrete financial information is available and reviewed regularly by the chief operating decision maker, our Chief Executive Officer, to evaluate performance and make operating decisions. Based on this criteria, each of the Company's communities qualifies as an operating segment, and therefore, it is impractical to provide segment disclosures for this many segments. As such, HEI has aggregated the homebuilding operating segments into six reportable segments.
HEI’s homebuilding operating segments are aggregated into reportable segments based primarily upon geographic proximity, similar regulatory environments, land acquisition characteristics and similar methods used to construct and sell homes. HEI’s reportable segments consist of the following homebuilding segments and a financial services segment noted below.
Homebuilding:
| (1) | Northeast (New Jersey and Pennsylvania) | |
| (2) | Mid-Atlantic (Delaware, Maryland, Virginia, Washington D.C. and West Virginia) | |
| (3) | Midwest (Illinois and Ohio) | |
| (4) | Southeast (Florida, Georgia and South Carolina) | |
| (5) | Southwest (Arizona and Texas) | |
| (6) | West (California) |
Financial Services
Operations of the Homebuilding segments primarily include the sale and construction of single-family attached and detached homes, attached townhomes and condominiums, urban infill and active lifestyle homes in planned residential developments. In addition, from time to time, operations of the homebuilding segments include sales of land. Operations of the Financial Services segment include mortgage banking and title services provided to the homebuilding operations’ customers. Our financial services subsidiaries do not typically retain or service mortgages that we originate but rather sell the mortgages and related servicing rights to investors.
Corporate and unallocated primarily represents operations at our headquarters in New Jersey. This includes our executive offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, construction services, and administration of insurance, quality and safety. It also includes interest income and interest expense resulting from interest incurred that cannot be capitalized in inventory in the Homebuilding segments, as well as the gains or losses on extinguishment of debt from any debt repurchases or exchanges.
Evaluation of segment performance is based primarily on operating earnings from continuing operations before provision or benefit for income taxes (“Income before income taxes”). Income before income taxes for the Homebuilding segments consist of revenues generated from the sales of homes and land, income from unconsolidated entities, management fees and other income, less the cost of homes and land sold, selling, general and administrative expenses and interest expense. Income before income taxes for the Financial Services segment consist of revenues generated from mortgage financing, title insurance and closing services, less the cost of such services and selling, general and administrative expenses incurred by the Financial Services segment.
Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent stand-alone entity during the periods presented.
Financial information relating to HEI’s segment operations was as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| (In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Revenues: | ||||||||||||||||
| Northeast | $ | $ | $ | $ | ||||||||||||
| Mid-Atlantic | ||||||||||||||||
| Midwest | ||||||||||||||||
| Southeast | ||||||||||||||||
| Southwest | ||||||||||||||||
| West | ||||||||||||||||
| Total homebuilding | ||||||||||||||||
| Financial services | ||||||||||||||||
| Corporate and unallocated | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
| Income before income taxes: | ||||||||||||||||
| Northeast | $ | $ | $ | $ | ||||||||||||
| Mid-Atlantic | ||||||||||||||||
| Midwest | ||||||||||||||||
| Southeast | ||||||||||||||||
| Southwest | ||||||||||||||||
| West | ||||||||||||||||
| Total homebuilding | ||||||||||||||||
| Financial services | ||||||||||||||||
| Corporate and unallocated (1) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income before income taxes | $ | $ | $ | $ | ||||||||||||
| (1) | Corporate and unallocated for the three months ended July 31, 2022 included corporate general and administrative costs of $ |
| July 31, | October 31, | |||||||
| (In thousands) | 2022 | 2021 | ||||||
| Assets: | ||||||||
| Northeast | $ | $ | ||||||
| Mid-Atlantic | ||||||||
| Midwest | ||||||||
| Southeast | ||||||||
| Southwest | ||||||||
| West | ||||||||
| Total homebuilding | ||||||||
| Financial services (1) | ||||||||
| Corporate and unallocated | ||||||||
| Total assets | $ | $ | ||||||
(1) Deferred tax assets for the Financial services segment are included in the Deferred tax assets, net line on the Condensed Consolidated Balance Sheets.
| 18. | Investments in Unconsolidated Homebuilding and Land Development Joint Ventures |
We enter into homebuilding and land development joint ventures from time to time as a means of accessing lot positions, expanding our market opportunities, establishing strategic alliances, managing our risk profile, leveraging our capital base and enhancing returns on capital. Our homebuilding joint ventures are generally entered into with third-party investors to develop land and construct homes that are sold directly to third-party home buyers. Our land development joint ventures include those entered into with developers and other homebuilders as well as financial investors to develop finished lots for sale to the joint venture’s members or other third parties.
During the third quarter of fiscal 2021, we purchased the remaining equity interest in of our unconsolidated joint ventures for $
During the second quarter of fiscal 2021, we contributed
The tables set forth below summarize the combined financial information related to our unconsolidated homebuilding and land development joint ventures that are accounted for under the equity method.
| (Dollars in thousands) | July 31, 2022 | |||||||||||
| Land | ||||||||||||
| Homebuilding | Development | Total | ||||||||||
| Assets: | ||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||
| Inventories | ||||||||||||
| Other assets | ||||||||||||
| Total assets | $ | $ | $ | |||||||||
| Liabilities and equity: | ||||||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||||||
| Notes payable | ||||||||||||
| Total liabilities | ||||||||||||
| Equity of: | ||||||||||||
| Hovnanian Enterprises, Inc. | ||||||||||||
| Others | ||||||||||||
| Total equity | ||||||||||||
| Total liabilities and equity | $ | $ | $ | |||||||||
| Debt to capitalization ratio | % | % | % | |||||||||
| (Dollars in thousands) | October 31, 2021 | |||||||||||
| Land | ||||||||||||
| Homebuilding | Development | Total | ||||||||||
| Assets: | ||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||
| Inventories | ||||||||||||
| Other assets | ||||||||||||
| Total assets | $ | $ | $ | |||||||||
| Liabilities and equity: | ||||||||||||
| Accounts payable and accrued liabilities | $ | $ | $ | |||||||||
| Notes payable | ||||||||||||
| Total liabilities | ||||||||||||
| Equity of: | ||||||||||||
| Hovnanian Enterprises, Inc. | ||||||||||||
| Others | ||||||||||||
| Total equity | ||||||||||||
| Total liabilities and equity | $ | $ | $ | |||||||||
| Debt to capitalization ratio | % | % | % | |||||||||
As of July 31, 2022 and October 31, 2021, we had advances outstanding of $
| Three Months Ended July 31, 2022 | ||||||||||||
| (In thousands) | Land | |||||||||||
| Homebuilding | Development | Total | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| Cost of sales and expenses | ( | ) | ( | ) | ( | ) | ||||||
| Joint venture net income (loss) | $ | $ | ( | ) | $ | |||||||
| Our share of net income (loss) | $ | $ | ( | ) | $ | |||||||
| Three Months Ended July 31, 2021 | ||||||||||||
| (In thousands) | Land | |||||||||||
| Homebuilding | Development | Total | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| Cost of sales and expenses | ( | ) | ( | ) | ( | ) | ||||||
| Joint venture net income (loss) | $ | $ | ( | ) | $ | |||||||
| Our share of net income | $ | $ | $ | |||||||||
| Nine Months Ended July 31, 2022 | ||||||||||||
| (In thousands) | Land | |||||||||||
| Homebuilding | Development | Total | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| Cost of sales and expenses | ( | ) | ( | ) | ( | ) | ||||||
| Joint venture net income | $ | $ | $ | |||||||||
| Our share of net income | $ | $ | $ | |||||||||
| Nine Months Ended July 31, 2021 | ||||||||||||
| (In thousands) | Land | |||||||||||
| Homebuilding | Development | Total | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| Cost of sales and expenses | ( | ) | ( | ) | ( | ) | ||||||
| Joint venture net income | $ | $ | $ | |||||||||
| Our share of net income | $ | $ | $ | |||||||||
“Income from unconsolidated joint ventures” is reflected as a separate line in the accompanying Condensed Consolidated Statements of Operations and reflects our proportionate share of the income or loss from these unconsolidated homebuilding and land development joint ventures.
The reason “Our share of net income” is higher or lower than the “Joint venture net income” shown in the tables above for both the three and nine months ended July 31, 2022 and 2021, respectively, is because we have varying ownership percentages, ranging from
For the three months ended July 31, 2021, "Our share of net income" is lower than the "Joint venture net income" due to increased income on one of our newer unconsolidated joint ventures during the quarter for which we currently recognize no percentage of the profit based on the joint venture agreement, and a second unconsolidated joint venture for which we recognize a lower profit sharing percentage which had higher profit in the current period. In addition, for the nine months ended July 31, 2021 we had written off our investment in two of our unconsolidated joint ventures that are generating losses and therefore we currently do not recognize those losses. Had we not fully written off our investment, our share of the net loss in these unconsolidated joint ventures would have been approximately
To compensate us for the administrative services we provide as the manager of certain unconsolidated joint ventures, we receive a management fee based on a percentage of the applicable unconsolidated joint venture’s revenues. These management fees, which totaled $
Typically, our unconsolidated joint ventures obtain separate project specific mortgage financing. For some of our unconsolidated joint ventures, obtaining financing was challenging; therefore, some of our unconsolidated joint ventures are capitalized only with equity. The total debt to capitalization ratio of all our unconsolidated joint ventures was
| 19. | Recent Accounting Pronouncements |
In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides companies with optional guidance to ease the potential accounting burden associated with reference rate reform on financial reporting. This guidance became effective for the Company beginning on March 12, 2020, and we may elect to apply the amendments prospectively from now through December 31, 2022. The Company is currently evaluating the potential impact, but does not expect the adoption of this guidance to have a material impact on our Condensed Consolidated Financial Statements.
| 20. | Fair Value of Financial Instruments |
ASC 820, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value, expands disclosures about fair-value measurements and establishes a fair-value hierarchy which prioritizes the inputs used in measuring fair value summarized as follows:
| Level 1: | Fair value determined based on quoted prices in active markets for identical assets. |
| Level 2: | Fair value determined using significant other observable inputs. |
| Level 3: | Fair value determined using significant unobservable inputs. |
Our financial instruments measured at fair value on a recurring basis are summarized below:
| Fair Value at | Fair Value at | ||||||||
| Fair Value | July 31, | October 31, | |||||||
| (In thousands) | Hierarchy | 2022 | 2021 | ||||||
| Mortgage loans held for sale (1) | Level 2 | $ | $ | ||||||
| Forward contracts | Level 2 | ( | ) | ( | ) | ||||
| Total | $ | $ | |||||||
| Interest rate lock commitments | Level 3 | ||||||||
| Total | $ | $ | |||||||
(1) The aggregate unpaid principal balance was $
We elected the fair value option for our loans held for sale in accordance with ASC 825, “Financial Instruments,” which permits us to measure financial instruments at fair value on a contract-by-contract basis. Management believes that the election of the fair value option for loans held for sale improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. Fair value of loans held for sale is based on independent quoted market prices, where available, or the prices for other mortgage loans with similar characteristics.
The Financial Services segment had a pipeline of loan applications in process of $
The Financial Services segment uses investor commitments and forward sales of mandatory MBS to hedge its mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk is managed by entering into MBS forward commitments, option contracts with investment banks, federally regulated bank affiliates and loan sales transactions with permanent investors meeting the segment’s credit standards. The segment’s risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and option contracts. At July 31, 2022, the segment had open commitments amounting to $
The assets accounted for using the fair value option are initially measured at fair value. Gains and losses from initial measurement and subsequent changes in fair value are recognized in the Condensed Consolidated Financial Statements in “Revenues: Financial services.” The changes in fair values that are included in income are shown, by financial instrument and financial statement line item, below:
| Three Months Ended July 31, 2022 | ||||||||||||
| Mortgage | Interest Rate | |||||||||||
| Loans Held | Lock | Forward | ||||||||||
| (In thousands) | For Sale | Commitments | Contracts | |||||||||
| Fair value included in net income all reflected in financial services revenues | $ | $ | $ | ( | ) | |||||||
| Three Months Ended July 31, 2021 | ||||||||||||
| Mortgage | Interest Rate | |||||||||||
| Loans Held | Lock | Forward | ||||||||||
| (In thousands) | For Sale | Commitments | Contracts | |||||||||
| Fair value included in net income all reflected in financial services revenues | $ | $ | $ | |||||||||
| Nine Months Ended July 31, 2022 | ||||||||||||
| Mortgage | Interest Rate | |||||||||||
| Loans Held | Lock | Forward | ||||||||||
| (In thousands) | For Sale | Commitments | Contracts | |||||||||
| Fair value included in net income all reflected in financial services revenues | $ | $ | $ | ( | ) | |||||||
| Nine Months Ended July 31, 2021 | ||||||||||||
| Mortgage | Interest Rate | |||||||||||
| Loans Held | Lock | Forward | ||||||||||
| (In thousands) | For Sale | Commitments | Contracts | |||||||||
| Fair value included in net income all reflected in financial services revenues | $ | $ | $ | ( | ) | |||||||
The Company's assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded valuation adjustments and write-offs during the three and nine months ended July 31, 2021. The Company did have any assets measured at fair value on a nonrecurring basis during the three and nine months ended July 31, 2022. The assets measured at fair value on a nonrecurring basis are all within the Company's Homebuilding operations and are summarized below:
Nonfinancial Assets
| Three Months Ended | |||||||||||||
| July 31, 2021 | |||||||||||||
| Pre- | |||||||||||||
| Fair Value | Impairment | ||||||||||||
| (In thousands) | Hierarchy | Amount | Total Losses | Fair Value | |||||||||
| Sold and unsold homes and lots under development | Level 3 | $ | $ | ( | ) | $ | |||||||
| Land and land options held for future development or sale | Level 3 | $ | $ | $ | |||||||||
| Nine Months Ended | |||||||||||||
| July 31, 2021 | |||||||||||||
| Pre- | |||||||||||||
| Fair Value | Impairment | ||||||||||||
| (In thousands) | Hierarchy | Amount | Total Losses | Fair Value | |||||||||
| Sold and unsold homes and lots under development | Level 3 | $ | $ | ( | ) | $ | |||||||
| Land and land options held for future development or sale | Level 3 | $ | $ | $ | |||||||||
We record impairment losses on inventories related to communities under development and held for future development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash flows are less than the carrying amount, then the community is written down to its fair value. We estimate the fair value of each impaired community by determining the present value of its estimated future cash flows at a discount rate commensurate with the risk of the respective community. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may be required to recognize additional impairments. We recorded inventory impairments, which are included in the Condensed Consolidated Statements of Operations as “Inventory impairment loss and land option write-offs” and deducted from inventory, of $
The fair value of our cash equivalents, restricted cash and cash equivalents and customers' deposits approximates their carrying amount, based on Level 1 inputs.
The fair value of each series of our Notes and Credit Facilities are listed below. Level 2 measurements are estimated based on recent trades or quoted market prices for the same issues or based on recent trades or quoted market prices for our debt of similar security and maturity to achieve comparable yields. Level 3 measurements are estimated based on third-party broker quotes or management’s estimate of the fair value based on available trades for similar debt instruments. As shown in the table below, our
| Fair Value as of July 31, 2022 |
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Senior Secured Notes: | ||||||||||||||||
| Senior Secured 1.75 Lien Notes due | ||||||||||||||||
| Senior Secured 1.125 Lien Notes due | ||||||||||||||||
| Senior Secured 1.25 Lien Notes due | ||||||||||||||||
| Senior Secured 1.5 Lien Notes due | - | - | ||||||||||||||
| Senior Notes: | ||||||||||||||||
| Senior Notes due | ||||||||||||||||
| Senior Notes due | - | |||||||||||||||
| Senior Credit Facilities: | ||||||||||||||||
| Senior Unsecured Term Loan Credit Facility due | - | - | ||||||||||||||
| Senior Secured 1.75 Lien Term Loan Credit Facility due | - | - | ||||||||||||||
| Total fair value | $ | - | $ | $ | $ | |||||||||||
| Fair Value as of October 31, 2021 |
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Senior Secured Notes: | ||||||||||||||||
| Senior Secured 1.75 Lien Notes due | ||||||||||||||||
| Senior Secured 1.125 Lien Notes due | ||||||||||||||||
| Senior Secured 1.25 Lien Notes due | ||||||||||||||||
| Senior Secured 1.5 Lien Notes due | ||||||||||||||||
| Senior Notes: | ||||||||||||||||
| Senior Notes due | ||||||||||||||||
| Senior Notes due | ||||||||||||||||
| Senior Credit Facilities: | ||||||||||||||||
| Senior Unsecured Term Loan Credit Facility due | ||||||||||||||||
| Senior Secured 1.75 Lien Term Loan Credit Facility due | ||||||||||||||||
| Total fair value | $ | $ | $ | $ | ||||||||||||
The Senior Secured Revolving Credit Facility is not included in the above tables because there were borrowings outstanding thereunder as of July 31, 2022 and October 31, 2021.
| 21. | Transactions with Related Parties |
From time to time, an engineering firm owned by Tavit Najarian, a relative of Ara K. Hovnanian, our Chairman of the Board of Directors and our Chief Executive Officer, provides services to the Company. During both the three months ended July 31, 2022 and 2021, the services provided by such engineering firm to the Company totaled $
| 22. | Subsequent Events |
On August 19, 2022, the Company, K. Hovnanian, and other subsidiaries of the Company as guarantors entered into the Second Amendment (the “Second Amendment”) to the Credit Agreement, dated as of October 31, 2019, as amended by the First Amendment, dated as of November 27, 2019, by and among K. Hovnanian, the Company, the other guarantors party thereto, Wilmington Trust, National Association, as administrative agent, and the lenders party thereto, which provides for up to $
On September 1, 2022, our Board of Directors terminated our Prior Program and authorized a new program for the repurchase of up to $
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Hovnanian Enterprises, Inc. (“HEI”) conducts all of its homebuilding and financial services operations through its subsidiaries (references herein to the “Company,” “we,” “us” or “our” refer to HEI and its consolidated subsidiaries and should be understood to reflect the consolidated business of HEI’s subsidiaries).
Key Performance Indicators
The following key performance indicators are commonly used in the homebuilding industry and by management as a means to better understand our operating performance and trends affecting our business and compare our performance with the performance of other homebuilders. We believe these key performance indicators also provide useful information to investors in analyzing our performance:
| ● |
Net contracts is a volume indicator which represents the number of new contracts executed during the period for the purchase of homes, less cancellations of contracts in the same period. The dollar value of net contracts represents the dollars associated with net contracts executed in the period. These values are an indicator of potential future revenues; |
| ● |
Contract backlog is a volume indicator which represents the number of homes that are under contract, but not yet delivered as of the stated date. The dollar value of contract backlog represents the dollar amount of the homes in contract backlog. These values are an indicator of potential future revenues; |
| ● |
Active selling communities is a volume indicator which represents the number of communities which are open for sale with ten or more home sites available as of the end of a period. We identify communities based on product type; therefore at times there are multiple communities at one land site. These values are an indicator of potential revenues; |
| ● |
Net contracts per average active selling community is used to indicate the pace at which homes are being sold (put into contract) in active selling communities and is calculated by dividing the number of net contracts in a period by the average number of active selling communities in the same period. Sales pace is an indicator of market strength and demand; and |
| ● |
Contract cancellation rates is a volume indicator which represents the number of sales contracts cancelled in the period divided by the number of gross sales contracts executed during the period. Contract cancellation rates as a percentage of backlog is calculated by dividing the number of cancelled contracts in the period by the contract backlog at the beginning of the period. Cancellation rates as compared to prior periods can be an indicator of market strength or weakness. |
Overview
Market Conditions
The demand for new and existing homes is dependent on a variety of demographic and economic factors, including job and wage growth, household formation, consumer confidence, mortgage financing, interest rates, inflation and overall housing affordability. In general, at the start of fiscal year 2020, factors including rising levels of household formation, a constrained supply of new and used homes, wage growth, strong employment conditions and mortgage rates that were low by historical standards were contributing to improving conditions for new home sales.
In March 2020, as a result of the initial impact of COVID-19, we experienced adverse business conditions, including a slowdown in customer traffic and sales pace and an increase in cancellations. However, beginning in May 2020, the homebuilding market rapidly improved, due to what we believe is a combination of factors including low interest rates, low inventory levels of existing homes and a general desire for more indoor and outdoor space. During the third quarter and continuing through the fourth quarter of fiscal 2020, we returned to our normal activities with respect to land purchases, land development and resuming the construction of unsold homes. As a result, our operating metrics improved significantly in fiscal 2020 as compared to fiscal 2019, and improved even further in fiscal 2021. However, since early January 2022, 30-year mortgage rates have increased rapidly from 3.2% to 5.3% at the end of July 2022. While these rates are still low by historical standards, the increase in rates, along with record high inflation levels and consumer fears of an economic recession, has had a negative impact on our net contracts and net contracts per average active selling community. Despite the decrease in net contracts, our revenues, gross margin percentage and pretax profit results have continued to show strong improvement over the prior year through July 31, 2022, though it is difficult to predict the impact of these and other factors on our future results which may be negatively impacted.
Operating Results
The below highlights our overall positive operating results for the three and nine months ended July 31, 2022:
● For the three and nine months ended July 31, 2022, sale of homes revenues increased 11.1% and 4.2%, respectively, as compared to the same periods of the prior year, primarily resulting from an increase in average prices of 17.8% and 19.1%, respectively, as home prices increased in virtually all of our markets, along with the geographic and community mix of our deliveries, partially offset by respective decreases of 5.7% and 12.5% in the number of home deliveries. The decreases in home deliveries were due in part to the prior year deliveries being unusually high as a result of the unsustainable and extremely strong sales pace in late fiscal 2020 and early fiscal 2021, and also due to supply chain challenges extending construction cycle times and delaying some deliveries.
● Gross margin dollars increased 33.2% and 27.2% for the three and nine months ended July 31, 2022, respectively, as compared to the same period of the prior year, as a result of the increase in gross margin percentage to 23.1% for the three months ended July 31, 2022 from 19.2% for the three months ended July 31, 2021, and increased to 22.3% for the nine months ended July 31, 2022 from 18.3% for the nine months ended July 31, 2021. Gross margin percentage, before cost of sales interest expense and land charges, increased from 22.1% and 21.4% for the three and nine months ended July 31, 2021 to 26.3% and 25.3% for the three and nine months ended July 31, 2022. The increases were primarily due to price increases in virtually all of our markets, along with the mix of communities delivering homes in each period.
● Selling, general and administrative costs (including corporate general and administrative expenses) ("Total SGA") was $74.9 million, or 9.8% of total revenues, in the three months ended July 31, 2022 compared with $60.3 million, or 8.7% of total revenues, in the three months ended July 31, 2021. For the nine months ended July 31, 2022, Total SGA was $215.3 million, or 10.6% of total revenues, compared with $206.6 million, or 10.5% of total revenues, in the same period of the prior fiscal year. Such costs increased $14.6 million and $8.7 million for the three and nine months ended July 31, 2022, respectively, as compared to the same periods of the prior year. Excluding the impact in each of the three months ended July 31, 2022 and 2021 related to the grants of phantom stock awards under our 2019 Long Term Incentive Plan (“2019 LTIP”), SGA as a percentage of total revenues would have been 9.7% for each period. Had equity shares rather than phantom shares been utilized for the 2019 LTIP, there would not have been any expenses or benefit related to the movement in our stock price.
● Other interest decreased to $9.6 million and $35.4 million for the three and nine months ended July 31, 2022, respectively, from $19.2 million and $65.2 million for the three and nine months ended July 31, 2021, respectively, as we incurred less interest and had less debt in excess of inventory, as a result of the reduction of our debt in fiscal 2021 and fiscal 2022, and an increase in average inventory not owned during the three and nine months ended July 31, 2022 compared to the three and nine months ended July 31, 2021.
● Pre-tax income increased to $111.9 million for the three months ended July 31, 2022 from pre-tax income of $61.8 million for the three months ended July 31, 2021, and increased to $228.3 million for the nine months ended July 31, 2022 from pre-tax income of $112.4 million for the nine months ended July 31, 2021. Net income increased to $82.6 million for the three months ended July 31, 2022 from net income of $47.7 million for the three months ended July 31, 2021, and decreased to $169.9 million for the nine months ended July 31, 2022 from net income of $555.3 million for the nine months ended July 31, 2021. Earnings per share, basic and diluted, increased to $10.92 and $10.82, respectively, for the three months ended July 31, 2022 compared to $6.85 and $6.72, respectively, for the three months ended July 31, 2021. Earnings per share, basic and diluted, decreased to $22.05 and $21.77, respectively, for the nine months ended July 31, 2022 compared to $80.02 and $78.51, respectively, for the nine months ended July 31, 2021. While pretax income increased in fiscal 2022, the significant decrease in net income for the nine months ended July 31, 2022 was due to the full reversal of our federal valuation allowance and a portion of the state valuation allowance in respect of our deferred tax assets in the second quarter of fiscal 2021 (see Note 16 to the Condensed Consolidated Financial Statements).
● Net contracts decreased 34.0% and 18.6% for the three and nine months ended July 31, 2022, respectively, compared to the same periods of the prior year, as sales pace slowed to below normal levels during the third quarter of fiscal 2022, due to an overall slow-down in home demand.
● Net contracts per average active selling community decreased to 7.6 for the three months ended July 31, 2022 compared to 12.0 in the same period of the prior year, and decreased to 34.9 for the nine months ended July 31, 2022 compared to 44.9 in the same period of the prior year. The decreases were due to the decreases in net contracts discussed above.
● Active selling communities at July 31, 2022 increased by 3.8% compared to July 31, 2021. We continue to actively pursue new communities, and our total lots controlled increased to 31,913 at July 31, 2022 compared to 31,002 at July 31, 2021.
● Contract backlog decreased from 3,673 homes at July 31, 2021 to 3,183 homes at July 31, 2022. Despite this decrease, as a result of price increases in virtually all of our markets, the dollar value of contract backlog increased 2.4% to $1.8 billion compared to the prior year.
● Our cash position allowed us to spend $554.1 million on land purchases and land development during the nine months ended July 31, 2022, redeem $100 million principal amount of our senior secured notes, and still have total liquidity of $357.4 million, including $225.1 million of homebuilding cash and cash equivalents as of July 31, 2022 and $125.0 million of borrowing capacity under our senior secured revolving credit facility.
CRITICAL ACCOUNTING POLICIES
As disclosed in our annual report on Form 10-K for the fiscal year ended October 31, 2021, our most critical accounting policies relate to income recognition from mortgage loans; inventories; unconsolidated joint ventures; and warranty and construction defect reserves. Since October 31, 2021, there have been no significant changes to those critical accounting policies.
