Beneficial Owners of More Than 5Five Percent of Our Common Stock
Except as stated in the footnotes, the
The information below shows each person or entity known to us as of February 27, 200625, 2008 to be the beneficial owner of more than 5five percent of our Common Stock:common stock:
| | | | | | | | | |
| | | Amount and Nature | | Percent |
| | | of Beneficial | | of |
| Name and Address of Beneficial Owner | | Ownership (a – c) | | Class |
| | | | | |
| KB Home Grantor Stock Ownership Trust, | | | 12,434,342 | | | | 13.3 | % |
Wachovia Bank, N.A., as Trustee,
Institutional Trust and Retirement Services
101 North Main Street
Winston-Salem, North Carolina 27150 | | | | | | | | |
| |
| FMR Corp. | | | 10,333,548 | | | | 11.1 | % |
82 Devonshire Street
Boston, Massachusetts 02109 | | | | | | | | |
| |
| Marsico Capital Management, LLC | | | 6,429,687 | | | | 6.9 | % |
1200 17th Street, Suite 1600
Denver, Colorado 80202 | | | | | | | | |
| | | | | | | | | | | | | |
| | | | Amount and Nature
| | | | | |
| | | | of Beneficial
| | | Percent
| | |
| Name and Address of Beneficial Owner | | | Ownership | | | of Class | | |
| KB Home Grantor Stock Ownership Trust (a) | | | | 12,148,482 | | | | | 13.6 | % | | |
Wachovia Executive Benefits Group
One West Fourth Street - NC 6251
Winston-Salem, North Carolina 27101 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| FMR LLC and Edward C. Johnson 3d (b) | | | | 11,589,788 | | | | | 12.9 | % | | |
82 Devonshire Street
Boston, Massachusetts 02109 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| AXA Financial, Inc., et al. (c) | | | | 10,006,055 | | | | | 11.2 | % | | |
1290 Avenue of the Americas
New York, NY 10104 | | | | | | | | | | | | |
| |
| |
| (a) | The KB Home Grantor Stock Ownership Trust Wachovia Bank, N.A., as Trustee (the “GSOT”(“GSOT”) holds all of the shares of our common stock reported above pursuant to a trust agreement with Wachovia Bank, N.A., as trustee, in connection with the prefunding of certain of our obligations to employees under our employee benefit plans. Both the GSOT and the Trusteetrustee disclaim beneficial ownership of the shares reported. The Trusteetrustee has no discretion over the manner in which the shares of our common stock held byin the GSOT are voted. The trust agreement for the GSOT provides |
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| |
| that, as of any given record date, employees who hold unexercised options under our employee equity compensation plans will determine the manner in which shares of our Common Stockcommon stock held in the GSOT are voted. |
| | |
| | | The Trusteetrustee will vote the shares of our Common Stockcommon stock held in the GSOT in the manner directed by those eligible employees who submit voting instructions for the shares. The number of shares of our common stock as to which any one employee can direct the vote is determined on a pro-rata basis and will depend upon how many employees submit voting instructions to the Trustee.trustee. Employees who are also Directorsdirectors are excluded from voting; accordingly, Mr. KaratzMezger may not direct the vote of any shares in the GSOT. If all eligible employees submit voting instructions to the Trustee,trustee, the other Named Executive Officersnamed executive officers who are employed by us at the date of the Annual Meeting will have the right to direct the vote of the following share amounts of the shares of our common stock held in the GSOT (which, for each eligible Named Executive Officer,named executive officer, include both the stock options reported above in the “Directors“Beneficial Ownership of Directors and Management” table and stock options granted to them under our employee benefit plans that do not vest within 60 days of February 27, 2006)25, 2008): Mr. Mezger 1,545,606;Cecere 1,114,047, Mr. Moss 103,266;Hollinger 1,148,343, Mr. Freed 68,732;Barnard 352,216, Mr. Widner 63,800;Masuda 293,514, and all current executive officers as a group 3,214,018. If less than all of the eligible employees submit voting instructions, then the foregoing amounts will be higher.(excluding Mr. Mezger) 2,908,119. The trust agreement furtherfor the GSOT provides that all voting instructionsfor the GSOT received by the Trusteetrustee will be held in confidence and will not be disclosed to any person, including to us. |
| |