CAPITAL RESOURCES AND LIQUIDITY
Our operations consist primarily of residential housing development and sales in the Northeast (New Jersey and Pennsylvania), the Mid-Atlantic (Delaware, Maryland, Virginia, Washington D.C. and West Virginia), the Midwest (Illinois and Ohio), the Southeast (Florida, Georgia and South Carolina), the Southwest (Arizona and Texas) and the West (California). In addition, we provide certain financial services to our homebuilding customers.
We have historically funded our homebuilding and financial services operations with cash flows from operating activities, borrowings under our credit facilities, the issuance of new debt and equity securities and other financing activities. We may not be able to obtain desired financing even if market conditions, including then-current market available interest rates (in recent years, we have not been able to access the traditional capital and bank lending markets at competitive interest rates due to our highly leveraged capital structure), would otherwise be favorable, which could also impact our ability to grow our business.
Operating, Investing and Financing Activities – Overview
Our total liquidity at July 31, 2022 was $357.4 million, including $225.1 million in homebuilding cash and cash equivalents and $125.0 million of borrowing capacity under our senior secured revolving credit facility. Our total liquidity was above our target liquidity range of $170.0 to $245.0 million. The lingering macro economic effects of the COVID-19 pandemic, including inflation and labor and supply market constraints, as well as geopolitical tensions have created significant uncertainty as to general economic and housing market conditions for fiscal 2022 and beyond. We believe that these sources of cash together with available borrowings on our senior secured revolving credit facility will be sufficient through fiscal 2022 to finance our working capital requirements.
We spent $554.1 million on land and land development during the first three quarters of fiscal 2022, along with $105.5 million for the $100.0 million partial redemption of our 7.75% Senior Secured 1.125 Lien Notes due 2026. After considering this land and land development, debt payment and all other operating activities, including revenue received from deliveries, cash used for operations was $28.6 million. During the first three quarters of fiscal 2022, cash used for investing activities was $3.3 million, primarily due to the acquisition of certain fixed assets, partially offset by distributions from existing unconsolidated joint ventures. Cash used for financing activities was $0.9 million during the first three quarters of fiscal 2022, which in addition to the $100.0 million debt redemption mentioned above, was due primarily to net payments related to our mortgage warehouse lines of credit, partially offset by net proceeds from nonrecourse mortgage financings and land banking and model sale leaseback financings during the period. We intend to continue to use nonrecourse mortgage financings, model sale leaseback, joint ventures, and, subject to covenant restrictions in our debt instruments, land banking programs as our business needs dictate.
Our cash uses during the nine months ended July 31, 2022 and 2021 were for operating expenses, land purchases, land deposits, land development, construction spending, debt payments, state income taxes, interest payments, preferred dividend payments, litigation matters and investments in unconsolidated joint ventures. During these periods, we provided for our cash requirements from available cash on hand, housing and land sales, model sale leasebacks, land banking transactions, unconsolidated joint ventures, financial service revenues and other revenues.
Our net income historically does not approximate cash flow from operating activities. The difference between net income and cash flow from operating activities is primarily caused by changes in inventory levels together with changes in receivables, prepaid and other assets, mortgage loans held for sale, interest and other accrued liabilities, deferred income taxes, accounts payable and other liabilities, noncash charges relating to depreciation and stock compensation awards and impairment losses for inventory. When we are expanding our operations, inventory levels, prepaids and other assets increase causing cash flow from operating activities to decrease. Certain liabilities also increase as operations expand and partially offset the negative effect on cash flow from operations caused by the increase in inventory levels, prepaids and other assets. Similarly, as our mortgage operations expand, net income from these operations increases, but for cash flow purposes net income is partially offset by the net change in mortgage assets and liabilities. The opposite is true as our investment in new land purchases and development of new communities decrease, causing us to generate positive cash flow from operations.
Debt Transactions
Senior notes and credit facilities balances as of July 31, 2022 and October 31, 2021, were as follows:
| July 31, |
October 31, |
|||||||
| (In thousands) |
2022 |
2021 |
||||||
| Senior Secured Notes: |
||||||||
| 10.0% Senior Secured 1.75 Lien Notes due November 15, 2025 |
$ | 158,502 | $ | 158,502 | ||||
| 7.75% Senior Secured 1.125 Lien Notes due February 15, 2026 |
250,000 | 350,000 | ||||||
| 10.5% Senior Secured 1.25 Lien Notes due February 15, 2026 |
282,322 | 282,322 | ||||||
| 11.25% Senior Secured 1.5 Lien Notes due February 15, 2026 |
162,269 | 162,269 | ||||||
| Total Senior Secured Notes |
$ | 853,093 | $ | 953,093 | ||||
| Senior Notes: |
||||||||
| 8.0% Senior Notes due November 1, 2027 (1) |
$ | - | $ | - | ||||
| 13.5% Senior Notes due February 1, 2026 |
90,590 | 90,590 | ||||||
| 5.0% Senior Notes due February 1, 2040 |
90,120 | 90,120 | ||||||
| Total Senior Notes |
$ | 180,710 | $ | 180,710 | ||||
| Senior Unsecured Term Loan Credit Facility due February 1, 2027 |
$ | 39,551 | $ | 39,551 | ||||
| Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028 |
$ | 81,498 | $ | 81,498 | ||||
| Senior Secured Revolving Credit Facility (2) |
$ | - | $ | - | ||||
| Subtotal notes payable |
$ | 1,154,852 | $ | 1,254,852 | ||||
| Net (discounts) premiums |
$ | 6,266 | $ | 10,769 | ||||
| Net debt issuance costs |
$ | (13,246 | ) | $ | (17,248 | ) | ||
| Total notes payable, net of discounts, premiums and debt issuance costs |
$ | 1,147,872 | $ | 1,248,373 | ||||
(1) $26.0 million of 8.0% Senior Notes due 2027 (the "8.0% 2027 Notes") are owned by a wholly-owned consolidated subsidiary of HEI. Therefore, in accordance with GAAP, such notes are not reflected on the Condensed Consolidated Balance Sheets of HEI.
(2) At July 31, 2022, provides for up to $125.0 million in aggregate amount of senior secured first lien revolving loans. On August 19, 2022, the maturity of the Senior Secured Revolving Credit Facility was extended from December 28, 2022 to June 30, 2024 and the fixed interest rate was replaced with a floating interest rate in each case, effective upon the satisfaction of customary conditions in respect of the collateral securing the borrowings thereunder. See Note 22 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Except for K. Hovnanian, the issuer of the notes and borrower under the Credit Facilities (as defined below), our home mortgage subsidiaries, certain of our title insurance subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures, we and each of our subsidiaries are guarantors of the Credit Facilities, the senior secured notes and senior notes outstanding at July 31, 2022 (except for the 8.0% 2027 Notes which are not guaranteed by K. Hovnanian at Sunrise Trail III, LLC, a wholly-owned subsidiary of the Company) (collectively, the “Notes Guarantors”).
The credit agreements governing the Credit Facilities and the indentures governing the senior secured and senior notes (together, the “Debt Instruments”) outstanding at July 31, 2022 do not contain any financial maintenance covenants, but do contain restrictive covenants that limit, among other things, the ability of HEI and certain of its subsidiaries, including K. Hovnanian, to incur additional indebtedness, pay dividends and make distributions on common and preferred stock, repay/repurchase certain indebtedness prior to its respective stated maturity, repurchase (including through exchanges) common and preferred stock, make other restricted payments (including investments), sell certain assets (including in certain land banking transactions), incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of their assets and enter into certain transactions with affiliates. The Debt Instruments also contain customary events of default which would permit the lenders or holders thereof to exercise remedies with respect to the collateral (as applicable), declare the loans made under the Unsecured Term Loan Facility (defined below) (the “Unsecured Term Loans”), loans made under the Secured Term Loan Facility (defined below) (the “Secured Term Loans”) and loans made under the Secured Credit Agreement (as defined below) (the “Secured Revolving Loans”) or notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the Unsecured Term Loans, Secured Term Loans, Secured Revolving Loans or notes or other material indebtedness, cross default to other material indebtedness, the failure to comply with agreements and covenants and specified events of bankruptcy and insolvency, with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, material inaccuracy of representations and warranties and with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, a change of control, and, with respect to the Secured Term Loans, Secured Revolving Loans and senior secured notes, the failure of the documents granting security for the obligations under the secured Debt Instruments to be in full force and effect, and the failure of the liens on any material portion of the collateral securing the obligations under the secured Debt Instruments to be valid and perfected. As of July 31, 2022, we believe we were in compliance with the covenants of the Debt Instruments.
If our consolidated fixed charge coverage ratio is less than 2.0 to 1.0, as defined in the applicable Debt Instrument, we are restricted from making certain payments, including dividends (in each such case, our secured debt leverage ratio must also be less than 4.0 to 1.0), and from incurring indebtedness other than certain permitted indebtedness and nonrecourse indebtedness. Beginning as of October 31, 2021, as a result of our improved operating results, our fixed coverage ratio was above 2.0 to 1.0 and our secured debt leverage ratio was below 4.0 to 1.0, therefore we were no longer restricted from paying dividends. As such, we made dividend payments of $2.7 million to preferred shareholders in each of the first, second and third quarters of fiscal 2022.
Under the terms of our Debt Instruments, we have the right to make certain redemptions and prepayments and, depending on market conditions, our strategic priorities and covenant restrictions, may do so from time to time (for example, we redeemed $100 million aggregate principal amount of our senior secured notes during the second quarter of fiscal 2022). We also continue to actively analyze and evaluate our capital structure and explore transactions to simplify our capital structure and to strengthen our balance sheet, including those that reduce leverage, interest rates and/or extend maturities, and will seek to do so with the right opportunity. We may also continue to make debt purchases and/or exchanges for debt or equity from time to time through tender offers, exchange offers, redemptions, open market purchases, private transactions, or otherwise, or seek to raise additional debt or equity capital, depending on market conditions and covenant restrictions.
Any liquidity-enhancing or other capital raising or refinancing transaction will depend on identifying counterparties, negotiation of documentation and applicable closing conditions and any required approvals. Due to covenant restrictions in our Debt Instruments, we are currently limited in the amount of debt we can incur, even if market conditions, including then-current market available interest rates (in recent years, we have not been able to access the traditional capital and bank lending markets at competitive interest rates due to our highly leveraged capital structure), would otherwise be favorable, which could also impact our ability to grow our business.
See Note 12 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of the Unsecured Term Loans, the Secured Term Loans and Secured Revolving Loans and K. Hovnanian’s senior secured notes and senior notes, including information with respect to the collateral securing our secured Debt Instruments.
Mortgages and Notes Payable
We have nonrecourse mortgage loans for certain communities totaling $187.8 million and $125.1 million (net of debt issuance costs) at July 31, 2022 and October 31, 2021, respectively, which are secured by the related real property, including any improvements, with an aggregate book value of $527.6 million and $448.5 million, respectively. The weighted-average interest rate on these obligations was 6.1% and 4.4% at July 31, 2022 and October 31, 2021, respectively, and the mortgage loan payments on each community primarily correspond to home deliveries.
Our wholly owned mortgage banking subsidiary, K. Hovnanian American Mortgage, LLC (“K. Hovnanian Mortgage”), originates mortgage loans primarily from the sale of our homes. Such mortgage loans and related servicing rights are sold in the secondary mortgage market within a short period of time. In certain instances, we retain the servicing rights for a small amount of loans. K. Hovnanian Mortgage finances the origination of mortgage loans through various master repurchase agreements, which are recorded in "Financial services" liabilities on the Condensed Consolidated Balance Sheets. The loans are secured by the mortgages held for sale and are repaid when we sell the underlying mortgage loans to permanent investors. As of July 31, 2022 and October 31, 2021, we had an aggregate of $70.7 million and $134.9 million, respectively, outstanding under several of K. Hovnanian Mortgage’s short-term borrowing facilities.
See Note 11 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of these agreements.
Inventory Activities
Total inventory, excluding consolidated inventory not owned, increased $148.8 million during the nine months ended July 31, 2022 from October 31, 2021. Total inventory, excluding consolidated inventory not owned, increased in the Northeast by $35.6 million, in the Mid-Atlantic by $51.5 million, in the Southeast by $46.4 million and in the Southwest by $29.6 million. The increase was partially offset by decreases in the Midwest of $10.1 million and in the West of $4.2 million. The net increase was primarily attributable to new land purchases and land development, partially offset by home deliveries during the period. During the nine months ended July 31, 2022, we wrote-off costs in the amount of $1.8 million related to land options that expired or that we terminated, as the communities’ forecasted profitability was not projected to produce adequate returns on investment commensurate with the risk. There were no impairment losses during the nine months ended July 31, 2022. In the last few years, we have been able to acquire new land parcels at prices that we believe will generate reasonable returns under current homebuilding market conditions. This trend may not continue in either the near or the long term. Substantially all homes under construction or completed and included in inventory at July 31, 2022 are expected to be delivered during the next six to nine months.
Consolidated inventory not owned increased $182.2 million. Consolidated inventory not owned consists of options related to land banking and model financing transactions that were added to our Condensed Consolidated Balance Sheet in accordance with US GAAP. The increase from October 31, 2021 to July 31, 2022 was primarily due to an increase in land banking transactions along with an increase in the sale and leaseback of certain model homes during the period. We have land banking arrangements, whereby we sell land parcels to the land bankers and they provide us an option to purchase back finished lots on a predetermined schedule. Because of our options to repurchase these parcels, for accounting purposes in accordance with ASC 606-10-55-70, these transactions are considered a financing rather than a sale. For purposes of our Condensed Consolidated Balance Sheet, at July 31, 2022, inventory of $237.1 million was recorded to “Consolidated inventory not owned,” with a corresponding amount of $131.3 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions. In addition, we sell and lease back certain of our model homes with the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease. As a result of our continued involvement, for accounting purposes in accordance with ASC 606-10-55-68, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Condensed Consolidated Balance Sheet, at July 31, 2022, inventory of $43.8 million was recorded to “Consolidated inventory not owned,” with a corresponding amount of $47.2 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.
When possible, we option property for development prior to acquisition. By optioning property, we are only subject to the loss of the cost of the option and predevelopment costs if we choose not to exercise the option. As a result, our commitment for major land acquisitions is reduced. The costs associated with optioned properties are included in “Land and land options held for future development or sale” on the Condensed Consolidated Balance Sheets. Also included in “Land and land options held for future development or sale” are amounts associated with inventory in mothballed communities. We mothball (or stop development on) certain communities when we determine the current performance does not justify further investment at the time. That is, we believe we will generate higher returns if we decide against spending money to improve land today and save the raw land until such time as the markets improve or we determine to sell the property. As of July 31, 2022, we had mothballed land in two communities. The book value associated with these communities at July 31, 2022 was $1.4 million, which was net of impairment charges recorded in prior periods of $20.3 million. We continually review communities to determine if mothballing is appropriate. During the first three quarters of fiscal 2022, we did not mothball any additional communities, nor did we sell any previously mothballed communities, however, we re-activated four previously mothballed communities.
Inventories held for sale, which are land parcels where we have decided not to build homes and we are actively marketing the land for sale, are reported at the lower of carrying amount or fair value less costs to sell. There were no inventories held for sale at both July 31, 2022 and October 31, 2021. In determining fair value for land held for sale, management considers, among other things, prices for land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would pay for the land (other than in a forced liquidation sale) and recent bona fide offers received from outside third parties.
The following tables summarize home sites included in our total residential real estate. The increase in total home sites available at July 31, 2022 compared to October 31, 2021 is attributable to acquiring new land parcels, partially offset by delivering homes and terminating certain option agreements during the period.
| Active |
Proposed |
|||||||||||||||
| Active |
Communities |
Developable |
Total |
|||||||||||||
| Communities(1) |
Homes |
Homes |
Homes |
|||||||||||||
| July 31, 2022: |
||||||||||||||||
| Northeast |
4 | 704 | 3,187 | 3,891 | ||||||||||||
| Mid-Atlantic |
19 | 2,013 | 6,591 | 8,604 | ||||||||||||
| Midwest |
6 | 975 | 1,615 | 2,590 | ||||||||||||
| Southeast |
19 | 2,141 | 1,320 | 3,461 | ||||||||||||
| Southwest |
44 | 5,208 | 4,714 | 9,922 | ||||||||||||
| West |
16 | 2,330 | 1,499 | 3,829 | ||||||||||||
| Consolidated total |
108 | 13,371 | 18,926 | 32,297 | ||||||||||||
| Unconsolidated joint ventures (2) |
17 | 3,535 | - | 3,535 | ||||||||||||
| Owned |
7,375 | 2,708 | 10,083 | |||||||||||||
| Optioned |
5,612 | 16,218 | 21,830 | |||||||||||||
| Controlled lots |
12,987 | 18,926 | 31,913 | |||||||||||||
| Construction to permanent financing lots |
384 | - | 384 | |||||||||||||
| Consolidated total |
13,371 | 18,926 | 32,297 | |||||||||||||
| (1) |
Active communities are open for sale communities with ten or more home sites available. We identify communities based on product type. Therefore, at times there are multiple communities at one land site. |
| (2) |
Represents active communities and home sites for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 18 to the Condensed Consolidated Financial Statements for a further discussion of our unconsolidated joint ventures. |
| Active |
Proposed |
|||||||||||||||
| Active |
Communities |
Developable |
Total |
|||||||||||||
| Communities(1) |
Homes |
Homes |
Homes |
|||||||||||||
| October 31, 2021: |
||||||||||||||||
| Northeast |
6 | 821 | 2,525 | 3,346 | ||||||||||||
| Mid-Atlantic |
20 | 2,160 | 6,083 | 8,243 | ||||||||||||
| Midwest |
8 | 1,263 | 1,120 | 2,383 | ||||||||||||
| Southeast |
22 | 1,736 | 2,043 | 3,779 | ||||||||||||
| Southwest |
53 | 4,728 | 4,680 | 9,408 | ||||||||||||
| West |
15 | 2,225 | 1,859 | 4,084 | ||||||||||||
| Consolidated total |
124 | 12,933 | 18,310 | 31,243 | ||||||||||||
| Unconsolidated joint ventures (2) |
17 | 4,030 | - | 4,030 | ||||||||||||
| Owned |
7,257 | 3,194 | 10,451 | |||||||||||||
| Optioned |
5,307 | 15,116 | 20,423 | |||||||||||||
| Controlled lots |
12,564 | 18,310 | 30,874 | |||||||||||||
| Construction to permanent financing lots |
369 | - | 369 | |||||||||||||
| Consolidated total |
12,933 | 18,310 | 31,243 | |||||||||||||
| (1) |
Active communities are open for sale communities with ten or more home sites available. We identify communities based on product type. Therefore, at times there are multiple communities at one land site. |
|
|
|
|
|
| (2) |
Represents active communities and home sites for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 18 to the Condensed Consolidated Financial Statements for a further discussion of our unconsolidated joint ventures. |
The following table summarizes our started or completed unsold homes and models, excluding unconsolidated joint ventures, in active and substantially completed communities. The increase in unsold homes was primarily due to a conscious effort to increase our number of started unsold homes per community to provide buyers the opportunity to close quickly, so they may lock in a lower mortgage rate, thereby making our homes more affordable as mortgage rates continue to rise.
| July 31, 2022 |
October 31, 2021: |
|||||||||||||||||||||||
| Unsold |
Unsold |
|||||||||||||||||||||||
| Homes |
Models |
Total |
Homes |
Models |
Total |
|||||||||||||||||||
| Northeast |
14 | 7 | 21 | 8 | 10 | 18 | ||||||||||||||||||
| Mid-Atlantic |
38 | 20 | 58 | 26 | 22 | 48 | ||||||||||||||||||
| Midwest |
14 | 2 | 16 | 8 | 9 | 17 | ||||||||||||||||||
| Southeast |
47 | 6 | 53 | 24 | 22 | 46 | ||||||||||||||||||
| Southwest |
172 | 13 | 185 | 114 | 29 | 143 | ||||||||||||||||||
| West |
65 | 14 | 79 | 7 | 12 | 19 | ||||||||||||||||||
| Total |
350 | 62 | 412 | 187 | 104 | 291 | ||||||||||||||||||
| Started or completed unsold homes and models per active selling communities (1) |
3.2 | 0.6 | 3.8 | 1.5 | 0.8 | 2.3 | ||||||||||||||||||
| (1) |
Active selling communities (which are communities that are open for sale with ten or more home sites available) were 108 and 124 at July 31, 2022 and October 31, 2021, respectively. This ratio does not include substantially completed communities, which are communities with less than ten home sites available. |
Other Balance Sheet Activities
Investments in and advances to unconsolidated joint ventures increased $13.8 million to $74.7 million at July 31, 2022 compared to October 31, 2021. The increase was primarily due to income recorded from one of our unconsolidated joint ventures during the period, partially offset by partner distributions. As of July 31, 2022 and October 31, 2021, we had investments in seven and nine unconsolidated homebuilding joint ventures, respectively, and one unconsolidated land development joint venture for both periods. We have no guarantees associated with our unconsolidated joint ventures, other than guarantees limited to performance and completion of development activities, environmental indemnification and standard warranty and representation against fraud, misrepresentation and similar actions, including a voluntary bankruptcy.
Prepaid expenses and other assets were as follows as of:
| July 31, |
October 31, |
Dollar |
||||||||||
| (In thousands) |
2022 |
2021 |
Change |
|||||||||
| Prepaid insurance |
$ | 4,272 | $ | 2,577 | $ | 1,695 | ||||||
| Prepaid project costs |
29,321 | 25,880 | 3,441 | |||||||||
| Other prepaids |
11,349 | 9,140 | 2,209 | |||||||||
| Other assets |
506 | 745 | (239 | ) | ||||||||
| Lease right of use asset |
18,898 | 17,844 | 1,054 | |||||||||
| Total |
$ | 64,346 | $ | 56,186 | $ | 8,160 | ||||||
Prepaid insurance increased for the nine months ended July 31, 2022, due to the timing of premium payments. These costs are amortized over the life of the associated insurance policy, which can be one to three years. Prepaid project costs consist of community specific expenditures that are used over the life of the community. Such prepaid costs are expensed as homes are delivered. The increase was primarily due to costs incurred for communities not yet open for sale. Other prepaids increased primarily due to new premiums for the renewal of certain software and related services during the period, partially offset by the amortization of these costs. Other prepaids also increased related to a new program for the bulk purchase of mortgage lock commitments to be used for qualifying homebuyers and expensed on future deliveries. Lease right of use asset represents the net present value of our operating leases which, in accordance with ASC 842, are required to be recorded as an asset on our Condensed Consolidated Balance Sheets. See Note 9 to the Condensed Consolidated Financial Statements for further information. The increase in lease right of use assets was primarily due to lease renewals, partially offset by lease payments during the period.
Financial services assets consist primarily of residential mortgages receivable held for sale of which $85.1 million and $149.2 million at July 31, 2022 and October 31, 2021, respectively, were being temporarily warehoused and are awaiting sale in the secondary mortgage market. The decrease in mortgage loans held for sale from October 31, 2021 was primarily due to a decrease in the volume of loans originated during the third quarter of fiscal 2022 compared to the fourth quarter of fiscal 2021, partially offset by an increase in the average loan value.
Deferred tax assets, net, decreased $49.1 million from October 31, 2021 to July 31, 2022, due to the utilization of our deferred tax assets to offset tax expense on taxable income during the period.
Nonrecourse mortgages secured by inventory increased to $187.8 million at July 31, 2022 from $125.1 million at October 31, 2021. The increase was primarily due to new mortgages for communities in all of our segments obtained during the nine months ended July 31, 2022, along with additional loan borrowings on existing mortgages, partially offset by the payment of existing mortgages during the period.
Accounts payable and other liabilities were as follows as of:
| July 31, |
October 31, |
Dollar |
||||||||||
| (In thousands) |
2022 |
2021 |
Change |
|||||||||
| Accounts payable |
$ | 197,673 | $ | 163,898 | $ | 33,775 | ||||||
| Reserves |
98,990 | 98,831 | 159 | |||||||||
| Lease liability |
19,940 | 18,952 | 988 | |||||||||
| Accrued expenses |
14,836 | 17,588 | (2,752 | ) | ||||||||
| Accrued compensation |
74,648 | 102,862 | (28,214 | ) | ||||||||
| Other liabilities |
18,421 | 24,250 | (5,829 | ) | ||||||||
| Total |
$ | 424,508 | $ | 426,381 | $ | (1,873 | ) | |||||
The increase in accounts payable was primarily due to the increase in backlog dollars from October 31, 2021 to July 31, 2022, as homes are under construction for future delivery. Lease liability represents the net present value of our minimum lease obligations, which as discussed above, are required to be recorded on our Condensed Consolidated Balance Sheets in accordance with ASC 842. The increase corresponds to the increase in the lease right of use asset discussed above. Accrued expenses decreased primarily due to the timing of certain accruals for profit and price participation programs, along with a decrease in accrued property taxes and a decrease in an accrual for a sales reward program. The decrease in accrued compensation was primarily due to the payment of our fiscal year 2021 bonuses during the first quarter of fiscal 2022, partially offset by the accrual of fiscal 2022 bonuses in the first three quarters of fiscal 2022. Other liabilities decreased primarily due to deferred payroll tax withholdings which were paid during the period.
Customers’ deposits increased $31.2 million from October 31, 2021 to $99.5 million at July 31, 2022. The increase was primarily related to the increase in backlog dollars during the period.
Liabilities from inventory not owned increased $115.7 million from October 31, 2021 to $178.5 million at July 31, 2022. The increase was primarily due to an increase in land banking activity during the period and an increase in the sale and leaseback of certain model homes, both accounted for as financing transactions as described above.
Financial Services (liabilities) decreased $73.6 million to $108.6 million at July 31, 2022 from $182.2 million at October 31, 2021. The decrease was primarily due to a decrease in amounts outstanding under our mortgage warehouse lines of credit and directly correlates to the decrease in the volume of mortgage loans held for sale during the period.
Accrued interest increased $19.4 million from $28.2 million at October 31, 2021, to $47.6 million at July 31, 2022. The increase was primarily due to timing of new accruals, partially offset by payments, related to our senior secured, senior notes and the term loan during the period.