| (b) | Pursuant toThe stock holding information reported in the table above and in this footnote is based solely on an amendment to Schedule 13G dated February 14, 20062008 that FMR LLC filed with the Securities and Exchange Commission byto report beneficial ownership of FMR LLC (f/k/a FMR Corp., 7,667,930) and Mr. Edward C. Johnson 3d, FMR LLC’s Chairman, as of theDecember 31, 2007. The shares reported are beneficially owned by the following direct or indirect wholly-owned subsidiaries of FMR LLC: (i) Fidelity Management & Research Company (11,530,567 shares), and (ii) Pyramis Global Advisors Trust Company (53,921 shares); and by Fidelity International Limited (5,300 shares), an investment adviserentity of which Edward C. Johnson 3d is Chairman and a wholly-owned subsidiary ofin which his family owns an indirect interest. FMR Corp., as a result of acting as investment adviser to various investment companies (collectively, the “Fidelity Funds”). With respect to these shares, FMR Corp.,LLC and Mr. Edward C. Johnson 3d and eachhave sole dispositive power as to all of the Fidelity Funds exercise investment power and the Fidelity Funds’ Boards of Trustees exercises voting power. Of the shares reported, 653,818 shares are beneficially owned by Fidelity Management Trust Company, a bank and a wholly owned subsidiary of FMR Corp.,LLC has sole voting power as to which each of Mr. Johnson and FMR Corp., through its control of Fidelity Management Trust Company, has investment and voting power. Of the shares reported, 620 shares are beneficially owned by Strategic Advisors, Inc., an investment advisor and wholly owned subsidiary of FMR Corp. The remaining 2,011,180 shares reported are beneficially owned by Fidelity International Limited, an investment adviser and an entity independent of FMR Corp., as to which shares Fidelity International Limited exercises sole investment and voting power.59,221 shares. |
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| (c) | PursuantThe stock holding information reported in the table above and in this footnote is based solely on amendment to the Schedule 13G dated February 13, 200614, 2008 that AXA Financial, Inc., et al. filed with the Securities and Exchange Commission by Marsico Capital Management, LLC, an investment advisor, Marsico Capital Management, LLC, reporting itspursuant to a joint filing agreement to report beneficial ownership as of December 31, 2005.2007. The shares are beneficially owned by the following AXA Financial, Inc. subsidiaries: AllianceBernstein L.P., an investment advisor, and AXA Equitable Life Insurance Company, an insurance company and an investment advisor. Of the sharesamount reported Marsico Capital Management, LLC exercisesas beneficially owned, (i) AllianceBernstein L.P. had sole voting power with respectas to 5,398,9276,468,637 shares of our common stock, had shared voting power as to 976,179 shares, had sole dispositive power as to 10,003,800 shares and had shared dispositive power as to 16 shares; and (ii) AXA Equitable Life Insurance Company had sole voting power as to 2,200 shares of our common stock and had sole dispositive power as to 2,239 shares. AXA is a parent holding company for AXA Financial, Inc. AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle and AXA Courtage Assurances Mutuelle, as a group (collectively, “Mutuelles AXA”), are the shares reported.parent holding company that controls AXA. The address of Mutuelles AXA is 26, rue Drouot, 75009 Paris, France. The address of AXA is 25, avenue Matignon, 75008 Paris, France. |
Stock Ownership Requirements
We have established stock ownership requirements for our non-employee directors and senior management to better align their interests with those of our stockholders. Our Corporate Governance Principles require each of our non-employee directors to own at least 5,000 shares of our common stock or common stock equivalents within three years of joining the Board. Our Executive Stock Ownership Policy applies to members of our senior management team and requires executives at various levels to own a number of shares whose value is equivalent to a range ofone-to-five times base salary. Executives are expected to demonstrate meaningful progress toward satisfying their applicable requirement and to comply fully within five years of becoming subject to the policy, or be subject to consequences for non-compliance. The policy, as it pertains to our named executive officers, is discussed in additional detail under the heading “Equity Stock Ownership Policy” on page 34 below.
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Executive Compensation
Management Development Andand Compensation Committee Report
Committee Report on Executive Compensation
Compensation Philosophy and Objectives
The Management Development and Compensation Committee of the Company’s Board of Directors overseeshas reviewed and discussed the Company’sfollowing “Compensation Discussion and Analysis” with KB Home management. Based on this review and discussion, the Management Development and Compensation Committee recommended to the Board of Directors that the “Compensation Discussion and Analysis” be included in this Proxy Statement.