RESULTS OF OPERATIONS FOR THE three and nine months ended July 31, 2022 COMPARED TO THE three and nine months ended July 31, 2021
Total Revenues
Compared to the same prior period, revenues increased (decreased) as follows:
| Three Months Ended |
||||||||||||||||
| July 31, |
July 31, |
Dollar |
Percentage |
|||||||||||||
| (Dollars in thousands) |
2022 |
2021 |
Change |
Change |
||||||||||||
| Homebuilding: |
||||||||||||||||
| Sale of homes |
$ | 736,654 | $ | 663,279 | $ | 73,375 | 11.1 | % | ||||||||
| Land sales and other revenues |
16,406 | 7,559 | 8,847 | 117.0 | % | |||||||||||
| Financial services |
14,533 | 19,845 | (5,312 | ) | (26.8 | )% | ||||||||||
| Total revenues |
$ | 767,593 | $ | 690,683 | $ | 76,910 | 11.1 | % | ||||||||
| Nine Months Ended |
||||||||||||||||
| July 31, |
July 31, |
Dollar |
Percentage |
|||||||||||||
| (Dollars in thousands) |
2022 |
2021 |
Change |
Change |
||||||||||||
| Homebuilding: |
||||||||||||||||
| Sale of homes |
$ | 1,973,843 | $ | 1,894,159 | $ | 79,684 | 4.2 | % | ||||||||
| Land sales and other revenues |
18,052 | 13,280 | 4,772 | 35.9 | % | |||||||||||
| Financial services |
43,548 | 61,070 | (17,522 | ) | (28.7 | )% | ||||||||||
| Total revenues |
$ | 2,035,443 | $ | 1,968,509 | $ | 66,934 | 3.4 | % | ||||||||
Homebuilding
For the three and nine months ended July 31, 2022, sale of homes revenues increased by 11.1% and 4.2%, respectively, compared to the same periods of the prior year due to a 17.8% and 19.1% increase in the average price per home, respectively, partially offset by a 5.7% and 12.5% decrease in homes delivered, respectively, for the three and nine months ended July 31, 2022, compared with the respective prior year period. The average price per home increased to $521,710 in the three months ended July 31, 2022 from $442,776 in the three months ended July 31, 2021. The average price per home increased to $501,103 in the nine months ended July 31, 2022 from $420,831 in the nine months ended July 31, 2021. The increase in average price was the result of increases in home prices in virtually all of our markets along with the geographic and community mix of our deliveries. Land sales are ancillary to our homebuilding operations and are expected to continue in the future but may significantly fluctuate up or down. For further details on the increase in land sales and other revenues, see the section titled “Land Sales and Other Revenues” below.
Information on homes delivered by segment is set forth below:
| Three Months Ended July 31, |
Nine Months Ended July 31, |
|||||||||||||||||||||||
| (Dollars in thousands) |
2022 |
2021 |
% Change |
2022 |
2021 |
% Change |
||||||||||||||||||
| Northeast: |
||||||||||||||||||||||||
| Dollars |
$ | 60,266 | $ | 35,255 | 70.9 | % | $ | 135,671 | $ | 95,157 | 42.6 | % | ||||||||||||
| Homes |
78 | 44 | 77.3 | % | 184 | 139 | 32.4 | % | ||||||||||||||||
| Mid-Atlantic: |
||||||||||||||||||||||||
| Dollars |
$ | 168,076 | $ | 106,195 | 58.3 | % | $ | 396,180 | $ | 311,230 | 27.3 | % | ||||||||||||
| Homes |
251 | 189 | 32.8 | % | 610 | 581 | 5.0 | % | ||||||||||||||||
| Midwest: |
||||||||||||||||||||||||
| Dollars |
$ | 61,375 | $ | 60,588 | 1.3 | % | $ | 172,987 | $ | 181,191 | (4.5 | )% | ||||||||||||
| Homes |
166 | 190 | (12.6 | )% | 483 | 576 | (16.1 | )% | ||||||||||||||||
| Southeast: |
||||||||||||||||||||||||
| Dollars |
$ | 71,484 | $ | 61,978 | 15.3 | % | $ | 200,133 | $ | 188,489 | 6.2 | % | ||||||||||||
| Homes |
148 | 139 | 6.5 | % | 402 | 408 | (1.5 | )% | ||||||||||||||||
| Southwest: |
||||||||||||||||||||||||
| Dollars |
$ | 266,107 | $ | 212,773 | 25.1 | % | $ | 692,093 | $ | 620,120 | 11.6 | % | ||||||||||||
| Homes |
590 | 593 | (0.5 | )% | 1,643 | 1,808 | (9.1 | )% | ||||||||||||||||
| West: |
||||||||||||||||||||||||
| Dollars |
$ | 109,346 | $ | 186,490 | (41.4 | )% | $ | 376,779 | $ | 497,972 | (24.3 | )% | ||||||||||||
| Homes |
179 | 343 | (47.8 | )% | 617 | 989 | (37.6 | )% | ||||||||||||||||
| Consolidated total: |
||||||||||||||||||||||||
| Dollars |
$ | 736,654 | $ | 663,279 | 11.1 | % | $ | 1,973,843 | $ | 1,894,159 | 4.2 | % | ||||||||||||
| Homes |
1,412 | 1,498 | (5.7 | )% | 3,939 | 4,501 | (12.5 | )% | ||||||||||||||||
| Unconsolidated joint ventures (1) |
||||||||||||||||||||||||
| Dollars |
$ | 78,390 | $ | 102,262 | (23.3 | )% | $ | 228,984 | $ | 264,442 | (13.4 | )% | ||||||||||||
| Homes |
121 | 179 | (32.4 | )% | 372 | 453 | (17.9 | )% | ||||||||||||||||
(1) Represents housing revenues and home deliveries for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 18 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion of our unconsolidated joint ventures.
An important indicator of our future results are recently signed contracts and our home contract backlog for future deliveries. Our sales contracts and homes in contract backlog by segment are set forth below:
| Net Contracts (1) for the |
Net Contracts (1) for the |
|||||||||||||||||||||||
| Three Months Ended |
Nine Months Ended |
Contract Backlog as of |
||||||||||||||||||||||
| July 31, |
July 31, |
July 31, |
||||||||||||||||||||||
| (Dollars in thousands) |
2022 |
2021 |
2022 |
2021 |
2022 |
2021 |
||||||||||||||||||
| Northeast: |
||||||||||||||||||||||||
| Dollars |
$ | 47,109 | $ | 52,066 | $ | 181,641 | $ | 135,684 | $ | 184,366 | $ | 122,638 | ||||||||||||
| Homes |
66 | 62 | 249 | 169 | 237 | 160 | ||||||||||||||||||
| Mid-Atlantic: |
||||||||||||||||||||||||
| Dollars |
$ | 91,100 | $ | 117,341 | $ | 384,950 | $ | 414,059 | $ | 330,960 | $ | 361,329 | ||||||||||||
| Homes |
139 | 176 | 608 | 647 | 506 | 572 | ||||||||||||||||||
| Midwest: |
||||||||||||||||||||||||
| Dollars |
$ | 29,999 | $ | 56,848 | $ | 144,833 | $ | 216,775 | $ | 166,291 | $ | 205,101 | ||||||||||||
| Homes |
60 | 165 | 371 | 628 | 493 | 648 | ||||||||||||||||||
| Southeast: |
||||||||||||||||||||||||
| Dollars |
$ | 67,402 | $ | 58,522 | $ | 326,727 | $ | 223,201 | $ | 348,019 | $ | 211,859 | ||||||||||||
| Homes |
114 | 124 | 555 | 487 | 574 | 440 | ||||||||||||||||||
| Southwest: |
||||||||||||||||||||||||
| Dollars |
$ | 179,005 | $ | 196,481 | $ | 742,953 | $ | 783,924 | $ | 510,681 | $ | 524,029 | ||||||||||||
| Homes |
336 | 469 | 1,533 | 2,034 | 966 | 1,292 | ||||||||||||||||||
| West: |
||||||||||||||||||||||||
| Dollars |
$ | 53,324 | $ | 127,872 | $ | 345,642 | $ | 453,557 | $ | 251,293 | $ | 325,472 | ||||||||||||
| Homes |
84 | 215 | 559 | 795 | 407 | 561 | ||||||||||||||||||
| Consolidated total: |
||||||||||||||||||||||||
| Dollars |
$ | 467,939 | $ | 609,130 | $ | 2,126,746 | $ | 2,227,200 | $ | 1,791,610 | $ | 1,750,428 | ||||||||||||
| Homes |
799 | 1,211 | 3,875 | 4,760 | 3,183 | 3,673 | ||||||||||||||||||
| Unconsolidated joint ventures:(2) |
||||||||||||||||||||||||
| Dollars |
$ | 84,392 | $ | 140,913 | $ | 315,015 | $ | 408,804 | $ | 628,034 | $ | 502,999 | ||||||||||||
| Homes |
133 | 380 | 683 | 1,112 | 2,599 | 2,065 | ||||||||||||||||||
(1) Net contracts are defined as new contracts executed during the period for the purchase of homes, less cancellations of contracts in the same period.
(2) Represents net contract dollars, net contract homes and contract backlog dollars and homes for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 18 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion of our unconsolidated joint ventures.
In the first three quarters of fiscal 2022, our open for sale community count decreased to 108 from 124 at October 31, 2021, which was the net result of opening 35 new communities and closing 51 communities since the beginning of fiscal 2022. The decrease in open for sale communities is a result of delays in land development as a result of supply chain and other issues that initially arose during the pandemic and have persisted. We expect community count to grow during the fourth quarter of 2022. Our reported level of sales contracts (net of cancellations) we have seen through the nine months ended July 31, 2022 was impacted by a decrease in sales pace per community for the nine months ended July 31, 2022 as compared to the same period of the prior year. Net contracts per average active selling community for the three months ended July 31, 2022 decreased to 7.6 compared to 12.0 for the same period in the prior year which was during a peak in sales pace during the pandemic. Net contracts per average active selling community for the nine months ended July 31, 2022 decreased to 34.9 compared to 44.9 for the same period in the prior year which was during a peak in sales pace during the pandemic.
Cancellation rates represent the number of cancelled contracts in the quarter divided by the number of gross sales contracts executed in the quarter. For comparison, the following are historical cancellation rates, excluding unconsolidated joint ventures:
| Quarter |
2022 |
2021 |
2020 |
2019 |
2018 |
|||||||||||||||
| First |
14 | % | 17 | % | 19 | % | 24 | % | 18 | % | ||||||||||
| Second |
17 | % | 16 | % | 23 | % | 19 | % | 17 | % | ||||||||||
| Third |
27 | % | 16 | % | 18 | % | 19 | % | 19 | % | ||||||||||
| Fourth |
15 | % | 18 | % | 21 | % | 23 | % | ||||||||||||
Another common and meaningful way to analyze our cancellation trends is to compare the number of contract cancellations as a percentage of the beginning backlog. The following table provides this historical comparison, excluding unconsolidated joint ventures:
| Quarter |
2022 |
2021 |
2020 |
2019 |
2018 |
|||||||||||||||
| First |
8 | % | 11 | % | 14 | % | 16 | % | 12 | % | ||||||||||
| Second |
9 | % | 9 | % | 20 | % | 20 | % | 15 | % | ||||||||||
| Third |
8 | % | 6 | % | 21 | % | 16 | % | 14 | % | ||||||||||
| Fourth |
6 | % | 14 | % | 14 | % | 13 | % | ||||||||||||
Most cancellations occur within the legal rescission period, which varies by state but is generally less than two weeks after the signing of the contract. Cancellations also occur as a result of a buyer’s failure to qualify for a mortgage, which generally occurs during the first few weeks after signing. As shown in the tables above, contract cancellations over the past several years have been within what we believe to be a normal range, with fiscal 2021 and the first half of fiscal 2022 cancellation rates, in particular, being below historical norms as a result of the strong market conditions. Fiscal 2020 had varying cancellation rates due to the COVID-19 pandemic and its effects. During the third quarter of fiscal 2022, due to the sharp decline in gross sales, our cancellation rate as a percentage of gross sales increased significantly to 27%, which is higher than our historical normal range. However, due to our strong backlog position, our cancellation rate as a percentage of beginning backlog decreased slightly from the prior quarter to 8%, which is below our historical normal range. Market conditions remain uncertain and it is difficult to predict what cancellation rates will be in the future.
Total cost of sales on our Condensed Consolidated Statements of Operations includes expenses for consolidated housing and land and lot sales, including inventory impairment loss and land option write-offs (defined as “land charges” in the tables below). A breakout of such expenses for housing sales and homebuilding gross margin is set forth below.
Homebuilding gross margin before cost of sales interest expense and land charges is a non-GAAP financial measure. This measure should not be considered as an alternative to homebuilding gross margin determined in accordance with GAAP as an indicator of operating performance.
Management believes this non-GAAP measure enables investors to better understand our operating performance. This measure is also useful internally, helping management evaluate our operating results on a consolidated basis and relative to other companies in our industry. In particular, the magnitude and volatility of land charges for the Company, and for other homebuilders, have been significant and, as such, have made financial analysis of our industry more difficult. Homebuilding metrics excluding land charges, as well as interest amortized to cost of sales, and other similar presentations prepared by analysts and other companies are frequently used to assist investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies’ respective level of impairments and levels of debt.
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| July 31, |
July 31, |
|||||||||||||||
| (Dollars in thousands) |
2022 |
2021 |
2022 |
2021 |
||||||||||||
| Sale of homes |
$ | 736,654 | $ | 663,279 | $ | 1,973,843 | $ | 1,894,159 | ||||||||
| Cost of sales, excluding interest expense and land charges |
543,064 | 516,530 | 1,474,403 | 1,488,919 | ||||||||||||
| Homebuilding gross margin, before cost of sales interest expense and land charges |
193,590 | 146,749 | 499,440 | 405,240 | ||||||||||||
| Cost of sales interest expense, excluding land sales interest expense |
22,453 | 17,821 | 57,855 | 56,242 | ||||||||||||
| Homebuilding gross margin, after cost of sales interest expense, before land charges |
171,137 | 128,928 | 441,585 | 348,998 | ||||||||||||
| Land charges |
1,173 | 1,309 | 1,837 | 3,267 | ||||||||||||
| Homebuilding gross margin |
$ | 169,964 | $ | 127,619 | $ | 439,748 | $ | 345,731 | ||||||||
| Homebuilding gross margin percentage |
23.1 | % | 19.2 | % | 22.3 | % | 18.3 | % | ||||||||
| Homebuilding gross margin percentage, before cost of sales interest expense and land charges |
26.3 | % | 22.1 | % | 25.3 | % | 21.4 | % | ||||||||
| Homebuilding gross margin percentage, after cost of sales interest expense, before land charges |
23.2 | % | 19.4 | % | 22.4 | % | 18.4 | % | ||||||||
Cost of sales expenses as a percentage of consolidated home sales revenues are presented below:
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| July 31, |
July 31, |
|||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Sale of homes |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Cost of sales, excluding interest expense and land charges: |
||||||||||||||||
| Housing, land and development costs |
66.3 | % | 69.6 | % | 66.8 | % | 70.1 | % | ||||||||
| Commissions |
3.2 | % | 3.7 | % | 3.4 | % | 3.6 | % | ||||||||
| Financing concessions |
0.8 | % | 1.0 | % | 0.9 | % | 1.2 | % | ||||||||
| Overheads |
3.4 | % | 3.6 | % | 3.6 | % | 3.7 | % | ||||||||
| Total cost of sales, before interest expense and land charges |
73.7 | % | 77.9 | % | 74.7 | % | 78.6 | % | ||||||||
| Cost of sales interest |
3.1 | % | 2.7 | % | 2.9 | % | 3.0 | % | ||||||||
| Land charges |
0.1 | % | 0.2 | % | 0.1 | % | 0.1 | % | ||||||||
| Homebuilding gross margin percentage |
23.1 | % | 19.2 | % | 22.3 | % | 18.3 | % | ||||||||
| Homebuilding gross margin percentage, before cost of sales interest expense and land charges |
26.3 | % | 22.1 | % | 25.3 | % | 21.4 | % | ||||||||
| Homebuilding gross margin percentage, after cost of sales interest expense, before land charges |
23.2 | % | 19.4 | % | 22.4 | % | 18.4 | % | ||||||||
We sell a variety of home types in various communities, each yielding a different gross margin. As a result, depending on the mix of communities delivering homes, consolidated gross margin may fluctuate up or down. Total homebuilding gross margin percentage increased to 23.1% during the three months ended July 31, 2022 compared to 19.2% for the same period last year. Homebuilding gross margin percentage, before cost of sales interest expense and land charges, increased from 22.1% for the three months ended July 31, 2021 to 26.3% for the three months ended July 31, 2022. Total homebuilding gross margin percentage increased to 22.3% during the nine months ended July 31, 2022 compared to 18.3% for the same period last year. Homebuilding gross margin percentage, before cost of sales interest expense and land charges, increased from 21.4% for the nine months ended July 31, 2021 to 25.3% for the nine months ended July 31, 2022. The increases for the three and nine months ended July 31, 2022 for both gross margin percentage and gross margin percentage, before cost of sales interest expense and land charges, were primarily due to increases in home prices across virtually all our operating segments, along with the mix of communities delivering compared to the prior year periods.
Reflected as inventory impairment loss and land option write-offs in cost of sales, we wrote-off or wrote-down certain inventories totaling $1.1 million and $1.3 million during the three months ended July 31, 2022 and 2021, respectively, and $1.8 million and $3.3 million during the nine months ended July 31, 2022 and 2021, respectively, to their estimated fair value. During the three and nine months ended July 31, 2022, we wrote-off residential land options and approval and engineering costs amounting to $1.1 million and $1.8 million, respectively, compared to $0.1 million and $1.3 million for the three and nine months ended July 31, 2021, respectively, which are included in the total land charges discussed above. Option, approval and engineering costs are written-off when a community’s pro forma profitability is not projected to produce adequate returns on the investment commensurate with the risk and when we believe it is probable we will cancel the option or when a community is redesigned engineering costs related to the initial design are written-off. Such write-offs were located in all the segments in the first three quarters of fiscal 2022 and in the Mid-Atlantic, Southeast, Southwest and West segments in the first three quarters of fiscal 2021. There were no inventory impairments during the three and nine months ended July 31, 2022. We recorded inventory impairments of $1.2 million and $2.0 million during the three and nine months ended July 31, 2021, respectively, which were related to two communities in the Southeast segment for the three and nine months ended July 31, 2021, and one community in the West segment for the nine months ended July 31, 2021. It is difficult to predict impairment levels, and should it become necessary or desirable to have additional land sales, lower prices, or should the estimates or expectations used in determining estimated cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments.
Land Sales and Other Revenues
Land sales and other revenues consist primarily of land and lot sales. A breakout of land and lot sales is set forth below:
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| July 31, |
July 31, |
|||||||||||||||
| (In thousands) |
2022 |
2021 |
2022 |
2021 |
||||||||||||
| Land and lot sales |
$ | 15,788 | $ | 6,819 | $ | 16,187 | $ | 11,730 | ||||||||
| Cost of sales, excluding interest |
5,512 | 5,338 | 5,772 | 9,121 | ||||||||||||
| Land and lot sales gross margin, excluding interest |
10,276 | 1,481 | 10,415 | 2,609 | ||||||||||||
| Land and lot sales interest expense |
- | 1,419 | 21 | 1,888 | ||||||||||||
| Land and lot sales gross margin, including interest |
$ | 10,276 | $ | 62 | $ | 10,394 | $ | 721 | ||||||||
Land sales are ancillary to our residential homebuilding operations and are expected to continue in the future but may significantly fluctuate up or down. Although we budget land sales, they are often dependent upon receiving approvals and entitlements, the timing of which can be uncertain. As a result, projecting the amount and timing of land sales is difficult. Revenue associated with land sales can vary significantly due to the mix of land parcels sold. There were one and two land sales in the three months ended July 31, 2022 and 2021, respectively, resulting in an increase of $9.0 million in land sales revenues. There were four and eight land sales in the nine months ended July 31, 2022 and 2021, respectively, resulting in an increase of $4.5 million in land sales revenues. During the third quarter of fiscal 2022, we had a more significant land sale in the Northeast segment causing the increase in land sales revenue for both the three and nine months ended July 31, 2022.
Land sales and other revenues increased $8.8 million and $4.8 million for the three and nine months ended July 31, 2022 compared to the same period in the prior year. Other revenues include income from contract cancellations where the deposit has been forfeited due to contract terminations, interest income, cash discounts and miscellaneous one-time receipts. The increase for the three and nine months ended July 31, 2022, compared to the three and nine months ended July 31, 2021, was mainly due to the increase in land sales discussed above.
Homebuilding Selling, General and Administrative
Homebuilding selling, general and administrative (“SGA”) expenses increased $7.2 million and $14.0 million for the three and nine months ended July 31, 2022, respectively, compared to the same period last year. The increase for the three and nine months ended July 31, 2022 was due to an increase in total compensation expense as a result of an increase in headcount and bonuses related to market conditions and company performance and an increase in insurance costs as a result of an increase in premiums to obtain insurance during fiscal 2022. Also impacting the increase in the three months ended July 31, 2022 was a decrease of unconsolidated joint venture management fees received, which offset general and administrative expenses, as a result of fewer unconsolidated joint venture deliveries during the respective periods, while the same remained flat for the nine months ended July 31, 2022 compared to same period in the prior year. SGA expenses as a percentage of homebuilding revenues increased to 6.7% and 7.0% for the three and nine months ended July 31, 2022 compared to 6.4% and 6.6% for the three and nine months ended July 31, 2021, respectively, as a result of the increase in expense for the current periods compared to the prior year periods.
HOMEBUILDING OPERATIONS BY SEGMENT
Segment Analysis
| Three Months Ended July 31, |
||||||||||||||||
| (Dollars in thousands, except average sales price) |
2022 |
2021 |
Variance |
Variance % |
||||||||||||
| Northeast |
||||||||||||||||
| Homebuilding revenue |
$ | 76,032 | $ | 35,255 | $ | 40,777 | 115.7 | % | ||||||||
| Income before income taxes |
$ | 20,179 | $ | 6,765 | $ | 13,414 | 198.3 | % | ||||||||
| Homes delivered |
78 | 44 | 34 | 77.3 | % | |||||||||||
| Average sales price |
$ | 772,641 | $ | 801,250 | $ | (28,609 | ) | (3.6 | )% | |||||||
| Mid-Atlantic |
||||||||||||||||
| Homebuilding revenue |
$ | 168,135 | $ | 106,419 | $ | 61,716 | 58.0 | % | ||||||||
| Income before income taxes |
$ | 37,756 | $ | 15,907 | $ | 21,849 | 137.4 | % | ||||||||
| Homes delivered |
251 | 189 | 62 | 32.8 | % | |||||||||||
| Average sales price |
$ | 669,625 | $ | 561,878 | $ | 107,747 | 19.2 | % | ||||||||
| Midwest |
||||||||||||||||
| Homebuilding revenue |
$ | 61,410 | $ | 60,659 | $ | 751 | 1.2 | % | ||||||||
| Income before income taxes |
$ | 2,023 | $ | 3,358 | $ | (1,335 | ) | (39.8 | )% | |||||||
| Homes delivered |
166 | 190 | (24 | ) | (12.6 | )% | ||||||||||
| Average sales price |
$ | 369,729 | $ | 318,884 | $ | 50,845 | 15.9 | % | ||||||||
| Southeast |
||||||||||||||||
| Homebuilding revenue |
$ | 71,542 | $ | 68,854 | $ | 2,688 | 3.9 | % | ||||||||
| Income before income taxes |
$ | 15,263 | $ | 2,682 | $ | 12,581 | 469.1 | % | ||||||||
| Homes delivered |
148 | 139 | 9 | 6.5 | % | |||||||||||
| Average sales price |
$ | 483,000 | $ | 445,885 | $ | 37,115 | 8.3 | % | ||||||||
| Southwest |
||||||||||||||||
| Homebuilding revenue |
$ | 266,374 | $ | 213,127 | $ | 53,247 | 25.0 | % | ||||||||
| Income before income taxes |
$ | 42,725 | $ | 28,523 | $ | 14,202 | 49.8 | % | ||||||||
| Homes delivered |
590 | 593 | (3 | ) | (0.5 | )% | ||||||||||
| Average sales price |
$ | 451,029 | $ | 358,808 | $ | 92,221 | 25.7 | % | ||||||||
| West |
||||||||||||||||
| Homebuilding revenue |
$ | 109,410 | $ | 186,519 | $ | (77,109 | ) | (41.3 | )% | |||||||
| Income before income taxes |
$ | 19,223 | $ | 27,189 | $ | (7,966 | ) | (29.3 | )% | |||||||
| Homes delivered |
179 | 343 | (164 | ) | (47.8 | )% | ||||||||||
| Average sales price |
$ | 610,872 | $ | 543,703 | $ | 67,169 | 12.4 | % | ||||||||
| Nine Months Ended July 31, |
||||||||||||||||
| (Dollars in thousands, except average sales price) |
2022 |
2021 |
Variance |
Variance % |
||||||||||||
| Northeast |
||||||||||||||||
| Homebuilding revenue |
$ | 151,517 | $ | 97,488 | $ | 54,029 | 55.4 | % | ||||||||
| Income before income taxes |
$ | 31,052 | $ | 16,427 | $ | 14,625 | 89.0 | % | ||||||||
| Homes delivered |
184 | 139 | 45 | 32.4 | % | |||||||||||
| Average sales price |
$ | 737,342 | $ | 684,583 | $ | 52,759 | 7.7 | % | ||||||||
| Mid-Atlantic |
||||||||||||||||
| Homebuilding revenue |
$ | 396,750 | $ | 311,564 | $ | 85,186 | 27.3 | % | ||||||||
| Income before income taxes |
$ | 82,441 | $ | 38,618 | $ | 43,823 | 113.5 | % | ||||||||
| Homes delivered |
610 | 581 | 29 | 5.0 | % | |||||||||||
| Average sales price |
$ | 649,475 | $ | 535,680 | $ | 113,795 | 21.2 | % | ||||||||
| Midwest |
||||||||||||||||
| Homebuilding revenue |
$ | 173,175 | $ | 183,895 | $ | (10,720 | ) | (5.8 | )% | |||||||
| Income before income taxes |
$ | 4,303 | $ | 11,070 | $ | (6,767 | ) | (61.1 | )% | |||||||
| Homes delivered |
483 | 576 | (93 | ) | (16.1 | )% | ||||||||||
| Average sales price |
$ | 358,151 | $ | 314,568 | $ | 43,583 | 13.9 | % | ||||||||
| Southeast |
||||||||||||||||
| Homebuilding revenue |
$ | 200,359 | $ | 195,545 | $ | 4,814 | 2.5 | % | ||||||||
| Income before income taxes |
$ | 36,185 | $ | 9,540 | $ | 26,645 | 279.3 | % | ||||||||
| Homes delivered |
402 | 408 | (6 | ) | (1.5 | )% | ||||||||||
| Average sales price |
$ | 497,843 | $ | 461,983 | $ | 35,860 | 7.8 | % | ||||||||
| Southwest |
||||||||||||||||
| Homebuilding revenue |
$ | 692,766 | $ | 620,848 | $ | 71,918 | 11.6 | % | ||||||||
| Income before income taxes |
$ | 99,370 | $ | 78,848 | $ | 20,522 | 26.0 | % | ||||||||
| Homes delivered |
1,643 | 1,808 | (165 | ) | (9.1 | )% | ||||||||||
| Average sales price |
$ | 421,237 | $ | 342,987 | $ | 78,250 | 22.8 | % | ||||||||
| West |
||||||||||||||||
| Homebuilding revenue |
$ | 377,151 | $ | 498,084 | $ | (120,933 | ) | (24.3 | )% | |||||||
| Income before income taxes |
$ | 70,002 | $ | 58,729 | $ | 11,273 | 19.2 | % | ||||||||
| Homes delivered |
617 | 989 | (372 | ) | (37.6 | )% | ||||||||||
| Average sales price |
$ | 610,663 | $ | 503,511 | $ | 107,152 | 21.3 | % | ||||||||
Homebuilding Results by Segment
Northeast - Homebuilding revenues increased 115.7% for the three months ended July 31, 2022 compared to the same period of the prior year. The increase for the three months ended July 31, 2022 was attributed to a $15.8 million increase in land sales and other revenue and a 77.3% increase in homes delivered, partially offset by a 3.6% decrease in average sales price. The decrease in average sales price was the result of new communities delivering higher priced, larger single family homes and townhomes in higher-end submarkets of the segment in the three months ended July 31, 2022 compared to some communities delivering in the three months ended July 31, 2021 that had smaller single family homes in mid to higher-end submarkets of the segment with higher location premiums that are no longer delivering.