Management Development and Compensation Committee
J. Terrence Lanni, Chairman
Timothy W. Finchem
Michael G. McCaffery
Luis G. Nogales
Compensation Discussion and Analysis
Overview
We believe our KBnxt operational business model provides us with a distinct competitive advantage over other homebuilders. This disciplined, fact-based and process-driven approach to homebuilding, founded on a constant and systematic assessment of consumer preferences and market opportunities, is designed to generate operational efficiencies and return on investment for our business.
We also believe that our success depends on our having a talented and dedicated workforce. Therefore, our compensation and benefit programs aim to attract, motivate and retain the best people and to maximize, through an appropriate investment of resources, their contributions in creating enterprise and stockholder value. To accomplish these goals, we design our compensation and benefit arrangements to appropriately reward the contributions our people make, taking into account the following: their specific roles, responsibilities, experience and skill sets; individual performance; the market rate for comparable jobs; the existing business environment; and our overall financial and operational results. We believe our linking the compensation and benefits we provide to contributions that enhance enterprise and stockholder value establishes a clear alignment between the interests of our employees and our stockholders. We also promote an alignment of employee and stockholder interests by paying a greater proportion of variable (i.e., performance-based) cash and equity-based compensation to our employees as their specific duties and responsibilities increase.
The above goals and considerations provide the basis for our executive compensation programs.philosophy and the specific compensation and benefit arrangements we have with our named executive officers (“NEOs”). Short- and long-term NEO compensation is based primarily on each NEO’s individual performance in achieving meaningful financialand/or operational objectives and metrics that create and sustain enterprise and stockholder value. NEO compensation and benefits are also based on our overall financial results and on our judgment of what we believe is necessary to attract, motivate and retain high caliber individuals in a highly competitive market for senior executive talent. In keeping with our focus of aligning our compensation arrangements with stockholder interests, a significant proportion of NEO compensation is variable and equity-based in nature.
Executive Compensation Oversight. The Company designs itsCompensation Committee, with support from our management and outside advisors, oversees our executive compensation and benefit programs, around five key principles, which together compriseincluding the Company’sspecific compensation and benefit arrangements we have with our NEOs. The Compensation Committee evaluates and, as necessary, adjusts these compensation and benefit arrangements to ensure consistency with our compensation and benefit programs’ goals.
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Compensation Committee Role. In addition to providing general oversight, the Compensation Committee annually reviews and approves goals and objectives for our CEO, evaluates our CEO’s performance in light of those goals and objectives, and determines and approves our CEO’s compensation based on that performance evaluation, as discussed under the heading “Overview of Executive Officer and Non-Employee Director Compensation Processes and Procedures” on page 7 above. The Compensation Committee also reviews and approves the compensation of the other NEOs.
Compensation Committee Consultant Role. Semler Brossy Consulting Group LLC serves as the Compensation Committee’s independent compensation consultant, providing advice and perspective to the Compensation Committee on executive and non-employee director compensation and benefits. Under the Compensation Committee’s charter, and to maintain its independence and avoid any conflict of interests, Semler Brossy may not work for our management unless the Compensation Committee pre-approves any such work, including fees.
CEO and Management’s Role. The Compensation Committee frequently asks for input and support from our management, including our CEO, our Senior Vice President, Human Resources and our Executive Vice President, General Counsel and Secretary and their respective staffs, particularly regarding compensation and benefit plan design and implementation, feedback from employees, and compliance and disclosure requirements. At the request of the Compensation Committee, the CEO reviews and discusses the compensation of the other NEOs and makes recommendations to the Compensation Committee as to annual base salary and short- and long-term incentive compensation awards. Our management is responsible for implementing our compensation and benefit programs under the Compensation Committee’s oversight. Our management has recently retained a compensation consultant, Towers Perrin, for the purpose of providing compensation and benefits related information, analysis and support.
The following discussion provides additional information and analysis regarding our executive compensation philosophy:and benefits program and the specific compensation and benefit arrangements we have with our NEOs.