Income before income taxes increased $13.4 million to $20.2 million for the three months ended July 31, 2022 as compared to the prior year period. This was primarily due to the increase in homebuilding revenue discussed above, partially offset by a decrease in gross margin percentage before interest expense for the period compared to the same period of the prior year.
Homebuilding revenues increased 55.4% for the nine months ended July 31, 2022 compared to the same period of the prior year. The increase for the nine months ended July 31, 2022 was attributed to a $13.5 million increase in land sales and other revenue, a 32.4% increase in homes delivered and a 7.7% increase in average sales price. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes and townhomes in higher-end submarkets of the segment in the nine months ended July 31, 2022 compared to some communities delivering in the nine months ended July 31, 2021 that had smaller single family homes, townhomes and affordable-housing homes in mid to higher-end submarkets of the segment that are no longer delivering. Also impacting the increase in average sales price was price increases in certain communities.
Income before income taxes increased $14.6 million to $31.1 million for the nine months ended July 31, 2022 as compared to the prior year period. This was primarily due to the increase in homebuilding revenue discussed above, partially offset by a decrease in gross margin percentage before interest expense for the period compared to the same period of the prior year.
Mid-Atlantic - Homebuilding revenues increased 58.0% for the three months ended July 31, 2022 compared to the same period in the prior year period. The increase was primarily due to a 19.2% increase in average sales price and a 32.8% increase in homes delivered for the three months ended July 31, 2022 compared to the same period in the prior year. The increase in average sales price was mainly the result of price increases in certain communities.
Income before income taxes increased $21.8 million to $37.8 million for the three months ended July 31, 2022 compared to the same period in the prior year. This was primarily due to the increase in homebuilding revenue discussed above, a $4.1 million increase in income from unconsolidated joint ventures and an increase in gross margin percentage before interest expense for the three months ended July 31, 2022 compared to the same period of the prior year.
Homebuilding revenues increased 27.3% for the nine months ended July 31, 2022 compared to the same period in the prior year period. The increase was primarily due to a 21.2% increase in average sales price and a 5.0% increase in homes delivered for the nine months ended July 31, 2022 compared to the same period in the prior year. The increase in average sales price was mainly the result of price increases in certain communities.
Income before income taxes increased $43.8 million to $82.4 million for the nine months ended July 31, 2022 compared to the same period in the prior year. This was primarily due to the increase in homebuilding revenue discussed above, a $7.7 million increase in income from unconsolidated joint ventures and an increase in gross margin percentage before interest expense for the nine months ended July 31, 2022 compared to the same period of the prior year.
Midwest - Homebuilding revenues increased 1.2% for the three months ended July 31, 2022 compared to the same period in the prior year. The increase was due to a 15.9% increase in average sales price, partially offset by a 12.6% decrease in homes delivered for the three months ended July 31, 2022. The increase in average sales price was mainly the result of price increases in certain communities.
Income before income taxes decreased $1.3 million to $2.0 million for the three months ended July 31, 2022 compared to the same period in the prior year. The decrease was primarily due to a $0.4 million increase in selling, general and administrative costs and a decrease in gross margin percentage before interest expense for the period compared to the same period of the prior year.
Homebuilding revenues decreased 5.8% for the nine months ended July 31, 2022 compared to the same period in the prior year. The decrease was due to a $2.5 million decrease in land sales and other revenue, a 16.1% decrease in homes delivered, partially offset by a 13.9% increase in average sales price for the nine months ended July 31, 2022. The increase in average sales price was mainly the result of price increases in certain communities.
Income before income taxes decreased $6.8 million to $4.3 million for the nine months ended July 31, 2022 compared to the same period in the prior year. The decrease was primarily due to the decrease in homebuilding revenue discussed above, a $2.0 million increase in selling, general and administrative costs and a decrease in gross margin percentage before interest expense for the period compared to the same period of the prior year.
Southeast – Homebuilding revenues increased 3.9% for the three months ended July 31, 2022 compared to the same period in the prior year. The increase was due to a 6.5% increase in homes delivered and an 8.3% increase in average sales price, partially offset by a $6.8 million decrease in land sales and other revenue for the three months ended July 31, 2022 compared to the same period of the prior year. The increase in average price was mainly the result of price increases in certain communities.
Income before income taxes increased $12.6 million to $15.3 million for the three months ended July 31, 2022 compared to the prior year period, primarily due to the increase in homebuilding revenue discussed above, a $6.1 million increase in income from unconsolidated joint ventures and an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year.
Homebuilding revenues increased 2.5% for the nine months ended July 31, 2022 compared to the same period in the prior year. The increase was due to a 7.8% increase in average sales price, partially offset by a 1.5% decrease in homes delivered and a $6.8 million decrease in land sales and other revenue. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in the nine months ended July 31, 2022 compared to some communities delivering in the nine months ended July 31, 2021 that had lower priced, smaller single family homes in higher-end submarkets of the segment that are no longer delivering. Also impacting the increase in the average sales price was price increases in certain communities.
Income before income taxes increased $26.6 million to $36.2 million for the nine months ended July 31, 2022 compared to the prior year period, primarily due to the increase in homebuilding revenue discussed above, a $10.7 million increase in income from unconsolidated joint ventures and an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year.
Southwest - Homebuilding revenues increased 25.0% for the three months ended July 31, 2022 compared to the same period in the prior year. The increase was primarily due to a 25.7% increase in average sales price, partially offset by a 0.5% decrease in homes delivered for the three months ended July 31, 2022 compared to the same period in the prior year. The increase in average sales price was mainly the result of price increases in certain communities.
Income before income taxes increased $14.2 million to $42.7 million for the three months ended July 31, 2022 compared to the same period in the prior year. The increase was primarily due to the increase in homebuilding revenues discussed above and an increase in gross margin percentage before interest expense for the three months ended July 31, 2022 compared to the same period of the prior year.
Homebuilding revenues increased 11.6% for the nine months ended July 31, 2022 compared to the same period in the prior year. The increase was primarily due to a 22.8% increase in average sales price, partially offset by a 9.1% decrease in homes delivered for the nine months ended July 31, 2022 compared to the same period in the prior year. The increase in average sales price was mainly the result of price increases in certain communities.
Income before income taxes increased $20.5 million to $99.4 million for the nine months ended July 31, 2022 compared to the same period in the prior year. The increase was primarily due to the increase in homebuilding revenues discussed above and an increase in gross margin percentage before interest expense for the nine months ended July 31, 2022 compared to the same period of the prior year.
West – Homebuilding revenues decreased 41.3% for the three months ended July 31, 2022 compared to the same period in the prior year. The decrease was due to a 47.8% decrease in homes delivered, partially offset by a 12.4% increase in average sales price. The increase in average sales price was mainly the result of price increases in certain communities.
Income before income taxes decreased $8.0 million to $19.2 million for the three months ended July 31, 2022 compared to the prior year period. The decrease is primarily due to the decrease in homebuilding revenues discussed above and a $2.2 million increase in selling, general and administrative costs, partially offset by an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year.
Homebuilding revenues decreased 24.3% for the nine months ended July 31, 2022 compared to the same period in the prior year. The decrease was due to a 37.6% decrease in homes delivered, partially offset by a 21.3% increase in average sales price. The increase in average sales price was mainly the result of price increases in certain communities.
Income before income taxes increased $11.3 million to $70.0 million for the nine months ended July 31, 2022 compared to the prior year period. The increase is primarily due to a $1.3 million decrease in inventory impairment loss and land option write-offs and an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year.
Financial Services
Financial services consist primarily of originating mortgages from our home buyers, selling such mortgages in the secondary market, and title insurance activities. We use mandatory investor commitments and forward sales of mortgage-backed securities (“MBS”) to hedge our mortgage-related interest rate exposure on agency and government loans. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments and loan sales transactions is managed by limiting our counterparties to investment banks, federally regulated bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments. For the first three quarters of fiscal 2022 and 2021, Federal Housing Administration and Veterans Administration (“FHA/VA”) loans represented 24.0% and 29.6%, respectively, of our total loans. The origination of FHA/VA loans decreased from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022, and our conforming conventional loan originations as a percentage of our total loans increased from 69.7% to 75.2% for this period, respectively. The origination of loans which exceed conforming conventions was relatively flat at 0.8% for the first three quarters of fiscal 2021 compared to fiscal 2022. Profits and losses relating to the sale of mortgage loans are recognized when legal control passes to the buyer of the mortgage and the sales price is collected.
During the three and nine months ended July 31, 2022, financial services provided a $3.7 million and $11.6 million pretax profit, respectively, compared to $8.6 million and $28.1 million, respectively, of pretax profit for the same periods of fiscal 2021. The decrease in pretax profit was attributed to the decrease in the homebuilding deliveries and a decrease in the basis point spread between the loans originated and the implied rate from the sale of the loans. In the market areas served by our wholly owned mortgage banking subsidiaries, 52.5% and 65.6% of our noncash homebuyers obtained mortgages originated by these subsidiaries during the three months ended July 31, 2022 and 2021, respectively, and 59.0% and 68.6% of our noncash homebuyers obtained mortgages originated by these subsidiaries during the nine months ended July 31, 2022 and 2021, respectively.
Corporate General and Administrative
Corporate general and administrative expenses include the operations at our headquarters in New Jersey. These expenses include payroll, stock compensation, facility costs and rent and other costs associated with our executive offices, legal expenses, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, national and digital marketing, construction services and administration of insurance, quality and safety. Corporate general and administrative expenses increased to $24.8 million for the three months ended July 31, 2022 compared to $17.3 million for the three months ended July 31, 2021 and decreased to $75.9 million for the nine months ended July 31, 2022 compared to $81.1 million for the nine months ended July 31, 2021. The increase for the three months ended July 31, 2022 compared to the same period in the prior fiscal year was primarily due to increased compensation and bonuses related to market conditions and company performance. The decrease for the nine months ended July 31, 2022 compared to the same period in the prior fiscal year was primarily due to decreases in compensation expense, mainly related to the grants of phantom stock awards under our 2019 LTIP, for which expense is impacted by the change in our stock price each period. The expense decreased as a result of the significant decrease in our stock price during the third quarter of fiscal 2022, versus a significant increase in stock price during the same period of the prior year.
Other Interest
Other interest decreased $9.5 million for the three months ended July 31, 2022 compared to the three months ended July 31, 2021 and decreased $29.7 million for the nine months ended July 31, 2022 compared to the nine months ended July 31, 2021. Our assets that qualify for interest capitalization (inventory under development) are less than our debt, and therefore the portion of interest not covered by qualifying assets is directly expensed. Other interest decreased because we incurred less interest and had less debt in excess of inventory as a result of the reduction of our debt and increase in our qualifying assets during fiscal 2021 and 2022.
Income from Unconsolidated Joint Ventures
Income from unconsolidated joint ventures consists of our share of the earnings or losses of our unconsolidated joint ventures. Income from unconsolidated joint ventures increased $7.5 million to $12.6 million for the three months ended July 31, 2022 and increased $14.4 million to $23.9 million for the nine months ended July 31, 2022 compared to the same respective periods of the prior year. The increase was primarily due to the recognition of our share of income from two of our unconsolidated joint ventures during the three and nine months ended July 31, 2022 based on the joint venture partner achieving certain return hurdles, in compliance with the joint venture agreement, and as a result, the Company was able to recognize a higher share of the unconsolidated joint venture’s profit.
Loss on Extinguishment of Debt
On April 29, 2022, K. Hovnanian redeemed $100.0 million aggregate principal amount of its 7.75% Senior Secured 1.125 Lien Notes due 2026. The aggregate purchase price for this redemption was $105.5 million, which included accrued and unpaid interest and which was funded with cash on hand. This redemption resulted in a loss on extinguishment of debt of $6.8 million for the nine months ended July 31, 2022, net of the write-off of unamortized financing costs and fees. The loss from the redemption is included in the Condensed Consolidated Statement of Operations as "Loss on extinguishment of debt".
Total Taxes
The total income tax expense for the three and nine months ended July 31, 2022 was $29.3 million and $58.4 million, respectively. The expense was primarily due to federal and state tax expense recorded as a result of our pretax income. The federal tax expense is not paid in cash as it is offset by the use of our existing NOL carryforwards. The total income tax expense for the three months ended July 31, 2021 was $14.1 million. The federal tax expense was primarily related to pretax income generated during the quarter and state tax expense from income generated in states where we do not have net operating loss carryforwards to offset the current year income. The total benefit for the nine months ended July 31, 2021 was $442.9 million. The benefit was primarily due to the reversal of a substantial portion of our valuation allowance previously recorded against our deferred tax assets.
Inflation
The annual rate of inflation in the United States hit 8.5% in July 2022, nearly the highest in more than three decades, as measured by the Consumer Price Index (CPI). Inflation has a long-term effect, because increasing costs of land, materials and labor result in increasing sale prices of our homes. Historically, these price increases have been commensurate with the general rate of inflation in our housing markets and have not had a significant adverse effect on the sale of our homes. A significant risk faced by the housing industry generally is that rising house construction costs, including land and interest costs, will substantially outpace increases in the income of potential purchasers and therefore limit our ability to raise home sale prices, which may result in lower gross margins.
Inflation has a lesser short-term effect, because we generally negotiate fixed-price contracts with many, but not all, of our subcontractors and material suppliers for the construction of our homes. These prices usually are applicable for a specified number of residential buildings or for a time period of between three to twelve months. Construction costs for residential buildings represented approximately 56.9% of our homebuilding cost of sales for the nine months ended July 31, 2022.
Safe Harbor Statement
All statements in this Quarterly Report on Form 10-Q that are not historical facts should be considered as “Forward-Looking Statements” within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such forward-looking statements include but are not limited to statements related to the Company's goals and expectations with respect to its financial results for future financial periods. Although we believe that our plans, intentions and expectations reflected in, or suggested by, such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. By their nature, forward-looking statements: (i) speak only as of the date they are made, (ii) are not guarantees of future performance or results and (iii) are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as result of a variety of factors. Such risks, uncertainties and other factors include, but are not limited to:
| ● |
Changes in general and local economic, industry and business conditions and impacts of a significant homebuilding downturn; |
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| ● |
Shortages in, and price fluctuations of, raw materials and labor, including due to geopolitical events, changes in trade policies, including the imposition of tariffs and duties on homebuilding materials and products, and related trade disputes with, and retaliatory measures taken by other countries; |
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| ● |
The outbreak and spread of COVID-19 and the measures that governments, agencies, law enforcement and/or health authorities implement to address it, as well as continuing macroeconomic effects of the pandemic; |
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| ● |
Adverse weather and other environmental conditions and natural disasters; |
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| ● |
The seasonality of the Company’s business; |
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| ● |
The availability and cost of suitable land and improved lots and sufficient liquidity to invest in such land and lots; |
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| ● |
Reliance on, and the performance of, subcontractors; |
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| ● |
Regional and local economic factors, including dependency on certain sectors of the economy, and employment levels affecting home prices and sales activity in the markets where the Company builds homes; |
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| ● |
Increases in cancellations of agreements of sale; |
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| ● |
Fluctuations in interest rates and the availability of mortgage financing; |
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| ● |
Changes in tax laws affecting the after-tax costs of owning a home; |
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| ● |
Legal claims brought against us and not resolved in our favor, such as product liability litigation, warranty claims and claims made by mortgage investors; |
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| ● |
Levels of competition; |
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| ● | Utility shortages and outages or rate fluctuations; | |
| ● | Information technology failures and data security breaches; | |
| ● | Negative publicity; | |
| ● | High leverage and restrictions on the Company's operations and activities imposed by the agreements governing the Company's outstanding indebtedness; | |
| ● | Availability and terms of financing to the Company; | |
| ● | The Company's sources of liquidity; | |
| ● | Changes in credit ratings; | |
| ● | Government regulations, including regulations concerning development of land, the home building, sales and customer financing processes, tax laws and the environment; | |
| ● | Operations through unconsolidated joint ventures with third parties; | |
| ● |
Significant influence of the Company’s controlling stockholders; |
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| ● |
Availability of net operating loss carryforwards; |
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| ● | Loss of key management personnel or failure to attract qualified personnel; and | |
| ● |
Increases in inflation. |
Certain risks, uncertainties and other factors are described in detail in Part I, Item 1 “Business” and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Quarterly Report on Form 10-Q.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A primary market risk facing us is interest rate risk on our long-term debt, including debt instruments at variable interest rates. In connection with our mortgage operations, mortgage loans held for sale and the associated mortgage warehouse lines of credit under our Master Repurchase Agreements are subject to interest rate risk; however, such obligations reprice frequently and are short-term in duration. In addition, we hedge the interest rate risk on mortgage loans by obtaining forward commitments from private investors. Accordingly, the interest rate risk from mortgage loans is not material. We do not use financial instruments to hedge interest rate risk except with respect to mortgage loans. We are also subject to foreign currency risk but we do not believe this risk is material. The following table sets forth as of July 31, 2022, our long-term debt obligations, principal cash flows by scheduled maturity, weighted-average interest rates and estimated fair value (“FV”).
| Long Term Debt as of July 31, 2022 by Fiscal Year of Expected Maturity Date |
||||||||||||||||||||||||||||||||
| FV at |
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| (Dollars in thousands) |
2022 |
2023 |
2024 |
2025 |
2026 |
Thereafter |
Total |
7/31/22 |
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| Long term debt(1)(2): |
||||||||||||||||||||||||||||||||
| Fixed rate |
$ | - | $ | - | $ | - | $ | - | $ | 943,683 | $ | 211,169 | $ | 1,154,852 | $ | 1,116,249 | ||||||||||||||||
| Weighted average interest rate |
- | % | - | % | - | % | - | % | 10.10 | % | 6.93 | % | 9.52 | % | ||||||||||||||||||
| (1) | Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements. Also, does not include our $125.0 million Secured Credit Facility under which there were no borrowings outstanding as of July 31, 2022. |
| (2) |
Does not include $187.8 million of nonrecourse mortgages secured by inventory. These mortgages have various maturities spread over the next two to three years and are paid off as homes are delivered. |
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of July 31, 2022. Based upon that evaluation and subject to the foregoing, the Company’s chief executive officer and chief financial officer concluded that the design and operation of the Company’s disclosure controls and procedures are effective to accomplish their objectives.
There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended July 31, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Information with respect to legal proceedings is incorporated into this Part II, Item 1 from Note 7 to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Recent Sales of Unregistered Equity Securities
None.
Issuer Purchases of Equity Securities
No shares of our Class A Common Stock or Class B Common Stock were purchased by or on behalf of the Company or any affiliated purchaser during the fiscal third quarter of 2022.
On September 1, 2022, our Board of Directors terminated our prior repurchase program and authorized a new program for the repurchase of up to $50.0 million of our Class A common stock. Under the new repurchase program, repurchases may be made from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing and the actual dollar amounts repurchased will depend on a variety of factors, including legal requirements, price and economic and market conditions. The repurchase program may be changed, suspended or discontinued at any time and does not have a specified expiration date.
Dividends
Certain debt agreements to which we are a party contain restrictions on the payment of cash dividends. However, beginning as of October 31, 2021, as a result of our improved operating results, we were no longer restricted from paying dividends. During each of the first, second and third quarters of fiscal 2022, we paid a dividend in the amount of $2.7 million on the Series A Preferred Stock.
| 10(d)* | Form of 2022 Performance Share Unit Agreement – EBIT ROI (Class A). |
| 10(e)* | Form of 2022 Performance Share Unit Agreement – EBIT ROI (Class B). |
| 10(f)* | Form of 2022 Performance Share Unit Agreement – Land Light Performance Vesting (Class A). |
| 10(g)* | Form of 2022 Performance Share Unit Agreement – National Contracts Savings Performance Vesting (Class A). |
| 10(h)* | Form of 2022 Performance Share Unit Agreement – KHDS Savings Performance Vesting (Class A). |
| 10(i)* |
Restricted Share Unit Agreement Class A (2022 grants and thereafter). |
| 10(j)* |
Director Restricted Share Unit Agreement Class A (2022 grants and thereafter). |
| 31(a) |
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
| 31(b) |
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
| 32(a) |
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| 32(b) |
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| 101
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The following financial information from our Quarterly Report on Form 10-Q for the quarter ended July 31, 2022, formatted in inline Extensible Business Reporting Language (Inline XBRL): (i) the Condensed Consolidated Balance Sheets at July 31, 2022 and October 31, 2021, (ii) the Condensed Consolidated Statements of Operations for the three and nine months ended July 31, 2022 and 2021, (iii) the Condensed Consolidated Statements of Changes in Equity Deficit for the nine months ended July 31, 2022 and 2021, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended July 31, 2022 and 2021, and (v) the Notes to Condensed Consolidated Financial Statements. |
| 104 | Cover Page from our Quarterly Report on Form 10-Q for the nine months ended July 31, 2022, formatted in Inline XBRL (and contained in Exhibit 101). |
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| * Management contracts or compensatory plans or arrangements. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HOVNANIAN ENTERPRISES, INC.
(Registrant)
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DATE: |
September 6, 2022 |
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/s/J. LARRY SORSBY |
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J. Larry Sorsby |
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Executive Vice President, |
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Chief Financial Officer and Director |
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DATE: |
September 6, 2022 |
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/s/BRAD G. O’CONNOR |
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Brad G. O’Connor |
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Senior Vice President, Treasurer and Chief Accounting Officer |
EXHIBIT 10(b)
2020 HOVNANIAN ENTERPRISES, INC.
SECOND AMENDED AND RESTATED STOCK INCENTIVE PLAN
PERFORMANCE SHARE UNIT AGREEMENT
(EBIT Performance Vesting)
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Participant: |
Date of Grant: |
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Target Number of PSUs: |
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Date of Vesting of Earned PSUs: |
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Date |
Percentage of Earned PSUs |
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[Date] |
100% |
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1. Grant of PSUs. For valuable consideration, receipt of which is hereby acknowledged, Hovnanian Enterprises, Inc., a Delaware Corporation (the "Company"), hereby grants the target number (“Target Number”) of performance share units ("PSUs") listed above to the Participant, on the terms and conditions hereinafter set forth. This grant is made pursuant to the terms and conditions of the 2020 Company Second Amended and Restated Stock Incentive Plan (the "Plan"), which Plan, as amended from time to time, is incorporated herein by reference and made a part of this Agreement. The actual number of PSUs, if any, that the Participant will be eligible to earn with respect to this Agreement (the “Earned PSUs”), subject to meeting the applicable service and performance vesting requirements, will equal the Target Number multiplied by the applicable “Performance Multiplier” as defined in Exhibit A hereto. Each Earned PSU represents the unfunded, unsecured right of the Participant to receive a Share on the date(s) specified herein. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.
2. Vesting and Timing of Transfer.
(a) The Participant will become vested in the Earned PSUs in accordance with the schedule set forth above (each such vesting date, a “Vesting Date”); provided, however, that upon the occurrence of a Change in Control that results in the Company's Shares ceasing to be publicly traded on a national securities exchange, the Earned PSUs shall immediately become fully vested (subject to any delay in Share delivery required pursuant to Sections 2(b) and 16 hereof).
(b) The Company shall transfer to the Participant, as soon as practicable but not later than 60 days after an applicable “Delivery Date” (as defined below), a number of Class A Shares equal to the number of Earned PSUs that became vested on the corresponding Vesting Date (rounded up to the next whole share), provided, however, that upon the final transfer of Shares to the Participant (i) such number of Shares shall be reduced to the extent necessary to reflect any previous rounding up pursuant to this sentence, and (ii) in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. If the Participant is eligible to participate in, and has elected to defer the transfer of Shares pursuant to the terms of a nonqualified deferred compensation plan maintained by the Company, such Shares shall be so deferred, and any such deferral, when paid, shall be paid in Shares. Once the transfer of any Shares is deferred, the rights and privileges of the Participant with respect to such Shares shall be determined solely pursuant to the terms of the applicable plan, and not pursuant to the terms and conditions of this Agreement. For purposes of this Agreement, the “Delivery Date” with respect to each Vesting Date shall mean the date that is the earlier of (i) the second anniversary of such Vesting Date or (ii) the second anniversary of the date of the Participant’s Qualified Termination (as defined below), if applicable.
(c) Notwithstanding Sections 2(a) and 2(b) of this Agreement, if the Participant's employment with the Company and its Affiliates terminates due to (i) death, (ii) Disability or (iii) Retirement, (any such termination, a “Qualified Termination”), then (A) any previously unvested Earned PSUs shall become fully vested, (B) if such Qualified Termination occurs prior to the determination of the number of Earned PSUs in accordance with Exhibit A hereto, the PSUs granted hereunder shall remaining outstanding and eligible to become Earned PSUs in accordance with such Exhibit A and (C) the Shares underlying all of the Participant’s Earned PSUs, if any, shall be delivered to the Participant as soon as practicable but not later than 60 days after the corresponding Delivery Date(s) subject to Section 16 of this Agreement; provided, however, that upon the transfer of such Shares to the Participant, in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. In the event of the death of the Participant, the transfer of Shares under this Section 2(c) shall be made in accordance with the beneficiary designation form on file with the Company; provided, however, that, in the absence of any such beneficiary designation form, the transfer of Shares under this Section 2(c) shall be made to the person or persons to whom the Participant's rights under the Agreement shall pass by will or by the applicable laws of descent and distribution. For purposes of this Agreement, "Disability" shall mean "Disability" as defined in the Plan, and "Retirement" shall mean termination of employment on or after age 60, or on or after age 58 with at least 15 years of "Service" to the Company and its Subsidiaries immediately preceding such termination of employment. For this purpose, "Service" means the period of employment immediately preceding Retirement, plus any prior periods of employment with the Company and its Subsidiaries of one or more years' duration, unless they were succeeded by a period of non-employment with the Company and its Subsidiaries of more than three years' duration.
(d) Upon each transfer or deferral of Shares in accordance with Sections 2(a), 2(b) and 2(c) of this Agreement, a number of Earned PSUs equal to the number of Shares transferred to the Participant or deferred shall be extinguished.
(e) Notwithstanding Sections 2(a), 2(b) and 2(c) of this Agreement, upon the Participant's termination of employment for any reason other than (i) death, Disability or Retirement or (ii) under the circumstances described in clause (f) below, any unvested PSUs (including, without limitation, any Earned PSUs) shall immediately terminate for no further consideration.
(f) Termination without Cause or for Good Reason within Two Years Following a Change in Control. In the event of the Participant's Qualifying Termination or involuntary termination of employment with the Company or a subsidiary thereof without "Cause" or for "Good Reason", in each case, within two years following a Change in Control, the Earned PSUs, to the extent not previously vested and settled, shall immediately become fully vested and settled in Shares. For purposes of this Agreement, "Cause" shall mean the occurrence of any of the following: (a) the willful and continued failure of the Participant to perform substantially all of his or her duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) for a period of 10 days following a written demand for substantial performance that is delivered to such Participant by the Company, which specifically identifies the manner in which the Company believes the Participant has not substantially performed his or her duties; (b) dishonesty in the performance of the Participant's duties with the Company; (c) the Participant's conviction of, or plea of guilty or nolo contendere to, a crime under the laws of the United States or any state thereof constituting a felony or a misdemeanor involving moral turpitude; (d) the Participant's willful malfeasance or willful misconduct in connection with the Participant's duties with the Company or any act or omission which is injurious to the financial condition or business reputation of the Company or its affiliates; or (e) the Participant's breach of the provisions of Section 11 of this Agreement. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following, without the Participant's express written consent: (a) any material diminution in the Participant's duties, titles or responsibilities with the Company from those in effect immediately prior to a Change in Control or (b) any reduction in the Participant's annual base salary or any material reduction in the Participant's annual bonus opportunity, annual equity awards or long-term incentive program awards from the Participant's annual base salary or annual bonus opportunity, annual equity awards or long-term incentive program awards in effect immediately prior to a Change in Control. Notwithstanding the foregoing, no event shall constitute Good Reason unless the Participant provides the Company with written notice of such event within 60 days after the occurrence thereof and the Company fails to cure or resolve the behavior otherwise constituting Good Reason within 30 days of its receipt of such notice.
(g) Any portion of the PSUs granted pursuant to this Agreement which do not become Earned PSUs in accordance with Exhibit A hereto shall be forfeited for no further consideration.
3. Dividends. If on any date while PSUs are outstanding hereunder the Company shall pay any dividend on the Shares (other than a dividend payable in Shares), the number of PSUs granted to the Participant shall, as of such dividend payment date, be increased by a number of PSUs equal to: (a) the product of (x) the number of PSUs held by the Participant as of the related dividend record date, multiplied by (y) the per Share amount of any cash dividend (or, in the case of any dividend payable in whole or in part other than in cash, the per Share value of such dividend, as determined in good faith by the Committee), divided by (b) the Fair Market Value of a Share on the payment date of such dividend. In the case of any dividend declared on Shares that is payable in the form of Shares, the number of PSUs granted to the Participant shall be increased by a number equal to the product of (a) the PSUs that are held by the Participant on the related dividend record date, multiplied by (b) the number of Shares (including any fraction thereof) payable as a dividend on a Share. Any PSUs attributable to dividends under this Section 3 shall be subject to the vesting provisions provided in Section 2 and the performance conditions set forth in Exhibit A.
4. Adjustments Upon Certain Events. Subject to the terms of the Plan, in the event of any change in the outstanding Shares by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, amalgamation, spin-off or combination transaction or exchange of Shares or other similar events (collectively, an "Adjustment Event"), the Committee shall, in its sole discretion, make an appropriate and equitable adjustment in the number of PSUs subject to this Agreement to reflect such Adjustment Event. Any such adjustment made by the Committee shall be final and binding upon the Participant, the Company and all other interested persons.
5. No Right to Continued Employment. Neither the Plan nor this Agreement shall be construed as giving the Participant the right to be retained in the employ of, or in any consulting relationship to, the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss the Participant, free from any liability or any claim under the Plan or this Agreement, except as otherwise expressly provided herein.
6. No Acquired Rights. In participating in the Plan, the Participant acknowledges and accepts that the Board has the power to amend or terminate the Plan, to the extent permitted thereunder, at any time and that the opportunity given to the Participant to participate in the Plan is entirely at the discretion of the Committee and does not obligate the Company or any of its Affiliates to offer such participation in the future (whether on the same or different terms). The Participant further acknowledges and accepts that such Participant's participation in the Plan is not to be considered part of any normal or expected compensation and that the termination of the Participant's employment under any circumstances whatsoever will give the Participant no claim or right of action against the Company or its Affiliates in respect of any loss of rights under this Agreement or the Plan that may arise as a result of such termination of employment.
7. No Rights of a Shareholder. The Participant shall not have any rights or privileges as a shareholder of the Company until the Shares in question have been registered in the Company's register of shareholders.
8. Legend on Certificates. Any Shares issued or transferred to the Participant pursuant to Section 2 of this Agreement shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares are listed, and any applicable Federal or state laws or relevant securities laws of the jurisdiction of the domicile of the Participant, and the Committee may cause a legend or legends to be put on any certificates representing such Shares to make appropriate reference to such restrictions. Whenever reference in this Agreement is made to the issuance or delivery of certificates representing Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.
9. Transferability. PSUs may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant otherwise than by will or by the laws of descent and distribution, and any purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance not permitted by this Section 9 shall be void and unenforceable against the Company or any Affiliate.
10. Withholding. The Participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any transfer due under this Agreement or under the Plan or from any compensation or other amount owing to the Participant, applicable withholding taxes with respect to any transfer under this Agreement or under the Plan and to take such action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. Notwithstanding the foregoing, if the Participant's employment with the Company terminates prior to the transfer of all of the Shares under this Agreement, the payment of any applicable withholding taxes with respect to any further transfer of Shares under this Agreement or the Plan shall be made solely through the sale of Shares equal to the statutory minimum withholding liability.
11. Non-Solicitation Covenants.
(a) The Participant acknowledges and agrees that, during the Participant's employment with the Company and its Affiliates and upon the Participant's termination of Employment with the Company and its Affiliates for any reason, for a period commencing on the termination of such Employment and ending on the second anniversary of such termination, the Participant shall not, whether on Participant's own behalf or on behalf of or in conjunction with any person, company, business entity or other organization whatsoever, directly or indirectly:
(i) solicit any employee of the Company or its Affiliates with whom the Participant had any contact during the last two years of the Participant's employment, or who worked in the same business segment or division as the Participant during that period to terminate employment with the Company or its Affiliates;
(ii) solicit the employment or services of, or hire, any such employee whose employment with the Company or its Affiliates terminated coincident with, or within twelve (12) months prior to or after the termination of Participant's employment with the Company and its Affiliates;
(iii) directly or indirectly, solicit to cease to work with the Company or its Affiliates any consultant then under contract with the Company or its Affiliates.
(b) It is expressly understood and agreed that although the Participant and the Company consider the restrictions contained in this Section 11 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or any other restriction contained in this Agreement is an unenforceable restriction against the Participant, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and terri‐tory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restric‐tion contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein.
12. Specific Performance. The Participant acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Section 11 would be inadequate and the Company would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, the Participant agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available.
13. Choice of Law. THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
14. RSUs Subject to Plan. By entering into this Agreement, the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. All PSUs are subject to the Plan. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.
15. Signature in Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
16. 409A. Notwithstanding any other provisions of this Agreement or the Plan, the PSUs covered by this Agreement shall not be deferred, accelerated, extended, paid out or modified in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon the Participant. In the event it is reasonably determined by the Committee that, as a result of Section 409A of the Code, the transfer of Class A Shares under this Agreement may not be made at the time contemplated hereunder without causing the Participant to be subject to taxation under Section 409A of the Code (including due to the Participant's status as a "specified employee" within the meaning of Section 409A of the Code), the Company will make such payment on the first day that would not result in the Participant incurring any tax liability under Section 409A of the Code.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
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HOVNANIAN ENTERPRISES, INC. |
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By: |
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PARTICIPANT1 |
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By: |
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1. To the extent that the Company has established, either itself or through a third-party plan administrator, the ability to accept this award electronically, such acceptance shall constitute the Participant’s signature hereof. |
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Exhibit A
[Insert Performance Metrics for Determining Earned PSUs]
EXHIBIT 10(c)
2020 HOVNANIAN ENTERPRISES, INC.
SECOND AMENDED AND RESTATED STOCK INCENTIVE PLAN
PERFORMANCE SHARE UNIT AGREEMENT
(EBIT Performance Vesting)
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Participant: |
Date of Grant: |
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Target Number of PSUs: |
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Date of Vesting of Earned PSUs: |
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Date |
Percentage of Earned PSUs |
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[Date] |
100% |
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1. Grant of PSUs. For valuable consideration, receipt of which is hereby acknowledged, Hovnanian Enterprises, Inc., a Delaware Corporation (the "Company"), hereby grants the target number (“Target Number”) of performance share units ("PSUs") listed above to the Participant, on the terms and conditions hereinafter set forth. This grant is made pursuant to the terms and conditions of the 2020 Company Second Amended and Restated Stock Incentive Plan (the "Plan"), which Plan, as amended from time to time, is incorporated herein by reference and made a part of this Agreement. The actual number of PSUs, if any, that the Participant will be eligible to earn with respect to this Agreement (the “Earned PSUs”), subject to meeting the applicable service and performance vesting requirements, will equal the Target Number multiplied by the applicable “Performance Multiplier” as defined in Exhibit A hereto. Each Earned PSU represents the unfunded, unsecured right of the Participant to receive a Share on the date(s) specified herein. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.
2. Vesting and Timing of Transfer.
(a) The Participant will become vested in the Earned PSUs in accordance with the schedule set forth above (each such vesting date, a “Vesting Date”); provided, however, that upon the occurrence of a Change in Control that results in the Company's Shares ceasing to be publicly traded on a national securities exchange, the Earned PSUs shall immediately become fully vested (subject to any delay in Share delivery required pursuant to Sections 2(b) and 16 hereof).
(b) The Company shall transfer to the Participant, as soon as practicable but not later than 60 days after an applicable “Delivery Date” (as defined below), a number of Class B Shares equal to the number of Earned PSUs that became vested on the corresponding Vesting Date (rounded up to the next whole share), provided, however, that upon the final transfer of Shares to the Participant (i) such number of Shares shall be reduced to the extent necessary to reflect any previous rounding up pursuant to this sentence, and (ii) in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. If the Participant is eligible to participate in, and has elected to defer the transfer of Shares pursuant to the terms of a nonqualified deferred compensation plan maintained by the Company, such Shares shall be so deferred, and any such deferral, when paid, shall be paid in Shares. Once the transfer of any Shares is deferred, the rights and privileges of the Participant with respect to such Shares shall be determined solely pursuant to the terms of the applicable plan, and not pursuant to the terms and conditions of this Agreement. For purposes of this Agreement, the “Delivery Date” with respect to each Vesting Date shall mean the date that is the earlier of (i) the second anniversary of such Vesting Date or (ii) the second anniversary of the date of the Participant’s Qualified Termination (as defined below), if applicable.
(c) Notwithstanding Sections 2(a) and 2(b) of this Agreement, if the Participant's employment with the Company and its Affiliates terminates due to (i) death, (ii) Disability or (iii) Retirement, (any such termination, a “Qualified Termination”), then (A) any previously unvested Earned PSUs shall become fully vested, (B) if such Qualified Termination occurs prior to the determination of the number of Earned PSUs in accordance with Exhibit A hereto, the PSUs granted hereunder shall remaining outstanding and eligible to become Earned PSUs in accordance with such Exhibit A and (C) the Shares underlying all of the Participant’s Earned PSUs, if any, shall be delivered to the Participant as soon as practicable but not later than 60 days after the corresponding Delivery Date(s) subject to Section 16 of this Agreement; provided, however, that upon the transfer of such Shares to the Participant, in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. In the event of the death of the Participant, the transfer of Shares under this Section 2(c) shall be made in accordance with the beneficiary designation form on file with the Company; provided, however, that, in the absence of any such beneficiary designation form, the transfer of Shares under this Section 2(c) shall be made to the person or persons to whom the Participant's rights under the Agreement shall pass by will or by the applicable laws of descent and distribution. For purposes of this Agreement, "Disability" shall mean "Disability" as defined in the Plan, and "Retirement" shall mean termination of employment on or after age 60, or on or after age 58 with at least 15 years of "Service" to the Company and its Subsidiaries immediately preceding such termination of employment. For this purpose, "Service" means the period of employment immediately preceding Retirement, plus any prior periods of employment with the Company and its Subsidiaries of one or more years' duration, unless they were succeeded by a period of non-employment with the Company and its Subsidiaries of more than three years' duration.
(d) Upon each transfer or deferral of Shares in accordance with Sections 2(a), 2(b) and 2(c) of this Agreement, a number of Earned PSUs equal to the number of Shares transferred to the Participant or deferred shall be extinguished.
(e) Notwithstanding Sections 2(a), 2(b) and 2(c) of this Agreement, upon the Participant's termination of employment for any reason other than (i) death, Disability or Retirement or (ii) under the circumstances described in clause (f) below, any unvested PSUs (including, without limitation, any Earned PSUs) shall immediately terminate for no further consideration.
(f) Termination without Cause or for Good Reason within Two Years Following a Change in Control. In the event of the Participant's Qualifying Termination or involuntary termination of employment with the Company or a subsidiary thereof without "Cause" or for "Good Reason", in each case, within two years following a Change in Control, the Earned PSUs, to the extent not previously vested and settled, shall immediately become fully vested and settled in Shares. For purposes of this Agreement, "Cause" shall mean the occurrence of any of the following: (a) the willful and continued failure of the Participant to perform substantially all of his or her duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) for a period of 10 days following a written demand for substantial performance that is delivered to such Participant by the Company, which specifically identifies the manner in which the Company believes the Participant has not substantially performed his or her duties; (b) dishonesty in the performance of the Participant's duties with the Company; (c) the Participant's conviction of, or plea of guilty or nolo contendere to, a crime under the laws of the United States or any state thereof constituting a felony or a misdemeanor involving moral turpitude; (d) the Participant's willful malfeasance or willful misconduct in connection with the Participant's duties with the Company or any act or omission which is injurious to the financial condition or business reputation of the Company or its affiliates; or (e) the Participant's breach of the provisions of Section 11 of this Agreement. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following, without the Participant's express written consent: (a) any material diminution in the Participant's duties, titles or responsibilities with the Company from those in effect immediately prior to a Change in Control or (b) any reduction in the Participant's annual base salary or any material reduction in the Participant's annual bonus opportunity, annual equity awards or long-term incentive program awards from the Participant's annual base salary or annual bonus opportunity, annual equity awards or long-term incentive program awards in effect immediately prior to a Change in Control. Notwithstanding the foregoing, no event shall constitute Good Reason unless the Participant provides the Company with written notice of such event within 60 days after the occurrence thereof and the Company fails to cure or resolve the behavior otherwise constituting Good Reason within 30 days of its receipt of such notice.
(g) Any portion of the PSUs granted pursuant to this Agreement which do not become Earned PSUs in accordance with Exhibit A hereto shall be forfeited for no further consideration.
3. Dividends. If on any date while PSUs are outstanding hereunder the Company shall pay any dividend on the Shares (other than a dividend payable in Shares), the number of PSUs granted to the Participant shall, as of such dividend payment date, be increased by a number of PSUs equal to: (a) the product of (x) the number of PSUs held by the Participant as of the related dividend record date, multiplied by (y) the per Share amount of any cash dividend (or, in the case of any dividend payable in whole or in part other than in cash, the per Share value of such dividend, as determined in good faith by the Committee), divided by (b) the Fair Market Value of a Share on the payment date of such dividend. In the case of any dividend declared on Shares that is payable in the form of Shares, the number of PSUs granted to the Participant shall be increased by a number equal to the product of (a) the PSUs that are held by the Participant on the related dividend record date, multiplied by (b) the number of Shares (including any fraction thereof) payable as a dividend on a Share. Any PSUs attributable to dividends under this Section 3 shall be subject to the vesting provisions provided in Section 2 and the performance conditions set forth in Exhibit A.
4. Adjustments Upon Certain Events. Subject to the terms of the Plan, in the event of any change in the outstanding Shares by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, amalgamation, spin-off or combination transaction or exchange of Shares or other similar events (collectively, an "Adjustment Event"), the Committee shall, in its sole discretion, make an appropriate and equitable adjustment in the number of PSUs subject to this Agreement to reflect such Adjustment Event. Any such adjustment made by the Committee shall be final and binding upon the Participant, the Company and all other interested persons.
5. No Right to Continued Employment. Neither the Plan nor this Agreement shall be construed as giving the Participant the right to be retained in the employ of, or in any consulting relationship to, the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss the Participant, free from any liability or any claim under the Plan or this Agreement, except as otherwise expressly provided herein.
6. No Acquired Rights. In participating in the Plan, the Participant acknowledges and accepts that the Board has the power to amend or terminate the Plan, to the extent permitted thereunder, at any time and that the opportunity given to the Participant to participate in the Plan is entirely at the discretion of the Committee and does not obligate the Company or any of its Affiliates to offer such participation in the future (whether on the same or different terms). The Participant further acknowledges and accepts that such Participant's participation in the Plan is not to be considered part of any normal or expected compensation and that the termination of the Participant's employment under any circumstances whatsoever will give the Participant no claim or right of action against the Company or its Affiliates in respect of any loss of rights under this Agreement or the Plan that may arise as a result of such termination of employment.
7. No Rights of a Shareholder. The Participant shall not have any rights or privileges as a shareholder of the Company until the Shares in question have been registered in the Company's register of shareholders.
8. Legend on Certificates. Any Shares issued or transferred to the Participant pursuant to Section 2 of this Agreement shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares are listed, and any applicable Federal or state laws or relevant securities laws of the jurisdiction of the domicile of the Participant, and the Committee may cause a legend or legends to be put on any certificates representing such Shares to make appropriate reference to such restrictions. Whenever reference in this Agreement is made to the issuance or delivery of certificates representing Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.
9. Transferability. PSUs may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant otherwise than by will or by the laws of descent and distribution, and any purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance not permitted by this Section 9 shall be void and unenforceable against the Company or any Affiliate.
10. Withholding. The Participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any transfer due under this Agreement or under the Plan or from any compensation or other amount owing to the Participant, applicable withholding taxes with respect to any transfer under this Agreement or under the Plan and to take such action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. Notwithstanding the foregoing, if the Participant's employment with the Company terminates prior to the transfer of all of the Shares under this Agreement, the payment of any applicable withholding taxes with respect to any further transfer of Shares under this Agreement or the Plan shall be made solely through the sale of Shares equal to the statutory minimum withholding liability.
11. Non-Solicitation Covenants.
(a) The Participant acknowledges and agrees that, during the Participant's employment with the Company and its Affiliates and upon the Participant's termination of Employment with the Company and its Affiliates for any reason, for a period commencing on the termination of such Employment and ending on the second anniversary of such termination, the Participant shall not, whether on Participant's own behalf or on behalf of or in conjunction with any person, company, business entity or other organization whatsoever, directly or indirectly:
(i) solicit any employee of the Company or its Affiliates with whom the Participant had any contact during the last two years of the Participant's employment, or who worked in the same business segment or division as the Participant during that period to terminate employment with the Company or its Affiliates;
(ii) solicit the employment or services of, or hire, any such employee whose employment with the Company or its Affiliates terminated coincident with, or within twelve (12) months prior to or after the termination of Participant's employment with the Company and its Affiliates;
(iii) directly or indirectly, solicit to cease to work with the Company or its Affiliates any consultant then under contract with the Company or its Affiliates.
(b) It is expressly understood and agreed that although the Participant and the Company consider the restrictions contained in this Section 11 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or any other restriction contained in this Agreement is an unenforceable restriction against the Participant, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and terri‐tory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restric‐tion contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein.
12. Specific Performance. The Participant acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Section 11 would be inadequate and the Company would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, the Participant agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available.
13. Choice of Law. THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
14. RSUs Subject to Plan. By entering into this Agreement, the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. All PSUs are subject to the Plan. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.
15. Signature in Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
16. 409A. Notwithstanding any other provisions of this Agreement or the Plan, the PSUs covered by this Agreement shall not be deferred, accelerated, extended, paid out or modified in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon the Participant. In the event it is reasonably determined by the Committee that, as a result of Section 409A of the Code, the transfer of Class B Shares under this Agreement may not be made at the time contemplated hereunder without causing the Participant to be subject to taxation under Section 409A of the Code (including due to the Participant's status as a "specified employee" within the meaning of Section 409A of the Code), the Company will make such payment on the first day that would not result in the Participant incurring any tax liability under Section 409A of the Code.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
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HOVNANIAN ENTERPRISES, INC. |
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By: |
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PARTICIPANT1 |
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By: |
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1. To the extent that the Company has established, either itself or through a third-party plan administrator, the ability to accept this award electronically, such acceptance shall constitute the Participant’s signature hereof. |
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Exhibit A
[Insert Performance Metrics for Determining Earned PSUs]
Exhibit 10(d)
2020 HOVNANIAN ENTERPRISES, INC.
SECOND AMENDED AND RESTATED STOCK INCENTIVE PLAN
PERFORMANCE SHARE UNIT AGREEMENT
(Relative EBIT ROI Rank Compared to Peers Performance Vesting)
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Participant: |
Date of Grant: |
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Target Number of PSUs: |
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Date of Vesting of Earned PSUs: |
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Date |
Percentage of Earned PSUs |
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[Date] |
100% |
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1. Grant of PSUs. For valuable consideration, receipt of which is hereby acknowledged, Hovnanian Enterprises, Inc., a Delaware Corporation (the "Company"), hereby grants the target number (“Target Number”) of performance share units ("PSUs") listed above to the Participant, on the terms and conditions hereinafter set forth. This grant is made pursuant to the terms and conditions of the 2020 Company Second Amended and Restated Stock Incentive Plan (the "Plan"), which Plan, as amended from time to time, is incorporated herein by reference and made a part of this Agreement. The actual number of PSUs, if any, that the Participant will be eligible to earn with respect to this Agreement (the “Earned PSUs”), subject to meeting the applicable service and performance vesting requirements, will equal the Target Number multiplied by the applicable “Performance Multiplier” as defined in Exhibit A hereto. Each Earned PSU represents the unfunded, unsecured right of the Participant to receive a Share on the date(s) specified herein. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.
2. Vesting and Timing of Transfer.
(a) The Participant will become vested in the Earned PSUs in accordance with the schedule set forth above (each such vesting date, a “Vesting Date”); provided, however, that upon the occurrence of a Change in Control that results in the Company's Shares ceasing to be publicly traded on a national securities exchange, the Earned PSUs shall immediately become fully vested (subject to any delay in Share delivery required pursuant to Sections 2(b) and 16 hereof).
(b) The Company shall transfer to the Participant, as soon as practicable but not later than 60 days after an applicable “Delivery Date” (as defined below), a number of Class A Shares equal to the number of Earned PSUs that became vested on the corresponding Vesting Date (rounded up to the next whole share), provided, however, that upon the final transfer of Shares to the Participant (i) such number of Shares shall be reduced to the extent necessary to reflect any previous rounding up pursuant to this sentence, and (ii) in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. If the Participant is eligible to participate in, and has elected to defer the transfer of Shares pursuant to the terms of a nonqualified deferred compensation plan maintained by the Company, such Shares shall be so deferred, and any such deferral, when paid, shall be paid in Shares. Once the transfer of any Shares is deferred, the rights and privileges of the Participant with respect to such Shares shall be determined solely pursuant to the terms of the applicable plan, and not pursuant to the terms and conditions of this Agreement. For purposes of this Agreement, the “Delivery Date” with respect to each Vesting Date shall mean the date that is the earlier of (i) the second anniversary of such Vesting Date or (ii) the second anniversary of the date of the Participant’s Qualified Termination (as defined below), if applicable.
(c) Notwithstanding Sections 2(a) and 2(b) of this Agreement, if the Participant's employment with the Company and its Affiliates terminates due to (i) death, (ii) Disability or (iii) Retirement, (any such termination, a “Qualified Termination”), then (A) any previously unvested Earned PSUs shall become fully vested, (B) if such Qualified Termination occurs prior to the determination of the number of Earned PSUs in accordance with Exhibit A hereto, the PSUs granted hereunder shall remaining outstanding and eligible to become Earned PSUs in accordance with such Exhibit A and (C) the Shares underlying all of the Participant’s Earned PSUs, if any, shall be delivered to the Participant as soon as practicable but not later than 60 days after the corresponding Delivery Date(s) subject to Section 16 of this Agreement; provided, however, that upon the transfer of such Shares to the Participant, in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. In the event of the death of the Participant, the transfer of Shares under this Section 2(c) shall be made in accordance with the beneficiary designation form on file with the Company; provided, however, that, in the absence of any such beneficiary designation form, the transfer of Shares under this Section 2(c) shall be made to the person or persons to whom the Participant's rights under the Agreement shall pass by will or by the applicable laws of descent and distribution. For purposes of this Agreement, "Disability" shall mean "Disability" as defined in the Plan, and "Retirement" shall mean termination of employment on or after age 60, or on or after age 58 with at least 15 years of "Service" to the Company and its Subsidiaries immediately preceding such termination of employment. For this purpose, "Service" means the period of employment immediately preceding Retirement, plus any prior periods of employment with the Company and its Subsidiaries of one or more years' duration, unless they were succeeded by a period of non-employment with the Company and its Subsidiaries of more than three years' duration.