NEO Compensation Elements Overview
| | | | |
Compensation Element | | Purpose / Description | |
|
| | |
| Base Salary | | Provide competitive fixed income for performance ofday-to-day position responsibilities. Consists of semi-monthly cash payments. |
|
| Short-Term Incentives | | Build accountability and reward achievement of annual goals that support short-term business objectives. Consists primarily of cash payments made after the relevant fiscal year. |
|
| Long-Term Incentives | | Promote retention and provide link between executive compensation and stockholder value creation over a multi-year period. Consists primarily of the following equity-based awards, which are either cash-or stock-settled: |
|
• Stock Options/Stock Appreciation
Rights (“SARs”) | | Provide compensation tied to the price of our common stock and paid in stock or cash. The awards have no value if our common stock price falls below the grant price. |
|
| • Restricted Stock/Phantom Shares | | Provide equity-based compensation tied to the performance of our common stock price to promote retention and to mitigate cyclical industry/market volatility associated with stock options/SARs. |
|
| Executive Benefits | | The following provide competitive health and welfare support to enhance recruitment and promote retention: |
|
| • Executive Life Insurance | | Provide a death benefit to an executive’s designated beneficiary through company-owned and/or company-paid term life insurance. |
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| | |
| • Retirement Plan (closed) | | Contribute to financial security upon retirement through an annuity benefit. Not all of our NEOs participate in this plan and no new participants have been added to the plan since 2004. |
|
| • Deferred Compensation Plan | | Permits deferred receipt of earned compensation into a non-qualified savings plan similar to our 401(k) Savings Plan. Amounts deferred under this plan and the 401(k) Savings Plan are eligible for a dollar-for-dollar company matching contribution up to an aggregate amount of six percent of base salary. |
|
| • Executive Health Benefits | | Provide 100% reimbursement ofout-of-pocket medical, dental and vision expenses. |
|
| Discontinued Perquisites | | Perquisites previously made available to all NEOs included automobile allowances, company-paid automobile fuel cards, and reimbursement of expenses for automobile insurance, annual financial planning and tax preparation services, and one-time estate planning services. These perquisites were discontinued in mid-2007. |
Mix of Compensation Elements. For our NEOs, we maintain a mix of market-competitive fixed compensation and benefits coupled with variable incentive pay that depends on individual and company performance. As a result, the compensation paid to each NEO can vary from the compensation paid to other NEOs in a given year and from the compensation paid to the same NEO in other years depending on individual performance evaluations and our results of operations. Individual performance evaluations are conducted as part of an annual merit and salary review process that the Compensation Committee oversees.
The Compensation Committee uses it own judgment when establishing the mix of compensation elements it approves for our NEOs in any given year, taking into account individual and company performance and market survey data, rather than following a set formula or a specific percentage allocation to each element. Consistent with our focus on aligning our compensation arrangements with stockholder interests, the Compensation Committee has generally weighted NEO and other senior executive compensation significantly toward variable, performance-based short-term and long-term vehicles.
Reflecting the Compensation Committee’s approach, over the past several years, approximately 90% of the CEO’s and 80% of other senior executives’ compensation has been variable and based on individual and company performance. In our 2007 fiscal year, approximately 95% of the CEO’s and 85% of other senior executives’ compensation was variable and based on performance because we granted a greater-than-usual number of long-term incentive grants, as further discussed under the heading “CEO and Other NEO Compensation Decisions” onpages 29-33 below.
Short-term variable compensation consists of cash incentives and is used to reward performance in attaining current-year objectives. Long-term variable compensation consists of equity-based awards and is used to reward performance in achieving multi-year strategic objectives and to motivate and retain executives. To reflect the CEO’s key role in setting and executing long-term business strategies, the Compensation Committee has generally awarded the CEO a higher proportion of long-term incentives when compared to the other NEOs.
Our management has prepared tally sheets for the Compensation Committee that set forth the mix of existing NEO compensation components. The Compensation Committee used the tally sheets in making decisions with respect to the compensation components.
Key Considerations in 2007
In 2007, we faced challenging market conditions of unusual severity. Several factors weighed on the entire housing industry, including a persistent oversupply of new and resale homes available for sale that reached historically high levels, increased foreclosure activity, heightened competition for home sales, reduced home affordability, turmoil in
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the mortgage and credit markets, and decreased consumer confidence in purchasing homes. These are discussed in greater detail in our Annual Report onForm 10-K for the fiscal year ended November 30, 2007.
The Compensation Committee established annual incentive compensation objectives for our NEOs and other senior executives shortly after the beginning of our 2007 fiscal year that were generally designed to further the following business and financial objectives in alignment with the strategic priorities we had set for the year: (a) enhance our balance sheet; (b) improve our gross and pre-tax margins; (c) adjust our strategies to align with the market environment; (d) optimize our land pipeline and reduce our inventory; and (e) execute our KBnxt operational business model.
Given the difficult business environment, our strategic priorities for 2007 were to solidify our financial position and to reposition our business consistent with the disciplines of our KBnxt operational business model. Based on these priorities, we focused on generating cash flow during the year by converting our backlog of sold homes into revenue and strategically converting operating assets into cash, which enabled us to reduce our debt levels. We also reviewed our market positions, community counts and overhead requirements during the year and curtailed our investments where it made financial or strategic sense to do so, including consolidating or exiting underperforming markets. In positioning our business for the future, we intensified our focus on our core customer base by introducing newly designed, smaller, more affordable homes in our active communities at price points calibrated to median income levels to attract these homebuyers, while continuing to invest in our KB Home Studios to provide our homebuyers with a customized approach that we believe uniquely differentiates us from other homebuilders. We also took steps to reengineer our home designs and restructure our supplier and subcontractor relationships to lower production costs and cycle times.
These strategic initiatives and the sale of our French operations near the recent market peak in that country yielded tangible results in our 2007 fiscal year, including:
| | |
| | • | closely link executive compensation to the creationgenerating $1.2 billion of stockholder value;cash from operating activities; |
| |
| | • | promote stock ownershipreducing debt levels by executives$759 million at November 30, 2007 compared to directly align their interests with stockholder interests;the prior year; |
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| | • | reward contributions that further the Company’s KBnxt business model (as described in its 2005 Annual Report on Form 10-K) by linking individual performance goals and compensation measuresimproving our debt-to-capital ratio, net of cash, to the achievement of specific business objectives; |
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| • | balance compensation elements to encourage the achievement of both short-term business plans and long-term strategic objectives with a focus on total compensation;31% at November 30, 2007 from 43% at November 30, 2006; and |
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| | • | attract, retain and motivate executives of the highest quality.increasing our cash balance by $625 million to $1.3 billion at November 30, 2007. |
The Companyspecific accomplishments of our NEOs with respect to these objectives are discussed further onpages 29-30 below.
Use of Market Data
The Compensation Committee considers survey and peer group data as one factor in setting NEO compensation. This information gives the Compensation Committee a general sense of whether our NEO compensation is reasonable and competitive relative to the compensation paid to executives with similar responsibilities at companies that we consider to be similar to us based on revenues or nature of operations. Although comparisons to compensation levels at other companies are helpful in assessing the overall competitiveness of our compensation program to attract and retain executive talent, the Compensation Committee does not target compensation at any specified level within a general industry or peer group. Other factors the Compensation Committee considers in making NEO compensation decisions include responsibilities unique to our business operations, individual performance and the requirements of our KBnxt operational business model.
In 2007, the Compensation Committee continually analyze the annual and long-term components of the Company’sconsidered aggregated survey data for general industry executive compensation programspublished by Towers Perrin, Mercer LLC and Watson Wyatt Data Services for companies with annual revenues ranging from $2 billion to adhere$10 billion. The Compensation Committee considered this survey data because it believes we compete against companies both within and outside our own industry to fill many of our top management positions.
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The Compensation Committee also considered data from the foregoing compensation philosophy,public companies listed below, which we consider to focus on total compensation and to ensure competitiveness withbe our peer companies.group. Our peer group consists of companies that are engaged, as we are, in high production home building. Our annual revenues approximate the group median.
Annual
| | | | |
| • Beazer Homes | | • Lennar Corporation | | • Ryland Group |
| • Centex Corporation | | • MDC Holdings | | • Standard Pacific |
| • DR Horton | | • NVR Incorporated | | • Toll Brothers |
| • Hovnanian Enterprises | | • Pulte Homes | | |
CEO and Other NEO Compensation Decisions
The terms of our CEO’s compensation for each Company executiveare governed by his Employment Agreement dated February 28, 2007 (“Employment Agreement”). The Compensation Committee and the Board approved the Employment Agreement following Mr. Mezger’s promotion from Executive Vice President and Chief Operating Officer in November 2006. The Employment Agreement was designed to motivate and retain our CEO, who provided critically-needed leadership, strategic direction, and stability by agreeing to assume the role following the abrupt departure of key senior executives and during a period of turbulent business conditions. The Board believes the Employment Agreement provides compensation that is composedin line with CEO compensation practices in the homebuilding industry.