(d) Upon each transfer or deferral of Shares in accordance with Sections 2(a), 2(b) and 2(c) of this Agreement, a number of Earned PSUs equal to the number of Shares transferred to the Participant or deferred shall be extinguished.
(e) Notwithstanding Sections 2(a), 2(b) and 2(c) of this Agreement, upon the Participant's termination of employment for any reason other than (i) death, Disability or Retirement or (ii) under the circumstances described in clause (f) below, any unvested PSUs (including, without limitation, any Earned PSUs) shall immediately terminate for no further consideration.
(f) Termination without Cause or for Good Reason within Two Years Following a Change in Control. In the event of the Participant's Qualifying Termination or involuntary termination of employment with the Company or a subsidiary thereof without "Cause" or for "Good Reason", in each case, within two years following a Change in Control, the Earned PSUs, to the extent not previously vested and settled, shall immediately become fully vested and settled in Shares. For purposes of this Agreement, "Cause" shall mean the occurrence of any of the following: (a) the willful and continued failure of the Participant to perform substantially all of his or her duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) for a period of 10 days following a written demand for substantial performance that is delivered to such Participant by the Company, which specifically identifies the manner in which the Company believes the Participant has not substantially performed his or her duties; (b) dishonesty in the performance of the Participant's duties with the Company; (c) the Participant's conviction of, or plea of guilty or nolo contendere to, a crime under the laws of the United States or any state thereof constituting a felony or a misdemeanor involving moral turpitude; (d) the Participant's willful malfeasance or willful misconduct in connection with the Participant's duties with the Company or any act or omission which is injurious to the financial condition or business reputation of the Company or its affiliates; or (e) the Participant's breach of the provisions of Section 11 of this Agreement. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following, without the Participant's express written consent: (a) any material diminution in the Participant's duties, titles or responsibilities with the Company from those in effect immediately prior to a Change in Control or (b) any reduction in the Participant's annual base salary or any material reduction in the Participant's annual bonus opportunity, annual equity awards or long-term incentive program awards from the Participant's annual base salary or annual bonus opportunity, annual equity awards or long-term incentive program awards in effect immediately prior to a Change in Control. Notwithstanding the foregoing, no event shall constitute Good Reason unless the Participant provides the Company with written notice of such event within 60 days after the occurrence thereof and the Company fails to cure or resolve the behavior otherwise constituting Good Reason within 30 days of its receipt of such notice.
(g) Any portion of the PSUs granted pursuant to this Agreement which do not become Earned PSUs in accordance with Exhibit A hereto shall be forfeited for no further consideration.
3. Dividends. If on any date while PSUs are outstanding hereunder the Company shall pay any dividend on the Shares (other than a dividend payable in Shares), the number of PSUs granted to the Participant shall, as of such dividend payment date, be increased by a number of PSUs equal to: (a) the product of (x) the number of PSUs held by the Participant as of the related dividend record date, multiplied by (y) the per Share amount of any cash dividend (or, in the case of any dividend payable in whole or in part other than in cash, the per Share value of such dividend, as determined in good faith by the Committee), divided by (b) the Fair Market Value of a Share on the payment date of such dividend. In the case of any dividend declared on Shares that is payable in the form of Shares, the number of PSUs granted to the Participant shall be increased by a number equal to the product of (a) the PSUs that are held by the Participant on the related dividend record date, multiplied by (b) the number of Shares (including any fraction thereof) payable as a dividend on a Share. Any PSUs attributable to dividends under this Section 3 shall be subject to the vesting provisions provided in Section 2 and the performance conditions set forth in Exhibit A.
4. Adjustments Upon Certain Events. Subject to the terms of the Plan, in the event of any change in the outstanding Shares by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, amalgamation, spin-off or combination transaction or exchange of Shares or other similar events (collectively, an "Adjustment Event"), the Committee shall, in its sole discretion, make an appropriate and equitable adjustment in the number of PSUs subject to this Agreement to reflect such Adjustment Event. Any such adjustment made by the Committee shall be final and binding upon the Participant, the Company and all other interested persons.
5. No Right to Continued Employment. Neither the Plan nor this Agreement shall be construed as giving the Participant the right to be retained in the employ of, or in any consulting relationship to, the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss the Participant, free from any liability or any claim under the Plan or this Agreement, except as otherwise expressly provided herein.
6. No Acquired Rights. In participating in the Plan, the Participant acknowledges and accepts that the Board has the power to amend or terminate the Plan, to the extent permitted thereunder, at any time and that the opportunity given to the Participant to participate in the Plan is entirely at the discretion of the Committee and does not obligate the Company or any of its Affiliates to offer such participation in the future (whether on the same or different terms). The Participant further acknowledges and accepts that such Participant's participation in the Plan is not to be considered part of any normal or expected compensation and that the termination of the Participant's employment under any circumstances whatsoever will give the Participant no claim or right of action against the Company or its Affiliates in respect of any loss of rights under this Agreement or the Plan that may arise as a result of such termination of employment.
7. No Rights of a Shareholder. The Participant shall not have any rights or privileges as a shareholder of the Company until the Shares in question have been registered in the Company's register of shareholders.
8. Legend on Certificates. Any Shares issued or transferred to the Participant pursuant to Section 2 of this Agreement shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares are listed, and any applicable Federal or state laws or relevant securities laws of the jurisdiction of the domicile of the Participant, and the Committee may cause a legend or legends to be put on any certificates representing such Shares to make appropriate reference to such restrictions. Whenever reference in this Agreement is made to the issuance or delivery of certificates representing Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.
9. Transferability. PSUs may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant otherwise than by will or by the laws of descent and distribution, and any purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance not permitted by this Section 9 shall be void and unenforceable against the Company or any Affiliate.
10. Withholding. The Participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any transfer due under this Agreement or under the Plan or from any compensation or other amount owing to the Participant, applicable withholding taxes with respect to any transfer under this Agreement or under the Plan and to take such action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. Notwithstanding the foregoing, if the Participant's employment with the Company terminates prior to the transfer of all of the Shares under this Agreement, the payment of any applicable withholding taxes with respect to any further transfer of Shares under this Agreement or the Plan shall be made solely through the sale of Shares equal to the statutory minimum withholding liability.
11. Non-Solicitation Covenants.
(a) The Participant acknowledges and agrees that, during the Participant's employment with the Company and its Affiliates and upon the Participant's termination of Employment with the Company and its Affiliates for any reason, for a period commencing on the termination of such Employment and ending on the second anniversary of such termination, the Participant shall not, whether on Participant's own behalf or on behalf of or in conjunction with any person, company, business entity or other organization whatsoever, directly or indirectly:
(i) solicit any employee of the Company or its Affiliates with whom the Participant had any contact during the last two years of the Participant's employment, or who worked in the same business segment or division as the Participant during that period to terminate employment with the Company or its Affiliates;
(ii) solicit the employment or services of, or hire, any such employee whose employment with the Company or its Affiliates terminated coincident with, or within twelve (12) months prior to or after the termination of Participant's employment with the Company and its Affiliates;
(iii) directly or indirectly, solicit to cease to work with the Company or its Affiliates any consultant then under contract with the Company or its Affiliates.
(b) It is expressly understood and agreed that although the Participant and the Company consider the restrictions contained in this Section 11 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or any other restriction contained in this Agreement is an unenforceable restriction against the Participant, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and terri‐tory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restric‐tion contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein.
12. Specific Performance. The Participant acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Section 11 would be inadequate and the Company would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, the Participant agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available.
13. Choice of Law. THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
14. RSUs Subject to Plan. By entering into this Agreement, the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. All PSUs are subject to the Plan. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.
15. Signature in Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
16. 409A. Notwithstanding any other provisions of this Agreement or the Plan, the PSUs covered by this Agreement shall not be deferred, accelerated, extended, paid out or modified in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon the Participant. In the event it is reasonably determined by the Committee that, as a result of Section 409A of the Code, the transfer of Class A Shares under this Agreement may not be made at the time contemplated hereunder without causing the Participant to be subject to taxation under Section 409A of the Code (including due to the Participant's status as a "specified employee" within the meaning of Section 409A of the Code), the Company will make such payment on the first day that would not result in the Participant incurring any tax liability under Section 409A of the Code.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
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HOVNANIAN ENTERPRISES, INC. |
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By: |
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PARTICIPANT1 |
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By: |
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1. To the extent that the Company has established, either itself or through a third-party plan administrator, the ability to accept this award electronically, such acceptance shall constitute the Participant’s signature hereof. |
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Exhibit A
[Insert Performance Metrics for Determining Earned PSUs]
Exhibit 10(e)
2020 HOVNANIAN ENTERPRISES, INC.
SECOND AMENDED AND RESTATED STOCK INCENTIVE PLAN
PERFORMANCE SHARE UNIT AGREEMENT
(Relative EBIT ROI Rank Compared to Peers Performance Vesting)
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Participant: |
Date of Grant: |
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Target Number of PSUs: |
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Date of Vesting of Earned PSUs: |
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Date |
Percentage of Earned PSUs |
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[Date] |
100% |
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1. Grant of PSUs. For valuable consideration, receipt of which is hereby acknowledged, Hovnanian Enterprises, Inc., a Delaware Corporation (the "Company"), hereby grants the target number (“Target Number”) of performance share units ("PSUs") listed above to the Participant, on the terms and conditions hereinafter set forth. This grant is made pursuant to the terms and conditions of the 2020 Company Second Amended and Restated Stock Incentive Plan (the "Plan"), which Plan, as amended from time to time, is incorporated herein by reference and made a part of this Agreement. The actual number of PSUs, if any, that the Participant will be eligible to earn with respect to this Agreement (the “Earned PSUs”), subject to meeting the applicable service and performance vesting requirements, will equal the Target Number multiplied by the applicable “Performance Multiplier” as defined in Exhibit A hereto. Each Earned PSU represents the unfunded, unsecured right of the Participant to receive a Share on the date(s) specified herein. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.
2. Vesting and Timing of Transfer.
(a) The Participant will become vested in the Earned PSUs in accordance with the schedule set forth above (each such vesting date, a “Vesting Date”); provided, however, that upon the occurrence of a Change in Control that results in the Company's Shares ceasing to be publicly traded on a national securities exchange, the Earned PSUs shall immediately become fully vested (subject to any delay in Share delivery required pursuant to Sections 2(b) and 16 hereof).
(b) The Company shall transfer to the Participant, as soon as practicable but not later than 60 days after an applicable “Delivery Date” (as defined below), a number of Class B Shares equal to the number of Earned PSUs that became vested on the corresponding Vesting Date (rounded up to the next whole share), provided, however, that upon the final transfer of Shares to the Participant (i) such number of Shares shall be reduced to the extent necessary to reflect any previous rounding up pursuant to this sentence, and (ii) in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. If the Participant is eligible to participate in, and has elected to defer the transfer of Shares pursuant to the terms of a nonqualified deferred compensation plan maintained by the Company, such Shares shall be so deferred, and any such deferral, when paid, shall be paid in Shares. Once the transfer of any Shares is deferred, the rights and privileges of the Participant with respect to such Shares shall be determined solely pursuant to the terms of the applicable plan, and not pursuant to the terms and conditions of this Agreement. For purposes of this Agreement, the “Delivery Date” with respect to each Vesting Date shall mean the date that is the earlier of (i) the second anniversary of such Vesting Date or (ii) the second anniversary of the date of the Participant’s Qualified Termination (as defined below), if applicable.
(c) Notwithstanding Sections 2(a) and 2(b) of this Agreement, if the Participant's employment with the Company and its Affiliates terminates due to (i) death, (ii) Disability or (iii) Retirement, (any such termination, a “Qualified Termination”), then (A) any previously unvested Earned PSUs shall become fully vested, (B) if such Qualified Termination occurs prior to the determination of the number of Earned PSUs in accordance with Exhibit A hereto, the PSUs granted hereunder shall remaining outstanding and eligible to become Earned PSUs in accordance with such Exhibit A and (C) the Shares underlying all of the Participant’s Earned PSUs, if any, shall be delivered to the Participant as soon as practicable but not later than 60 days after the corresponding Delivery Date(s) subject to Section 16 of this Agreement; provided, however, that upon the transfer of such Shares to the Participant, in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. In the event of the death of the Participant, the transfer of Shares under this Section 2(c) shall be made in accordance with the beneficiary designation form on file with the Company; provided, however, that, in the absence of any such beneficiary designation form, the transfer of Shares under this Section 2(c) shall be made to the person or persons to whom the Participant's rights under the Agreement shall pass by will or by the applicable laws of descent and distribution. For purposes of this Agreement, "Disability" shall mean "Disability" as defined in the Plan, and "Retirement" shall mean termination of employment on or after age 60, or on or after age 58 with at least 15 years of "Service" to the Company and its Subsidiaries immediately preceding such termination of employment. For this purpose, "Service" means the period of employment immediately preceding Retirement, plus any prior periods of employment with the Company and its Subsidiaries of one or more years' duration, unless they were succeeded by a period of non-employment with the Company and its Subsidiaries of more than three years' duration.
(d) Upon each transfer or deferral of Shares in accordance with Sections 2(a), 2(b) and 2(c) of this Agreement, a number of Earned PSUs equal to the number of Shares transferred to the Participant or deferred shall be extinguished.
(e) Notwithstanding Sections 2(a), 2(b) and 2(c) of this Agreement, upon the Participant's termination of employment for any reason other than (i) death, Disability or Retirement or (ii) under the circumstances described in clause (f) below, any unvested PSUs (including, without limitation, any Earned PSUs) shall immediately terminate for no further consideration.
(f) Termination without Cause or for Good Reason within Two Years Following a Change in Control. In the event of the Participant's Qualifying Termination or involuntary termination of employment with the Company or a subsidiary thereof without "Cause" or for "Good Reason", in each case, within two years following a Change in Control, the Earned PSUs, to the extent not previously vested and settled, shall immediately become fully vested and settled in Shares. For purposes of this Agreement, "Cause" shall mean the occurrence of any of the following: (a) the willful and continued failure of the Participant to perform substantially all of his or her duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) for a period of 10 days following a written demand for substantial performance that is delivered to such Participant by the Company, which specifically identifies the manner in which the Company believes the Participant has not substantially performed his or her duties; (b) dishonesty in the performance of the Participant's duties with the Company; (c) the Participant's conviction of, or plea of guilty or nolo contendere to, a crime under the laws of the United States or any state thereof constituting a felony or a misdemeanor involving moral turpitude; (d) the Participant's willful malfeasance or willful misconduct in connection with the Participant's duties with the Company or any act or omission which is injurious to the financial condition or business reputation of the Company or its affiliates; or (e) the Participant's breach of the provisions of Section 11 of this Agreement. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following, without the Participant's express written consent: (a) any material diminution in the Participant's duties, titles or responsibilities with the Company from those in effect immediately prior to a Change in Control or (b) any reduction in the Participant's annual base salary or any material reduction in the Participant's annual bonus opportunity, annual equity awards or long-term incentive program awards from the Participant's annual base salary or annual bonus opportunity, annual equity awards or long-term incentive program awards in effect immediately prior to a Change in Control. Notwithstanding the foregoing, no event shall constitute Good Reason unless the Participant provides the Company with written notice of such event within 60 days after the occurrence thereof and the Company fails to cure or resolve the behavior otherwise constituting Good Reason within 30 days of its receipt of such notice.
(g) Any portion of the PSUs granted pursuant to this Agreement which do not become Earned PSUs in accordance with Exhibit A hereto shall be forfeited for no further consideration.
3. Dividends. If on any date while PSUs are outstanding hereunder the Company shall pay any dividend on the Shares (other than a dividend payable in Shares), the number of PSUs granted to the Participant shall, as of such dividend payment date, be increased by a number of PSUs equal to: (a) the product of (x) the number of PSUs held by the Participant as of the related dividend record date, multiplied by (y) the per Share amount of any cash dividend (or, in the case of any dividend payable in whole or in part other than in cash, the per Share value of such dividend, as determined in good faith by the Committee), divided by (b) the Fair Market Value of a Share on the payment date of such dividend. In the case of any dividend declared on Shares that is payable in the form of Shares, the number of PSUs granted to the Participant shall be increased by a number equal to the product of (a) the PSUs that are held by the Participant on the related dividend record date, multiplied by (b) the number of Shares (including any fraction thereof) payable as a dividend on a Share. Any PSUs attributable to dividends under this Section 3 shall be subject to the vesting provisions provided in Section 2 and the performance conditions set forth in Exhibit A.
4. Adjustments Upon Certain Events. Subject to the terms of the Plan, in the event of any change in the outstanding Shares by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, amalgamation, spin-off or combination transaction or exchange of Shares or other similar events (collectively, an "Adjustment Event"), the Committee shall, in its sole discretion, make an appropriate and equitable adjustment in the number of PSUs subject to this Agreement to reflect such Adjustment Event. Any such adjustment made by the Committee shall be final and binding upon the Participant, the Company and all other interested persons.
5. No Right to Continued Employment. Neither the Plan nor this Agreement shall be construed as giving the Participant the right to be retained in the employ of, or in any consulting relationship to, the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss the Participant, free from any liability or any claim under the Plan or this Agreement, except as otherwise expressly provided herein.
6. No Acquired Rights. In participating in the Plan, the Participant acknowledges and accepts that the Board has the power to amend or terminate the Plan, to the extent permitted thereunder, at any time and that the opportunity given to the Participant to participate in the Plan is entirely at the discretion of the Committee and does not obligate the Company or any of its Affiliates to offer such participation in the future (whether on the same or different terms). The Participant further acknowledges and accepts that such Participant's participation in the Plan is not to be considered part of any normal or expected compensation and that the termination of the Participant's employment under any circumstances whatsoever will give the Participant no claim or right of action against the Company or its Affiliates in respect of any loss of rights under this Agreement or the Plan that may arise as a result of such termination of employment.
7. No Rights of a Shareholder. The Participant shall not have any rights or privileges as a shareholder of the Company until the Shares in question have been registered in the Company's register of shareholders.
8. Legend on Certificates. Any Shares issued or transferred to the Participant pursuant to Section 2 of this Agreement shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares are listed, and any applicable Federal or state laws or relevant securities laws of the jurisdiction of the domicile of the Participant, and the Committee may cause a legend or legends to be put on any certificates representing such Shares to make appropriate reference to such restrictions. Whenever reference in this Agreement is made to the issuance or delivery of certificates representing Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.
9. Transferability. PSUs may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant otherwise than by will or by the laws of descent and distribution, and any purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance not permitted by this Section 9 shall be void and unenforceable against the Company or any Affiliate.
10. Withholding. The Participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any transfer due under this Agreement or under the Plan or from any compensation or other amount owing to the Participant, applicable withholding taxes with respect to any transfer under this Agreement or under the Plan and to take such action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. Notwithstanding the foregoing, if the Participant's employment with the Company terminates prior to the transfer of all of the Shares under this Agreement, the payment of any applicable withholding taxes with respect to any further transfer of Shares under this Agreement or the Plan shall be made solely through the sale of Shares equal to the statutory minimum withholding liability.
11. Non-Solicitation Covenants.
(a) The Participant acknowledges and agrees that, during the Participant's employment with the Company and its Affiliates and upon the Participant's termination of Employment with the Company and its Affiliates for any reason, for a period commencing on the termination of such Employment and ending on the second anniversary of such termination, the Participant shall not, whether on Participant's own behalf or on behalf of or in conjunction with any person, company, business entity or other organization whatsoever, directly or indirectly:
(i) solicit any employee of the Company or its Affiliates with whom the Participant had any contact during the last two years of the Participant's employment, or who worked in the same business segment or division as the Participant during that period to terminate employment with the Company or its Affiliates;
(ii) solicit the employment or services of, or hire, any such employee whose employment with the Company or its Affiliates terminated coincident with, or within twelve (12) months prior to or after the termination of Participant's employment with the Company and its Affiliates;
(iii) directly or indirectly, solicit to cease to work with the Company or its Affiliates any consultant then under contract with the Company or its Affiliates.
(b) It is expressly understood and agreed that although the Participant and the Company consider the restrictions contained in this Section 11 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or any other restriction contained in this Agreement is an unenforceable restriction against the Participant, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and terri‐tory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restric‐tion contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein.
12. Specific Performance. The Participant acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Section 11 would be inadequate and the Company would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, the Participant agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available.
13. Choice of Law. THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
14. RSUs Subject to Plan. By entering into this Agreement, the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. All PSUs are subject to the Plan. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.
15. Signature in Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
16. 409A. Notwithstanding any other provisions of this Agreement or the Plan, the PSUs covered by this Agreement shall not be deferred, accelerated, extended, paid out or modified in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon the Participant. In the event it is reasonably determined by the Committee that, as a result of Section 409A of the Code, the transfer of Class B Shares under this Agreement may not be made at the time contemplated hereunder without causing the Participant to be subject to taxation under Section 409A of the Code (including due to the Participant's status as a "specified employee" within the meaning of Section 409A of the Code), the Company will make such payment on the first day that would not result in the Participant incurring any tax liability under Section 409A of the Code.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
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HOVNANIAN ENTERPRISES, INC. |
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By: |
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PARTICIPANT1 |
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By: |
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1. To the extent that the Company has established, either itself or through a third-party plan administrator, the ability to accept this award electronically, such acceptance shall constitute the Participant’s signature hereof. |
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Exhibit A
[Insert Performance Metrics for Determining Earned PSUs]
Exhibit 10(f)
2020 HOVNANIAN ENTERPRISES, INC.
SECOND AMENDED AND RESTATED STOCK INCENTIVE PLAN
PERFORMANCE SHARE UNIT AGREEMENT
(Land Light Performance Vesting)
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Participant: |
Date of Grant: |
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Target Number of PSUs: |
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Date of Vesting of Earned PSUs: |
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Date |
Percentage of Earned PSUs |
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[Date] |
60% |
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[Date] |
20% |
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[Date] |
20% |
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1. Grant of PSUs. For valuable consideration, receipt of which is hereby acknowledged, Hovnanian Enterprises, Inc., a Delaware Corporation (the "Company"), hereby grants the target number (“Target Number”) of performance share units ("PSUs") listed above to the Participant, on the terms and conditions hereinafter set forth. This grant is made pursuant to the terms and conditions of the 2020 Company Second Amended and Restated Stock Incentive Plan (the "Plan"), which Plan, as amended from time to time, is incorporated herein by reference and made a part of this Agreement. The actual number of PSUs, if any, that the Participant will be eligible to earn with respect to this Agreement (the “Earned PSUs”), subject to meeting the applicable service and performance vesting requirements, will equal the Target Number multiplied by the applicable “Performance Multiplier” as defined in Exhibit A hereto. Each Earned PSU represents the unfunded, unsecured right of the Participant to receive a Share on the date(s) specified herein. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.
2. Vesting and Timing of Transfer.
(a) The Participant will become vested in the Earned PSUs in accordance with the schedule set forth above (each such vesting date, a “Vesting Date”); provided, however, that upon the occurrence of a Change in Control that results in the Company's Shares ceasing to be publicly traded on a national securities exchange, the Earned PSUs shall immediately become fully vested (subject to any delay in Share delivery required pursuant to Sections 2(b) and 16 hereof).
(b) The Company shall transfer to the Participant, as soon as practicable but not later than 60 days after an applicable “Delivery Date” (as defined below), a number of Class A Shares equal to the number of Earned PSUs that became vested on the corresponding Vesting Date (rounded up to the next whole share), provided, however, that upon the final transfer of Shares to the Participant (i) such number of Shares shall be reduced to the extent necessary to reflect any previous rounding up pursuant to this sentence, and (ii) in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. If the Participant is eligible to participate in, and has elected to defer the transfer of Shares pursuant to the terms of a nonqualified deferred compensation plan maintained by the Company, such Shares shall be so deferred, and any such deferral, when paid, shall be paid in Shares. Once the transfer of any Shares is deferred, the rights and privileges of the Participant with respect to such Shares shall be determined solely pursuant to the terms of the applicable plan, and not pursuant to the terms and conditions of this Agreement. For purposes of this Agreement, the “Delivery Date” with respect to each Vesting Date shall mean the date that is the second Friday of the January following such Vesting Date.
(c) Notwithstanding Sections 2(a) and 2(b) of this Agreement, if the Participant's employment with the Company and its Affiliates terminates due to (i) death, (ii) Disability or (iii) Retirement, (any such termination, a “Qualified Termination”), then (A) any previously unvested Earned PSUs shall become fully vested, (B) if such Qualified Termination occurs prior to the determination of the number of Earned PSUs in accordance with Exhibit A hereto, the PSUs granted hereunder shall remaining outstanding and eligible to become Earned PSUs in accordance with such Exhibit A and (C) the Shares underlying all of the Participant’s Earned PSUs, if any, shall be delivered to the Participant as soon as practicable but not later than 60 days after the corresponding Delivery Date(s) subject to Section 16 of this Agreement; provided, however, that upon the transfer of such Shares to the Participant, in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. In the event of the death of the Participant, the transfer of Shares under this Section 2(c) shall be made in accordance with the beneficiary designation form on file with the Company; provided, however, that, in the absence of any such beneficiary designation form, the transfer of Shares under this Section 2(c) shall be made to the person or persons to whom the Participant's rights under the Agreement shall pass by will or by the applicable laws of descent and distribution. For purposes of this Agreement, "Disability" shall mean "Disability" as defined in the Plan, and "Retirement" shall mean termination of employment on or after age 60, or on or after age 58 with at least 15 years of "Service" to the Company and its Subsidiaries immediately preceding such termination of employment. For this purpose, "Service" means the period of employment immediately preceding Retirement, plus any prior periods of employment with the Company and its Subsidiaries of one or more years' duration, unless they were succeeded by a period of non-employment with the Company and its Subsidiaries of more than three years' duration.
(d) Upon each transfer or deferral of Shares in accordance with Sections 2(a), 2(b) and 2(c) of this Agreement, a number of Earned PSUs equal to the number of Shares transferred to the Participant or deferred shall be extinguished.
(e) Notwithstanding Sections 2(a), 2(b) and 2(c) of this Agreement, upon the Participant's termination of employment for any reason other than (i) death, Disability or Retirement or (ii) under the circumstances described in clause (f) below, any unvested PSUs (including, without limitation, any Earned PSUs) shall immediately terminate for no further consideration.