In determining the level of base salary and incentive compensation. Annual incentive compensation is based on the pretax, pre-incentive profit of the Company (or of a particular business unit) and/or individual job performance. As such, the overall amount of annual compensation paid to an executive depends on the extent to which the executive and the Company achieve specific performance requirements established at the beginning of the fiscal year. Performance against these requirements is analyzed to ensure that the results achieved are sustainable and that the KBnxt business model is being followed.
Long-term compensation is comprised of the Company’s Unit Performance Program and equity awards, consisting of stock options and shares of restricted stock. Equity awards are granted based on individual performance results and build value for each executive grantee in step with improved performance of the Company’s Common Stock. Performance Unit awards track the Company’s cumulative earnings per share and the Company’s (or a particular business unit’s) average pretax return on investment over three year periods.
These components of the Company’s executive compensation programs, which are further described below, reflect and support the Company’s overall compensation philosophy by linking the majority of executives’ compensation to the achievement of balanced short-termshort- and long-term Companyincentives provided to our NEOs in 2007, the Compensation Committee balanced our financial and individual performance goals. Accordingly,operational results given the Committee believes that the Company’s executive compensation programs serve to motivate the Company’s executives to continually enhance stockholder value in a manner that maintains close alignment of their interestsexisting business environment with the interests of the Company’s stockholders.
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In fiscal year 2005, the Company achieved significant increases in unit deliveries, total revenues, and diluted earnings per share. Unit deliveries rose 17% from the prior fiscal year, to 37,140, while total revenues increased 34% to $9.44 billion. Diluted earnings per share increased 67% to $9.53, establishing a new Company record. Pretax income in 2005 was $1.30 billion, up 81% from 2004. The Company’s stock appreciated by 59% in 2005, exceeding the S&P 500, the S&P homebuilding and the Dow Jones home construction indices for the year. Because of the Company’s focus on linking executive compensation to Companyindividual performance and the creation of stockholder value, the compensation the Company paidneed to its executives in fiscal year 2005 reflects the Company’s strong fiscal year 2005 results.motivate and retain our executive talent pool.
Compensation in Fiscal Year 2005
The following generally describes how the Company compensated its executive officers and, in particular, the Named Executive Officers, in fiscal year 2005. Please see the tables under “Executive Compensation” on pages 43-47 for a detailed presentation of the compensation earned by the Named Executive Officers in fiscal year 2005.
Base Salaries. Base salaries aresalary is a fixed element of compensation for an executive’s ongoing contributionour CEO and our other NEOs. The Compensation Committee annually reviews and may approve base salary adjustments based on projected market trends and our performance. Base salaries were also adjusted in 2007 for promotions when they occurred.
Our CEO’s Employment Agreement sets his annual base salary at no less than $1,000,000. The Board believes this is appropriate given Mr. Mezger’s lifelong experience in the homebuilding industry and fourteen years with us, including his seven-year tenure as our Chief Operating Officer preceding his promotion to the performance of the business unit or units for which he or sheCEO. It also is responsible. In keepingconsistent with the Company’s compensation philosophy to attract and retain executivesmedian of the highest quality, executive base salaries are targeted to be competitive with averageCEO base salaries paid by our peer group.
Base salaries for the other NEOs reflect a number of factors, including each NEO’s experience and specific role in our business, individual performance evaluations and expectations, our current and expected financial results, equity of salary relative to similar executives who are not NEOs, an assessment of market rates with comparablerespect to each NEO’s responsibilities at peer companies. In this regard, the Committee reviews analyses by the Company’s Compensation Department and by outside consultants to ensure that base salaries remain competitive.
The Committee adjusts executive base salaries based on its assessment of each executive’s contribution to the Company’s businesscompetitiveness, and the Company’s overallour general budgetary guidelines for base salary increases. In fiscal year 2005, individualincreases as set by the Compensation Committee. For 2007, the Compensation Committee set annual base salary merit increases for our NEOs other than the CEO of between three and four percent. The Compensation Committee believes these increases represent an appropriate balance between our recent operational results, expected future business conditions and the need to maintain competitive levels of pay to promote retention. Additional one-time base salary increases were provided to Messrs. Cecere and Hollinger in January 2007 in consideration of their respective promotions.