(f) Termination without Cause or for Good Reason within Two Years Following a Change in Control. In the event of the Participant's Qualifying Termination or involuntary termination of employment with the Company or a subsidiary thereof without "Cause" or for "Good Reason", in each case, within two years following a Change in Control, the Earned PSUs, to the extent not previously vested and settled, shall immediately become fully vested and settled in Shares. For purposes of this Agreement, "Cause" shall mean the occurrence of any of the following: (a) the willful and continued failure of the Participant to perform substantially all of his or her duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) for a period of 10 days following a written demand for substantial performance that is delivered to such Participant by the Company, which specifically identifies the manner in which the Company believes the Participant has not substantially performed his or her duties; (b) dishonesty in the performance of the Participant's duties with the Company; (c) the Participant's conviction of, or plea of guilty or nolo contendere to, a crime under the laws of the United States or any state thereof constituting a felony or a misdemeanor involving moral turpitude; (d) the Participant's willful malfeasance or willful misconduct in connection with the Participant's duties with the Company or any act or omission which is injurious to the financial condition or business reputation of the Company or its affiliates; or (e) the Participant's breach of the provisions of Section 11 of this Agreement. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following, without the Participant's express written consent: (a) any material diminution in the Participant's duties, titles or responsibilities with the Company from those in effect immediately prior to a Change in Control or (b) any reduction in the Participant's annual base salary or any material reduction in the Participant's annual bonus opportunity, annual equity awards or long-term incentive program awards from the Participant's annual base salary or annual bonus opportunity, annual equity awards or long-term incentive program awards in effect immediately prior to a Change in Control. Notwithstanding the foregoing, no event shall constitute Good Reason unless the Participant provides the Company with written notice of such event within 60 days after the occurrence thereof and the Company fails to cure or resolve the behavior otherwise constituting Good Reason within 30 days of its receipt of such notice.
(g) Any portion of the PSUs granted pursuant to this Agreement which do not become Earned PSUs in accordance with Exhibit A hereto shall be forfeited for no further consideration.
3. Dividends. If on any date while PSUs are outstanding hereunder the Company shall pay any dividend on the Shares (other than a dividend payable in Shares), the number of PSUs granted to the Participant shall, as of such dividend payment date, be increased by a number of PSUs equal to: (a) the product of (x) the number of PSUs held by the Participant as of the related dividend record date, multiplied by (y) the per Share amount of any cash dividend (or, in the case of any dividend payable in whole or in part other than in cash, the per Share value of such dividend, as determined in good faith by the Committee), divided by (b) the Fair Market Value of a Share on the payment date of such dividend. In the case of any dividend declared on Shares that is payable in the form of Shares, the number of PSUs granted to the Participant shall be increased by a number equal to the product of (a) the PSUs that are held by the Participant on the related dividend record date, multiplied by (b) the number of Shares (including any fraction thereof) payable as a dividend on a Share. Any PSUs attributable to dividends under this Section 3 shall be subject to the vesting provisions provided in Section 2 and the performance conditions set forth in Exhibit A.
4. Adjustments Upon Certain Events. Subject to the terms of the Plan, in the event of any change in the outstanding Shares by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, amalgamation, spin-off or combination transaction or exchange of Shares or other similar events (collectively, an "Adjustment Event"), the Committee shall, in its sole discretion, make an appropriate and equitable adjustment in the number of PSUs subject to this Agreement to reflect such Adjustment Event. Any such adjustment made by the Committee shall be final and binding upon the Participant, the Company and all other interested persons.
5. No Right to Continued Employment. Neither the Plan nor this Agreement shall be construed as giving the Participant the right to be retained in the employ of, or in any consulting relationship to, the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss the Participant, free from any liability or any claim under the Plan or this Agreement, except as otherwise expressly provided herein.
6. No Acquired Rights. In participating in the Plan, the Participant acknowledges and accepts that the Board has the power to amend or terminate the Plan, to the extent permitted thereunder, at any time and that the opportunity given to the Participant to participate in the Plan is entirely at the discretion of the Committee and does not obligate the Company or any of its Affiliates to offer such participation in the future (whether on the same or different terms). The Participant further acknowledges and accepts that such Participant's participation in the Plan is not to be considered part of any normal or expected compensation and that the termination of the Participant's employment under any circumstances whatsoever will give the Participant no claim or right of action against the Company or its Affiliates in respect of any loss of rights under this Agreement or the Plan that may arise as a result of such termination of employment.
7. No Rights of a Shareholder. The Participant shall not have any rights or privileges as a shareholder of the Company until the Shares in question have been registered in the Company's register of shareholders.
8. Legend on Certificates. Any Shares issued or transferred to the Participant pursuant to Section 2 of this Agreement shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares are listed, and any applicable Federal or state laws or relevant securities laws of the jurisdiction of the domicile of the Participant, and the Committee may cause a legend or legends to be put on any certificates representing such Shares to make appropriate reference to such restrictions. Whenever reference in this Agreement is made to the issuance or delivery of certificates representing Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.
9. Transferability. PSUs may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant otherwise than by will or by the laws of descent and distribution, and any purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance not permitted by this Section 9 shall be void and unenforceable against the Company or any Affiliate.
10. Withholding. The Participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any transfer due under this Agreement or under the Plan or from any compensation or other amount owing to the Participant, applicable withholding taxes with respect to any transfer under this Agreement or under the Plan and to take such action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. Notwithstanding the foregoing, if the Participant's employment with the Company terminates prior to the transfer of all of the Shares under this Agreement, the payment of any applicable withholding taxes with respect to any further transfer of Shares under this Agreement or the Plan shall be made solely through the sale of Shares equal to the statutory minimum withholding liability.
11. Non-Solicitation Covenants.
(a) The Participant acknowledges and agrees that, during the Participant's employment with the Company and its Affiliates and upon the Participant's termination of Employment with the Company and its Affiliates for any reason, for a period commencing on the termination of such Employment and ending on the second anniversary of such termination, the Participant shall not, whether on Participant's own behalf or on behalf of or in conjunction with any person, company, business entity or other organization whatsoever, directly or indirectly:
(i) solicit any employee of the Company or its Affiliates with whom the Participant had any contact during the last two years of the Participant's employment, or who worked in the same business segment or division as the Participant during that period to terminate employment with the Company or its Affiliates;
(ii) solicit the employment or services of, or hire, any such employee whose employment with the Company or its Affiliates terminated coincident with, or within twelve (12) months prior to or after the termination of Participant's employment with the Company and its Affiliates;
(iii) directly or indirectly, solicit to cease to work with the Company or its Affiliates any consultant then under contract with the Company or its Affiliates.
(b) It is expressly understood and agreed that although the Participant and the Company consider the restrictions contained in this Section 11 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or any other restriction contained in this Agreement is an unenforceable restriction against the Participant, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and terri‐tory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restric‐tion contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein.
12. Specific Performance. The Participant acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Section 11 would be inadequate and the Company would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, the Participant agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available.
13. Choice of Law. THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
14. RSUs Subject to Plan. By entering into this Agreement, the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. All PSUs are subject to the Plan. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.
15. Signature in Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
16. 409A. Notwithstanding any other provisions of this Agreement or the Plan, the PSUs covered by this Agreement shall not be deferred, accelerated, extended, paid out or modified in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon the Participant. In the event it is reasonably determined by the Committee that, as a result of Section 409A of the Code, the transfer of Class A Shares under this Agreement may not be made at the time contemplated hereunder without causing the Participant to be subject to taxation under Section 409A of the Code (including due to the Participant's status as a "specified employee" within the meaning of Section 409A of the Code), the Company will make such payment on the first day that would not result in the Participant incurring any tax liability under Section 409A of the Code.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
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HOVNANIAN ENTERPRISES, INC. |
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By: |
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PARTICIPANT1 |
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By: |
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1. To the extent that the Company has established, either itself or through a third-party plan administrator, the ability to accept this award electronically, such acceptance shall constitute the Participant’s signature hereof. |
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Exhibit A
[Insert Performance Metrics for Determining Earned PSUs]
Exhibit 10(g)
2020 HOVNANIAN ENTERPRISES, INC.
SECOND AMENDED AND RESTATED STOCK INCENTIVE PLAN
PERFORMANCE SHARE UNIT AGREEMENT
(National Contracts Savings Performance Vesting)
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Participant: |
Date of Grant: |
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Target Number of PSUs: |
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Date of Vesting of Earned PSUs: |
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Date |
Percentage of Earned PSUs |
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[Date] |
60% |
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[Date] |
20% |
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[Date] |
20% |
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1. Grant of PSUs. For valuable consideration, receipt of which is hereby acknowledged, Hovnanian Enterprises, Inc., a Delaware Corporation (the "Company"), hereby grants the target number (“Target Number”) of performance share units ("PSUs") listed above to the Participant, on the terms and conditions hereinafter set forth. This grant is made pursuant to the terms and conditions of the 2020 Company Second Amended and Restated Stock Incentive Plan (the "Plan"), which Plan, as amended from time to time, is incorporated herein by reference and made a part of this Agreement. The actual number of PSUs, if any, that the Participant will be eligible to earn with respect to this Agreement (the “Earned PSUs”), subject to meeting the applicable service and performance vesting requirements, will equal the Target Number multiplied by the applicable “Performance Multiplier” as defined in Exhibit A hereto. Each Earned PSU represents the unfunded, unsecured right of the Participant to receive a Share on the date(s) specified herein. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.
2. Vesting and Timing of Transfer.
(a) The Participant will become vested in the Earned PSUs in accordance with the schedule set forth above (each such vesting date, a “Vesting Date”); provided, however, that upon the occurrence of a Change in Control that results in the Company's Shares ceasing to be publicly traded on a national securities exchange, the Earned PSUs shall immediately become fully vested (subject to any delay in Share delivery required pursuant to Sections 2(b) and 16 hereof).
(b) The Company shall transfer to the Participant, as soon as practicable but not later than 60 days after an applicable “Delivery Date” (as defined below), a number of Class A Shares equal to the number of Earned PSUs that became vested on the corresponding Vesting Date (rounded up to the next whole share), provided, however, that upon the final transfer of Shares to the Participant (i) such number of Shares shall be reduced to the extent necessary to reflect any previous rounding up pursuant to this sentence, and (ii) in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. If the Participant is eligible to participate in, and has elected to defer the transfer of Shares pursuant to the terms of a nonqualified deferred compensation plan maintained by the Company, such Shares shall be so deferred, and any such deferral, when paid, shall be paid in Shares. Once the transfer of any Shares is deferred, the rights and privileges of the Participant with respect to such Shares shall be determined solely pursuant to the terms of the applicable plan, and not pursuant to the terms and conditions of this Agreement. For purposes of this Agreement, the “Delivery Date” with respect to each Vesting Date shall mean the date that is the second Friday of the January following such Vesting Date.
(c) Notwithstanding Sections 2(a) and 2(b) of this Agreement, if the Participant's employment with the Company and its Affiliates terminates due to (i) death, (ii) Disability or (iii) Retirement, (any such termination, a “Qualified Termination”), then (A) any previously unvested Earned PSUs shall become fully vested, (B) if such Qualified Termination occurs prior to the determination of the number of Earned PSUs in accordance with Exhibit A hereto, the PSUs granted hereunder shall remaining outstanding and eligible to become Earned PSUs in accordance with such Exhibit A and (C) the Shares underlying all of the Participant’s Earned PSUs, if any, shall be delivered to the Participant as soon as practicable but not later than 60 days after the corresponding Delivery Date(s) subject to Section 16 of this Agreement; provided, however, that upon the transfer of such Shares to the Participant, in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. In the event of the death of the Participant, the transfer of Shares under this Section 2(c) shall be made in accordance with the beneficiary designation form on file with the Company; provided, however, that, in the absence of any such beneficiary designation form, the transfer of Shares under this Section 2(c) shall be made to the person or persons to whom the Participant's rights under the Agreement shall pass by will or by the applicable laws of descent and distribution. For purposes of this Agreement, "Disability" shall mean "Disability" as defined in the Plan, and "Retirement" shall mean termination of employment on or after age 60, or on or after age 58 with at least 15 years of "Service" to the Company and its Subsidiaries immediately preceding such termination of employment. For this purpose, "Service" means the period of employment immediately preceding Retirement, plus any prior periods of employment with the Company and its Subsidiaries of one or more years' duration, unless they were succeeded by a period of non-employment with the Company and its Subsidiaries of more than three years' duration.
(d) Upon each transfer or deferral of Shares in accordance with Sections 2(a), 2(b) and 2(c) of this Agreement, a number of Earned PSUs equal to the number of Shares transferred to the Participant or deferred shall be extinguished.
(e) Notwithstanding Sections 2(a), 2(b) and 2(c) of this Agreement, upon the Participant's termination of employment for any reason other than (i) death, Disability or Retirement or (ii) under the circumstances described in clause (f) below, any unvested PSUs (including, without limitation, any Earned PSUs) shall immediately terminate for no further consideration.
(f) Termination without Cause or for Good Reason within Two Years Following a Change in Control. In the event of the Participant's Qualifying Termination or involuntary termination of employment with the Company or a subsidiary thereof without "Cause" or for "Good Reason", in each case, within two years following a Change in Control, the Earned PSUs, to the extent not previously vested and settled, shall immediately become fully vested and settled in Shares. For purposes of this Agreement, "Cause" shall mean the occurrence of any of the following: (a) the willful and continued failure of the Participant to perform substantially all of his or her duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) for a period of 10 days following a written demand for substantial performance that is delivered to such Participant by the Company, which specifically identifies the manner in which the Company believes the Participant has not substantially performed his or her duties; (b) dishonesty in the performance of the Participant's duties with the Company; (c) the Participant's conviction of, or plea of guilty or nolo contendere to, a crime under the laws of the United States or any state thereof constituting a felony or a misdemeanor involving moral turpitude; (d) the Participant's willful malfeasance or willful misconduct in connection with the Participant's duties with the Company or any act or omission which is injurious to the financial condition or business reputation of the Company or its affiliates; or (e) the Participant's breach of the provisions of Section 11 of this Agreement. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following, without the Participant's express written consent: (a) any material diminution in the Participant's duties, titles or responsibilities with the Company from those in effect immediately prior to a Change in Control or (b) any reduction in the Participant's annual base salary or any material reduction in the Participant's annual bonus opportunity, annual equity awards or long-term incentive program awards from the Participant's annual base salary or annual bonus opportunity, annual equity awards or long-term incentive program awards in effect immediately prior to a Change in Control. Notwithstanding the foregoing, no event shall constitute Good Reason unless the Participant provides the Company with written notice of such event within 60 days after the occurrence thereof and the Company fails to cure or resolve the behavior otherwise constituting Good Reason within 30 days of its receipt of such notice.
(g) Any portion of the PSUs granted pursuant to this Agreement which do not become Earned PSUs in accordance with Exhibit A hereto shall be forfeited for no further consideration.
3. Dividends. If on any date while PSUs are outstanding hereunder the Company shall pay any dividend on the Shares (other than a dividend payable in Shares), the number of PSUs granted to the Participant shall, as of such dividend payment date, be increased by a number of PSUs equal to: (a) the product of (x) the number of PSUs held by the Participant as of the related dividend record date, multiplied by (y) the per Share amount of any cash dividend (or, in the case of any dividend payable in whole or in part other than in cash, the per Share value of such dividend, as determined in good faith by the Committee), divided by (b) the Fair Market Value of a Share on the payment date of such dividend. In the case of any dividend declared on Shares that is payable in the form of Shares, the number of PSUs granted to the Participant shall be increased by a number equal to the product of (a) the PSUs that are held by the Participant on the related dividend record date, multiplied by (b) the number of Shares (including any fraction thereof) payable as a dividend on a Share. Any PSUs attributable to dividends under this Section 3 shall be subject to the vesting provisions provided in Section 2 and the performance conditions set forth in Exhibit A.
4. Adjustments Upon Certain Events. Subject to the terms of the Plan, in the event of any change in the outstanding Shares by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, amalgamation, spin-off or combination transaction or exchange of Shares or other similar events (collectively, an "Adjustment Event"), the Committee shall, in its sole discretion, make an appropriate and equitable adjustment in the number of PSUs subject to this Agreement to reflect such Adjustment Event. Any such adjustment made by the Committee shall be final and binding upon the Participant, the Company and all other interested persons.
5. No Right to Continued Employment. Neither the Plan nor this Agreement shall be construed as giving the Participant the right to be retained in the employ of, or in any consulting relationship to, the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss the Participant, free from any liability or any claim under the Plan or this Agreement, except as otherwise expressly provided herein.
6. No Acquired Rights. In participating in the Plan, the Participant acknowledges and accepts that the Board has the power to amend or terminate the Plan, to the extent permitted thereunder, at any time and that the opportunity given to the Participant to participate in the Plan is entirely at the discretion of the Committee and does not obligate the Company or any of its Affiliates to offer such participation in the future (whether on the same or different terms). The Participant further acknowledges and accepts that such Participant's participation in the Plan is not to be considered part of any normal or expected compensation and that the termination of the Participant's employment under any circumstances whatsoever will give the Participant no claim or right of action against the Company or its Affiliates in respect of any loss of rights under this Agreement or the Plan that may arise as a result of such termination of employment.
7. No Rights of a Shareholder. The Participant shall not have any rights or privileges as a shareholder of the Company until the Shares in question have been registered in the Company's register of shareholders.
8. Legend on Certificates. Any Shares issued or transferred to the Participant pursuant to Section 2 of this Agreement shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares are listed, and any applicable Federal or state laws or relevant securities laws of the jurisdiction of the domicile of the Participant, and the Committee may cause a legend or legends to be put on any certificates representing such Shares to make appropriate reference to such restrictions. Whenever reference in this Agreement is made to the issuance or delivery of certificates representing Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.
9. Transferability. PSUs may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant otherwise than by will or by the laws of descent and distribution, and any purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance not permitted by this Section 9 shall be void and unenforceable against the Company or any Affiliate.
10. Withholding. The Participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any transfer due under this Agreement or under the Plan or from any compensation or other amount owing to the Participant, applicable withholding taxes with respect to any transfer under this Agreement or under the Plan and to take such action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. Notwithstanding the foregoing, if the Participant's employment with the Company terminates prior to the transfer of all of the Shares under this Agreement, the payment of any applicable withholding taxes with respect to any further transfer of Shares under this Agreement or the Plan shall be made solely through the sale of Shares equal to the statutory minimum withholding liability.
11. Non-Solicitation Covenants.
(a) The Participant acknowledges and agrees that, during the Participant's employment with the Company and its Affiliates and upon the Participant's termination of Employment with the Company and its Affiliates for any reason, for a period commencing on the termination of such Employment and ending on the second anniversary of such termination, the Participant shall not, whether on Participant's own behalf or on behalf of or in conjunction with any person, company, business entity or other organization whatsoever, directly or indirectly:
(i) solicit any employee of the Company or its Affiliates with whom the Participant had any contact during the last two years of the Participant's employment, or who worked in the same business segment or division as the Participant during that period to terminate employment with the Company or its Affiliates;
(ii) solicit the employment or services of, or hire, any such employee whose employment with the Company or its Affiliates terminated coincident with, or within twelve (12) months prior to or after the termination of Participant's employment with the Company and its Affiliates;
(iii) directly or indirectly, solicit to cease to work with the Company or its Affiliates any consultant then under contract with the Company or its Affiliates.
(b) It is expressly understood and agreed that although the Participant and the Company consider the restrictions contained in this Section 11 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or any other restriction contained in this Agreement is an unenforceable restriction against the Participant, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and terri‐tory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restric‐tion contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein.
12. Specific Performance. The Participant acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Section 11 would be inadequate and the Company would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, the Participant agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available.
13. Choice of Law. THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
14. RSUs Subject to Plan. By entering into this Agreement, the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. All PSUs are subject to the Plan. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.
15. Signature in Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
16. 409A. Notwithstanding any other provisions of this Agreement or the Plan, the PSUs covered by this Agreement shall not be deferred, accelerated, extended, paid out or modified in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon the Participant. In the event it is reasonably determined by the Committee that, as a result of Section 409A of the Code, the transfer of Class A Shares under this Agreement may not be made at the time contemplated hereunder without causing the Participant to be subject to taxation under Section 409A of the Code (including due to the Participant's status as a "specified employee" within the meaning of Section 409A of the Code), the Company will make such payment on the first day that would not result in the Participant incurring any tax liability under Section 409A of the Code.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
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HOVNANIAN ENTERPRISES, INC. |
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By: |
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PARTICIPANT1 |
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By: |
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1. To the extent that the Company has established, either itself or through a third-party plan administrator, the ability to accept this award electronically, such acceptance shall constitute the Participant’s signature hereof. |
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Exhibit A
[Insert Performance Metrics for Determining Earned PSUs]
Exhibit 10(h)
2020 HOVNANIAN ENTERPRISES, INC.
SECOND AMENDED AND RESTATED STOCK INCENTIVE PLAN
PERFORMANCE SHARE UNIT AGREEMENT
(KHDS Savings Performance Vesting)
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Participant: |
Date of Grant: |
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Target Number of PSUs: |
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Date of Vesting of Earned PSUs: |
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Date |
Percentage of Earned PSUs |
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[Date] |
60% |
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[Date] |
20% |
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[Date] |
20% |
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1. Grant of PSUs. For valuable consideration, receipt of which is hereby acknowledged, Hovnanian Enterprises, Inc., a Delaware Corporation (the "Company"), hereby grants the target number (“Target Number”) of performance share units ("PSUs") listed above to the Participant, on the terms and conditions hereinafter set forth. This grant is made pursuant to the terms and conditions of the 2020 Company Second Amended and Restated Stock Incentive Plan (the "Plan"), which Plan, as amended from time to time, is incorporated herein by reference and made a part of this Agreement. The actual number of PSUs, if any, that the Participant will be eligible to earn with respect to this Agreement (the “Earned PSUs”), subject to meeting the applicable service and performance vesting requirements, will equal the Target Number multiplied by the applicable “Performance Multiplier” as defined in Exhibit A hereto. Each Earned PSU represents the unfunded, unsecured right of the Participant to receive a Share on the date(s) specified herein. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.
2. Vesting and Timing of Transfer.
(a) The Participant will become vested in the Earned PSUs in accordance with the schedule set forth above (each such vesting date, a “Vesting Date”); provided, however, that upon the occurrence of a Change in Control that results in the Company's Shares ceasing to be publicly traded on a national securities exchange, the Earned PSUs shall immediately become fully vested (subject to any delay in Share delivery required pursuant to Sections 2(b) and 16 hereof).
(b) The Company shall transfer to the Participant, as soon as practicable but not later than 60 days after an applicable “Delivery Date” (as defined below), a number of Class A Shares equal to the number of Earned PSUs that became vested on the corresponding Vesting Date (rounded up to the next whole share), provided, however, that upon the final transfer of Shares to the Participant (i) such number of Shares shall be reduced to the extent necessary to reflect any previous rounding up pursuant to this sentence, and (ii) in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. If the Participant is eligible to participate in, and has elected to defer the transfer of Shares pursuant to the terms of a nonqualified deferred compensation plan maintained by the Company, such Shares shall be so deferred, and any such deferral, when paid, shall be paid in Shares. Once the transfer of any Shares is deferred, the rights and privileges of the Participant with respect to such Shares shall be determined solely pursuant to the terms of the applicable plan, and not pursuant to the terms and conditions of this Agreement. For purposes of this Agreement, the “Delivery Date” with respect to each Vesting Date shall mean the date that is the second Friday of the January following such Vesting Date.
(c) Notwithstanding Sections 2(a) and 2(b) of this Agreement, if the Participant's employment with the Company and its Affiliates terminates due to (i) death, (ii) Disability or (iii) Retirement, (any such termination, a “Qualified Termination”), then (A) any previously unvested Earned PSUs shall become fully vested, (B) if such Qualified Termination occurs prior to the determination of the number of Earned PSUs in accordance with Exhibit A hereto, the PSUs granted hereunder shall remaining outstanding and eligible to become Earned PSUs in accordance with such Exhibit A and (C) the Shares underlying all of the Participant’s Earned PSUs, if any, shall be delivered to the Participant as soon as practicable but not later than 60 days after the corresponding Delivery Date(s) subject to Section 16 of this Agreement; provided, however, that upon the transfer of such Shares to the Participant, in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. In the event of the death of the Participant, the transfer of Shares under this Section 2(c) shall be made in accordance with the beneficiary designation form on file with the Company; provided, however, that, in the absence of any such beneficiary designation form, the transfer of Shares under this Section 2(c) shall be made to the person or persons to whom the Participant's rights under the Agreement shall pass by will or by the applicable laws of descent and distribution. For purposes of this Agreement, "Disability" shall mean "Disability" as defined in the Plan, and "Retirement" shall mean termination of employment on or after age 60, or on or after age 58 with at least 15 years of "Service" to the Company and its Subsidiaries immediately preceding such termination of employment. For this purpose, "Service" means the period of employment immediately preceding Retirement, plus any prior periods of employment with the Company and its Subsidiaries of one or more years' duration, unless they were succeeded by a period of non-employment with the Company and its Subsidiaries of more than three years' duration.
(d) Upon each transfer or deferral of Shares in accordance with Sections 2(a), 2(b) and 2(c) of this Agreement, a number of Earned PSUs equal to the number of Shares transferred to the Participant or deferred shall be extinguished.
(e) Notwithstanding Sections 2(a), 2(b) and 2(c) of this Agreement, upon the Participant's termination of employment for any reason other than (i) death, Disability or Retirement or (ii) under the circumstances described in clause (f) below, any unvested PSUs (including, without limitation, any Earned PSUs) shall immediately terminate for no further consideration.
(f) Termination without Cause or for Good Reason within Two Years Following a Change in Control. In the event of the Participant's Qualifying Termination or involuntary termination of employment with the Company or a subsidiary thereof without "Cause" or for "Good Reason", in each case, within two years following a Change in Control, the Earned PSUs, to the extent not previously vested and settled, shall immediately become fully vested and settled in Shares. For purposes of this Agreement, "Cause" shall mean the occurrence of any of the following: (a) the willful and continued failure of the Participant to perform substantially all of his or her duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) for a period of 10 days following a written demand for substantial performance that is delivered to such Participant by the Company, which specifically identifies the manner in which the Company believes the Participant has not substantially performed his or her duties; (b) dishonesty in the performance of the Participant's duties with the Company; (c) the Participant's conviction of, or plea of guilty or nolo contendere to, a crime under the laws of the United States or any state thereof constituting a felony or a misdemeanor involving moral turpitude; (d) the Participant's willful malfeasance or willful misconduct in connection with the Participant's duties with the Company or any act or omission which is injurious to the financial condition or business reputation of the Company or its affiliates; or (e) the Participant's breach of the provisions of Section 11 of this Agreement. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following, without the Participant's express written consent: (a) any material diminution in the Participant's duties, titles or responsibilities with the Company from those in effect immediately prior to a Change in Control or (b) any reduction in the Participant's annual base salary or any material reduction in the Participant's annual bonus opportunity, annual equity awards or long-term incentive program awards from the Participant's annual base salary or annual bonus opportunity, annual equity awards or long-term incentive program awards in effect immediately prior to a Change in Control. Notwithstanding the foregoing, no event shall constitute Good Reason unless the Participant provides the Company with written notice of such event within 60 days after the occurrence thereof and the Company fails to cure or resolve the behavior otherwise constituting Good Reason within 30 days of its receipt of such notice.
(g) Any portion of the PSUs granted pursuant to this Agreement which do not become Earned PSUs in accordance with Exhibit A hereto shall be forfeited for no further consideration.
3. Dividends. If on any date while PSUs are outstanding hereunder the Company shall pay any dividend on the Shares (other than a dividend payable in Shares), the number of PSUs granted to the Participant shall, as of such dividend payment date, be increased by a number of PSUs equal to: (a) the product of (x) the number of PSUs held by the Participant as of the related dividend record date, multiplied by (y) the per Share amount of any cash dividend (or, in the case of any dividend payable in whole or in part other than in cash, the per Share value of such dividend, as determined in good faith by the Committee), divided by (b) the Fair Market Value of a Share on the payment date of such dividend. In the case of any dividend declared on Shares that is payable in the form of Shares, the number of PSUs granted to the Participant shall be increased by a number equal to the product of (a) the PSUs that are held by the Participant on the related dividend record date, multiplied by (b) the number of Shares (including any fraction thereof) payable as a dividend on a Share. Any PSUs attributable to dividends under this Section 3 shall be subject to the vesting provisions provided in Section 2 and the performance conditions set forth in Exhibit A.
4. Adjustments Upon Certain Events. Subject to the terms of the Plan, in the event of any change in the outstanding Shares by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, amalgamation, spin-off or combination transaction or exchange of Shares or other similar events (collectively, an "Adjustment Event"), the Committee shall, in its sole discretion, make an appropriate and equitable adjustment in the number of PSUs subject to this Agreement to reflect such Adjustment Event. Any such adjustment made by the Committee shall be final and binding upon the Participant, the Company and all other interested persons.
5. No Right to Continued Employment. Neither the Plan nor this Agreement shall be construed as giving the Participant the right to be retained in the employ of, or in any consulting relationship to, the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss the Participant, free from any liability or any claim under the Plan or this Agreement, except as otherwise expressly provided herein.
6. No Acquired Rights. In participating in the Plan, the Participant acknowledges and accepts that the Board has the power to amend or terminate the Plan, to the extent permitted thereunder, at any time and that the opportunity given to the Participant to participate in the Plan is entirely at the discretion of the Committee and does not obligate the Company or any of its Affiliates to offer such participation in the future (whether on the same or different terms). The Participant further acknowledges and accepts that such Participant's participation in the Plan is not to be considered part of any normal or expected compensation and that the termination of the Participant's employment under any circumstances whatsoever will give the Participant no claim or right of action against the Company or its Affiliates in respect of any loss of rights under this Agreement or the Plan that may arise as a result of such termination of employment.
7. No Rights of a Shareholder. The Participant shall not have any rights or privileges as a shareholder of the Company until the Shares in question have been registered in the Company's register of shareholders.
8. Legend on Certificates. Any Shares issued or transferred to the Participant pursuant to Section 2 of this Agreement shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares are listed, and any applicable Federal or state laws or relevant securities laws of the jurisdiction of the domicile of the Participant, and the Committee may cause a legend or legends to be put on any certificates representing such Shares to make appropriate reference to such restrictions. Whenever reference in this Agreement is made to the issuance or delivery of certificates representing Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.
9. Transferability. PSUs may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant otherwise than by will or by the laws of descent and distribution, and any purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance not permitted by this Section 9 shall be void and unenforceable against the Company or any Affiliate.
10. Withholding. The Participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any transfer due under this Agreement or under the Plan or from any compensation or other amount owing to the Participant, applicable withholding taxes with respect to any transfer under this Agreement or under the Plan and to take such action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. Notwithstanding the foregoing, if the Participant's employment with the Company terminates prior to the transfer of all of the Shares under this Agreement, the payment of any applicable withholding taxes with respect to any further transfer of Shares under this Agreement or the Plan shall be made solely through the sale of Shares equal to the statutory minimum withholding liability.
11. Non-Solicitation Covenants.
(a) The Participant acknowledges and agrees that, during the Participant's employment with the Company and its Affiliates and upon the Participant's termination of Employment with the Company and its Affiliates for any reason, for a period commencing on the termination of such Employment and ending on the second anniversary of such termination, the Participant shall not, whether on Participant's own behalf or on behalf of or in conjunction with any person, company, business entity or other organization whatsoever, directly or indirectly:
(i) solicit any employee of the Company or its Affiliates with whom the Participant had any contact during the last two years of the Participant's employment, or who worked in the same business segment or division as the Participant during that period to terminate employment with the Company or its Affiliates;
(ii) solicit the employment or services of, or hire, any such employee whose employment with the Company or its Affiliates terminated coincident with, or within twelve (12) months prior to or after the termination of Participant's employment with the Company and its Affiliates;
(iii) directly or indirectly, solicit to cease to work with the Company or its Affiliates any consultant then under contract with the Company or its Affiliates.
(b) It is expressly understood and agreed that although the Participant and the Company consider the restrictions contained in this Section 11 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or any other restriction contained in this Agreement is an unenforceable restriction against the Participant, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and terri‐tory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restric‐tion contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein.
12. Specific Performance. The Participant acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Section 11 would be inadequate and the Company would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, the Participant agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available.
13. Choice of Law. THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
14. RSUs Subject to Plan. By entering into this Agreement, the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. All PSUs are subject to the Plan. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.
15. Signature in Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
16. 409A. Notwithstanding any other provisions of this Agreement or the Plan, the PSUs covered by this Agreement shall not be deferred, accelerated, extended, paid out or modified in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon the Participant. In the event it is reasonably determined by the Committee that, as a result of Section 409A of the Code, the transfer of Class A Shares under this Agreement may not be made at the time contemplated hereunder without causing the Participant to be subject to taxation under Section 409A of the Code (including due to the Participant's status as a "specified employee" within the meaning of Section 409A of the Code), the Company will make such payment on the first day that would not result in the Participant incurring any tax liability under Section 409A of the Code.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
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HOVNANIAN ENTERPRISES, INC. |
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By: |
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PARTICIPANT1 |
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By: |
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1. To the extent that the Company has established, either itself or through a third-party plan administrator, the ability to accept this award electronically, such acceptance shall constitute the Participant’s signature hereof. |
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Exhibit A
[Insert Performance Metrics for Determining Earned PSUs]
Exhibit 10(i)
2020 HOVNANIAN ENTERPRISES, INC.
SECOND AMENDED AND RESTATED STOCK INCENTIVE PLAN
RESTRICTED SHARE UNIT AGREEMENT
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Participant: |
Date of Grant: |
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Number of RSUs: |
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Dates of Vesting of Class A Shares: |
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Date |
Number of RSUs |
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1. Grant of RSUs. For valuable consideration, receipt of which is hereby acknowledged, Hovnanian Enterprises, Inc., a Delaware Corporation (the "Company"), hereby grants the number of restricted share units ("RSUs") listed above to the Participant, on the terms and conditions hereinafter set forth. This grant is made pursuant to the terms and conditions of the 2020 Company Second Amended and Restated Stock Incentive Plan (the "Plan"), which Plan, as amended from time to time, is incorporated herein by reference and made a part of this Agreement. Each RSU represents the unfunded, unsecured right of the Participant to receive a Share on the date(s) specified herein. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.
2. Vesting and Timing of Transfer.
(a) The Participant will become vested in the RSUs in accordance with the schedule set forth above; provided, however, that upon the occurrence of a Change in Control that results in the Company's Shares ceasing to be publicly traded on a national securities exchange, the RSUs shall immediately become fully vested (subject to any delay in Share delivery required pursuant to Section 16 hereof).
(b) The Company shall transfer to the Participant, as soon as practicable but not later than 60 days after an applicable vesting date, a number of Class A Shares equal to the number of RSUs that became vested on that vesting date (rounded up to the next whole share), provided, however, that upon the final transfer of Shares to the Participant (i) such number of Shares shall be reduced to the extent necessary to reflect any previous rounding up pursuant to this sentence, and (ii) in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. If the Participant is eligible to participate in, and has elected to defer the transfer of Shares pursuant to the terms of a nonqualified deferred compensation plan maintained by the Company, such Shares shall be so deferred, and any such deferral, when paid, shall be paid in Shares. Once the transfer of any Shares is deferred, the rights and privileges of the Participant with respect to such Shares shall be determined solely pursuant to the terms of the applicable plan, and not pursuant to the terms and conditions of this Agreement.
(c) Notwithstanding Sections 2(a) and 2(b) of this Agreement, if the Participant's employment with the Company and its Affiliates terminates due to (i) death, (ii) Disability or (iii) Retirement, the Company shall cause there to be transferred to the Participant, as soon as practicable but not later than 60 days after such termination, but subject to Section 16 of this Agreement, a number of Shares equal to the aggregate number of then unvested RSUs granted to the Participant under this Agreement; provided, however, that upon the transfer of such Shares to the Participant, in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. In the event of the death of the Participant, the transfer of Shares under this Section 2(c) shall be made in accordance with the beneficiary designation form on file with the Company; provided, however, that, in the absence of any such beneficiary designation form, the transfer of Shares under this Section 2(c) shall be made to the person or persons to whom the Participant's rights under the Agreement shall pass by will or by the applicable laws of descent and distribution. For purposes of this Agreement, "Disability" shall mean "Disability" as defined in the Plan, and "Retirement" shall mean termination of employment on or after age 60, or on or after age 58 with at least 15 years of "Service" to the Company and its Subsidiaries immediately preceding such termination of employment. For this purpose, "Service" means the period of employment immediately preceding Retirement, plus any prior periods of employment with the Company and its Subsidiaries of one or more years' duration, unless they were succeeded by a period of non-employment with the Company and its Subsidiaries of more than three years' duration.
(d) Upon each transfer or deferral of Shares in accordance with Sections 2(a), 2(b) and 2(c) of this Agreement, a number of RSUs equal to the number of Shares transferred to the Participant or deferred shall be extinguished.
(e) Notwithstanding Sections 2(a), 2(b) and 2(c) of this Agreement, upon the Participant's termination of employment for any reason other than (i) death, Disability or Retirement or (ii) under the circumstances described in clause (f) below, any unvested RSUs shall immediately terminate for no further consideration.
(f) Termination without Cause or for Good Reason within Two Years Following a Change in Control. In the event of the Participant's involuntary termination of employment with the Company or a subsidiary thereof without "Cause" or for "Good Reason" within two years following a Change in Control, the RSUs, to the extent not previously vested and settled, shall immediately become fully vested and settled in Shares on the same terms as applicable to a termination due to death or Disability as described under Section 2(c) above. For purposes of this Agreement, "Cause" shall mean the occurrence of any of the following: (a) the willful and continued failure of the Participant to perform substantially all of his or her duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) for a period of 10 days following a written demand for substantial performance that is delivered to such Participant by the Company, which specifically identifies the manner in which the Company believes the Participant has not substantially performed his or her duties; (b) dishonesty in the performance of the Participant's duties with the Company; (c) the Participant's conviction of, or plea of guilty or nolo contendere to, a crime under the laws of the United States or any state thereof constituting a felony or a misdemeanor involving moral turpitude; (d) the Participant's willful malfeasance or willful misconduct in connection with the Participant's duties with the Company or any act or omission which is injurious to the financial condition or business reputation of the Company or its affiliates; or (e) the Participant's breach of the provisions of Section 11 of this Agreement. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following, without the Participant's express written consent: (a) any material diminution in the Participant's duties, titles or responsibilities with the Company from those in effect immediately prior to a Change in Control or (b) any reduction in the Participant's annual base salary or any material reduction in the Participant's annual bonus opportunity, annual equity awards or long-term incentive program awards from the Participant's annual base salary or annual bonus opportunity, annual equity awards or long-term incentive program awards in effect immediately prior to a Change in Control. Notwithstanding the foregoing, no event shall constitute Good Reason unless the Participant provides the Company with written notice of such event within 60 days after the occurrence thereof and the Company fails to cure or resolve the behavior otherwise constituting Good Reason within 30 days of its receipt of such notice.
3. Dividends. If on any date while RSUs are outstanding hereunder the Company shall pay any dividend on the Shares (other than a dividend payable in Shares), the number of RSUs granted to the Participant shall, as of such dividend payment date, be increased by a number of RSUs equal to: (a) the product of (x) the number of RSUs held by the Participant as of the related dividend record date, multiplied by (y) the per Share amount of any cash dividend (or, in the case of any dividend payable in whole or in part other than in cash, the per Share value of such dividend, as determined in good faith by the Committee), divided by (b) the Fair Market Value of a Share on the payment date of such dividend. In the case of any dividend declared on Shares that is payable in the form of Shares, the number of RSUs granted to the Participant shall be increased by a number equal to the product of (a) the RSUs that are held by the Participant on the related dividend record date, multiplied by (b) the number of Shares (including any fraction thereof) payable as a dividend on a Share. Any RSUs attributable to dividends under this Section 3 shall be subject to the vesting provisions provided in Section 2.
4. Adjustments Upon Certain Events. Subject to the terms of the Plan, in the event of any change in the outstanding Shares by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, amalgamation, spin-off or combination transaction or exchange of Shares or other similar events (collectively, an "Adjustment Event"), the Committee shall, in its sole discretion, make an appropriate and equitable adjustment in the number of RSUs subject to this Agreement to reflect such Adjustment Event. Any such adjustment made by the Committee shall be final and binding upon the Participant, the Company and all other interested persons.
5. No Right to Continued Employment. Neither the Plan nor this Agreement shall be construed as giving the Participant the right to be retained in the employ of, or in any consulting relationship to, the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss the Participant, free from any liability or any claim under the Plan or this Agreement, except as otherwise expressly provided herein.
6. No Acquired Rights. In participating in the Plan, the Participant acknowledges and accepts that the Board has the power to amend or terminate the Plan, to the extent permitted thereunder, at any time and that the opportunity given to the Participant to participate in the Plan is entirely at the discretion of the Committee and does not obligate the Company or any of its Affiliates to offer such participation in the future (whether on the same or different terms). The Participant further acknowledges and accepts that such Participant's participation in the Plan is not to be considered part of any normal or expected compensation and that the termination of the Participant's employment under any circumstances whatsoever will give the Participant no claim or right of action against the Company or its Affiliates in respect of any loss of rights under this Agreement or the Plan that may arise as a result of such termination of employment.
7. No Rights of a Shareholder. The Participant shall not have any rights or privileges as a shareholder of the Company until the Shares in question have been registered in the Company's register of shareholders.
8. Legend on Certificates. Any Shares issued or transferred to the Participant pursuant to Section 2 of this Agreement shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares are listed, and any applicable Federal or state laws or relevant securities laws of the jurisdiction of the domicile of the Participant, and the Committee may cause a legend or legends to be put on any certificates representing such Shares to make appropriate reference to such restrictions. Whenever reference in this Agreement is made to the issuance or delivery of certificates representing Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.
9. Transferability. RSUs may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant otherwise than by will or by the laws of descent and distribution, and any purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance not permitted by this Section 9 shall be void and unenforceable against the Company or any Affiliate.
10. Withholding. The Participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any transfer due under this Agreement or under the Plan or from any compensation or other amount owing to the Participant, applicable withholding taxes with respect to any transfer under this Agreement or under the Plan and to take such action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. Notwithstanding the foregoing, if the Participant's employment with the Company terminates prior to the transfer of all of the Shares under this Agreement, the payment of any applicable withholding taxes with respect to any further transfer of Shares under this Agreement or the Plan shall be made solely through the sale of Shares equal to the statutory minimum withholding liability.
11. Non-Solicitation Covenants.
(a) The Participant acknowledges and agrees that, during the Participant's employment with the Company and its Affiliates and upon the Participant's termination of Employment with the Company and its Affiliates for any reason, for a period commencing on the termination of such Employment and ending on the second anniversary of such termination, the Participant shall not, whether on Participant's own behalf or on behalf of or in conjunction with any person, company, business entity or other organization whatsoever, directly or indirectly:
(i) solicit any employee of the Company or its Affiliates with whom the Participant had any contact during the last two years of the Participant's employment, or who worked in the same business segment or division as the Participant during that period to terminate employment with the Company or its Affiliates;
(ii) solicit the employment or services of, or hire, any such employee whose employment with the Company or its Affiliates terminated coincident with, or within twelve (12) months prior to or after the termination of Participant's employment with the Company and its Affiliates;
(iii) directly or indirectly, solicit to cease to work with the Company or its Affiliates any consultant then under contract with the Company or its Affiliates.
(b) It is expressly understood and agreed that although the Participant and the Company consider the restrictions contained in this Section 11 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or any other restriction contained in this Agreement is an unenforceable restriction against the Participant, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and terri‐tory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restric‐tion contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein.
12. Specific Performance. The Participant acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Section 11 would be inadequate and the Company would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, the Participant agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available.
13. Choice of Law. THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
14. RSUs Subject to Plan. By entering into this Agreement, the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. All RSUs are subject to the Plan. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.
15. Signature in Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
16. 409A. Notwithstanding any other provisions of this Agreement or the Plan, this RSU shall not be deferred, accelerated, extended, paid out or modified in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon the Participant. In the event it is reasonably determined by the Committee that, as a result of Section 409A of the Code, the transfer of Class A Shares under this Agreement may not be made at the time contemplated hereunder without causing the Participant to be subject to taxation under Section 409A of the Code (including due to the Participant's status as a "specified employee" within the meaning of Section 409A of the Code), the Company will make such payment on the first day that would not result in the Participant incurring any tax liability under Section 409A of the Code.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
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HOVNANIAN ENTERPRISES, INC. |
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1. To the extent that the Company has established, either itself or through a third-party plan administrator, the ability to accept this award electronically, such acceptance shall constitute the Participant’s signature hereof. |
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Exhibit 10(j)
2020 HOVNANIAN ENTERPRISES, INC.
SECOND AMENDED AND RESTATED STOCK INCENTIVE PLAN
RESTRICTED SHARE UNIT AGREEMENT
(Directors)
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Date of Grant: |
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Number of RSUs: |
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Date of Vesting of Class A Shares: |
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1. Grant of RSUs. For valuable consideration, receipt of which is hereby acknowledged, Hovnanian Enterprises, Inc., a Delaware Corporation (the "Company"), hereby grants the number of restricted share units ("RSUs") listed above to the Participant, on the terms and conditions hereinafter set forth. This grant is made pursuant to the terms and conditions of the 2020 Company Second Amended and Restated Stock Incentive Plan (the "Plan"), which Plan, as amended from time to time, is incorporated herein by reference and made a part of this Agreement. Each RSU represents the unfunded, unsecured right of the Participant to receive a Share on the date(s) specified herein. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.
2. Vesting and Timing of Transfer.
(a) The Participant will become vested in the RSUs in accordance with the schedule set forth above (each such vesting date, a "Vesting Date").
(b) The Company shall transfer to the Participant, as soon as practicable but not later than 60 days after an applicable "Delivery Date" (as defined below), a number of Class A Shares equal to the number of RSUs that became vested on the corresponding Vesting Date (rounded up to the next whole share), provided, however, that upon the final transfer of Shares to the Participant (i) such number of Shares shall be reduced to the extent necessary to reflect any previous rounding up pursuant to this sentence, and (ii) in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share. If the Participant is eligible to participate in, and has elected to defer the transfer of Shares pursuant to the terms of a nonqualified deferred compensation plan maintained by the Company, such Shares shall be so deferred, and any such deferral, when paid, shall be paid in Shares. Once the transfer of any Shares is deferred, the rights and privileges of the Participant with respect to such Shares shall be determined solely pursuant to the terms of the applicable plan, and not pursuant to the terms and conditions of this Agreement. For purposes of this Agreement, the "Delivery Date" with respect to each Vesting Date shall mean the date that is the earlier of (i) the second anniversary of such Vesting Date or (ii) the second anniversary of the date of the Participant’s Qualified Termination (as defined below), if applicable.
(c) Notwithstanding Sections 2(a) and 2(b) of this Agreement, if the Participant ceases to be a member of the Board of Directors due to (i) death, (ii) Disability or (iii) Retirement (any such termination, a "Qualified Termination"), any previously unvested RSUs shall become fully vested and the Shares underlying all of the Participant’s outstanding RSUs shall be delivered to the Participant as soon as practicable but not later than 60 days after the corresponding Delivery Date(s). In the event of the death of the Participant, the transfer of Shares under this Section 2(c) shall be made in accordance with the beneficiary designation form on file with the Company; provided, however, that, in the absence of any such beneficiary designation form, the transfer of Shares under this Section 2(c) shall be made to the person or persons to whom the Participant's rights under the Agreement shall pass by will or by the applicable laws of descent and distribution. For purposes of this Agreement, "Disability" shall mean disability within the meaning of Section 22(e)(3) of the Code, and "Retirement" shall mean 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. For this purpose, "Service" means the period of service as a member of the Board of Directors immediately preceding Retirement, plus any prior periods of service as a member of the Board of Directors of one or more years' duration, unless they were succeeded by a period of non-service as a member of the Board of Directors of at least three years' duration.
(d) Upon each transfer or deferral of Shares in accordance with Sections 2(a), 2(b) and 2(c) of this Agreement, a number of RSUs equal to the number of Shares transferred to the Participant or deferred shall be extinguished.
(e) Notwithstanding Sections 2(a), 2(b) and 2(c) of this Agreement, upon the date that the Participant ceases to be a member of the Board of Directors for any reason other than death, Disability or Retirement, any unvested RSUs shall immediately terminate for no further consideration.
3. Dividends. If on any date while RSUs are outstanding hereunder the Company shall pay any dividend on the Shares (other than a dividend payable in Shares), the number of RSUs granted to the Participant shall, as of such dividend payment date, be increased by a number of RSUs equal to: (a) the product of (x) the number of RSUs held by the Participant as of the related dividend record date, multiplied by (y) the per Share amount of any cash dividend (or, in the case of any dividend payable in whole or in part other than in cash, the per Share value of such dividend, as determined in good faith by the Committee), divided by (b) the Fair Market Value of a Share on the payment date of such dividend. In the case of any dividend declared on Shares that is payable in the form of Shares, the number of RSUs granted to the Participant shall be increased by a number equal to the product of (a) the RSUs that are held by the Participant on the related dividend record date, multiplied by (b) the number of Shares (including any fraction thereof) payable as a dividend on a Share. Any RSUs attributable to dividends under this Section 3 shall be subject to the vesting provisions provided in Section 2.
4. Adjustments Upon Certain Events. Subject to the terms of the Plan, in the event of any change in the outstanding Shares by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, amalgamation, spin-off or combination transaction or exchange of Shares or other similar events (collectively, an "Adjustment Event"), the Committee shall, in its sole discretion, make an appropriate and equitable adjustment in the number of RSUs subject to this Agreement to reflect such Adjustment Event. Any such adjustment made by the Committee shall be final and binding upon the Participant, the Company and all other interested persons.
5. No Acquired Rights. In participating in the Plan, the Participant acknowledges and accepts that the Board has the power to amend or terminate the Plan, to the extent permitted thereunder, at any time and that the opportunity given to the Participant to participate in the Plan is entirely at the discretion of the Board and does not obligate the Company or any of its Affiliates to offer such participation in the future (whether on the same or different terms).
6. No Rights of a Shareholder. The Participant shall not have any rights or privileges as a shareholder of the Company until the Shares in question have been registered in the Company's register of shareholders.
7. Legend on Certificates. Any Shares issued or transferred to the Participant pursuant to Section 2 of this Agreement shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares are listed, and any applicable Federal or state laws or relevant securities laws of the jurisdiction of the domicile of the Participant, and the Committee may cause a legend or legends to be put on any certificates representing such Shares to make appropriate reference to such restrictions. Whenever reference in this Agreement is made to the issuance or delivery of certificates representing Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.
8. Transferability. RSUs may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant otherwise than by will or by the laws of descent and distribution, and any purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance not permitted by this Section 8 shall be void and unenforceable against the Company or any Affiliate.
9. Withholding. The Participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any transfer due under this Agreement or under the Plan or from any compensation or other amount owing to the Participant, applicable withholding taxes with respect to any transfer under this Agreement or under the Plan and to take such action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. Notwithstanding the foregoing, if the Participant ceases to be a member of the Board of Directors prior to the transfer of all of the Shares under this Agreement, the payment of any applicable withholding taxes with respect to any further transfer of Shares under this Agreement or the Plan shall be made solely through the sale of Shares equal to the statutory minimum withholding liability.
10. Choice of Law. THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
11. RSUs Subject to Plan. By entering into this Agreement, the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. All RSUs are subject to the Plan. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.
12. Signature in Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
13. 409A. Notwithstanding any other provisions of this Agreement or the Plan, this RSU shall not be deferred, accelerated, extended, paid out or modified in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon the Participant. In the event it is reasonably determined by the Committee that, as a result of Section 409A of the Code, the transfer of Class A Shares under this Agreement may not be made at the time contemplated hereunder without causing the Participant to be subject to taxation under Section 409A of the Code (including due to the Participant's status as a "specified employee" within the meaning of Section 409A of the Code), the Company will make such payment on the first day that would not result in the Participant incurring any tax liability under Section 409A of the Code.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
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HOVNANIAN ENTERPRISES, INC. |
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By: |
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CERTIFICATIONS
Exhibit 31(a)
I, Ara K. Hovnanian, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended July 31, 2022 of Hovnanian Enterprises, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: September 6, 2022
/s/ARA K. HOVNANIAN
Ara K. Hovnanian
Chairman, President and Chief Executive Officer
CERTIFICATIONS
Exhibit 31(b)
I, J. Larry Sorsby, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended July 31, 2022 of Hovnanian Enterprises, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: September 6, 2022
/s/J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President and Chief Financial Officer
Exhibit 32(a)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hovnanian Enterprises, Inc. (the “Company”) on Form 10‑Q for the period ended July 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ara K. Hovnanian, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: September 6, 2022
/s/ARA K. HOVNANIAN
Ara K. Hovnanian
Chairman, President and Chief Executive Officer
Exhibit 32(b)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hovnanian Enterprises, Inc. (the “Company”) on Form 10‑Q for the period ended July 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Larry Sorsby, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: September 6, 2022
/s/J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President and Chief Financial Officer