Annual Incentives and Discretionary Bonuses. In 2007, Mr. Mezger was eligible for a performance-based annual incentive award based on a specified percentage of our pre-tax, pre-incentive profit, subject to the Nameddiscretion of the Compensation Committee to reduce the award to an amount ranging from $0 to $17.5 million based on its subjective assessment of Mr. Mezger’s performance. Since pre-tax, pre-incentive profit was not achieved, Mr. Mezger did not qualify for this performance-based award.
In 2007, Mr. Mezger substantially exceeded objectives that the Compensation Committee established for his first year as our CEO: strengthen our balance sheet, improve our customer satisfaction scores, streamline our overhead structure and rebuild our senior executive team. In these areas, under Mr. Mezger’s leadership we: (a) generated $1.2 billion of cash from our operations, reducedyear-over-year debt levels by $759 million (26%) and improved ouryear-over-year ratio of debt to total capital, net of cash, to 31% from 43%; (b) significantly improved our customer satisfaction levels, as measured by J.D. Power and Associates, an independent global
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marketing information services firm; (c) achievedyear-over-year reductions in overhead expenses (26%) and headcount (39%) and restructured our operations to align with homebuilding market conditions; and (d) streamlined and rebuilt our executive leadership team by realigning our senior operations management under the leadership of three regional executives and hiring the Senior Vice President, Human Resources and the Executive Officers were determined byVice President, General Counsel and Secretary.
Based on these accomplishments and his key role and significant work in developing, leading and consummating the sale of our French operations at a price near the market peak in that country, which generated total gross cash proceeds of $807 million, the Compensation Committee approved a discretionary annual bonus for Mr. Mezger of $6 million.
In 2007, each of our other NEOs was eligible for an annual incentive based on his individual performance in achieving specified objectives set by the Compensation Committee, up to the following maximum amounts: Mr. Cecere $1,800,000, Mr. Hollinger $875,000, Mr. Barnard $1,250,000 and contribution levels and averaged 3.8%, excluding promotional increases. Base salary increases forMr. Masuda $743,750. However, the Named Executive Officers were consistent withCompensation Committee decided, in its discretion, to significantly reduce the foregoing base salary principles and Company-wide increasesactual annual incentive payments to each of these NEOs in base salaries.light of our 2007 financial results, as discussed below.
Annual Incentive Awards. Annual incentive awards are intended to reward executives for improved short-term
Messrs. Cecere, Hollinger and Masuda achieved their specified performance as measured against specific performance criteria relative to their respective businesses orobjectives of: (a) increasing cash flow by at least $750 million from the Company’s overall business results. The Company establishes performance criteriasale of our French operations; (b) lowering incurred interest expense, net of interest income, by $35 million while maintaining adebt-to-capital ratio, net of cash, of45-50% at the beginning of the fiscal year end; (c) generating more than $400 million in free cash flow; and consistent with(d) reducing selling, general and administrative expenses to ensure that they did not exceed 13.7% as a percent of housing revenues. Based on their individual performance in achieving these accomplishments, the key elementsCompensation Committee approved the following annual incentive payments to these NEOs: Mr. Cecere $400,000, Mr. Hollinger $450,000, and Mr. Masuda $350,000.
Mr. Barnard achieved his specified performance objectives of: (a) ensuring 75% of our operating divisions met or exceeded their direct cost reduction goals, resulting in a reduction of more than $50 million of direct costs; (b) developing, expanding and implementing a direct-buy model for building materials, capturing cost reductions; (c) establishing formal, documented and approved market strategies for each operating division; (d) improving the Company’sexecution of our KBnxt operational business model includemetrics by 25% from their December 1, 2006 levels; (e) reducing architecture expense by $1 million; and (f) ensuring that 100% of any floor plans and specification levels were consistent with KBnxt operational business model objectives. Based on his individual performance in pretax profit, pretax return on investment, unit deliveries, unit backlog, community count, customer satisfaction metrics (e.g., J.D. Power rankings) and other performance hurdles specific toachieving these accomplishments, the Compensation Committee approved an executive’s responsibilities.
Beginning in 2003, to promote executive stock ownership and to further motivate executives to improve the Company’s performance on a longer term basis in line with stockholders’ interests, the Company introduced caps on the amount of annual cash compensation paid to certain executives, including each of the Named Executive Officers, and incentive amounts earned in excess of the caps are paid in restricted stock. For fiscal year 2005, maximum cash values for annual incentive awards were set at $5,000,000 forpayment to Mr. Barnard of $600,000.
In April 2007, the Chief Executive Officer (pursuantCompensation Committee awarded one-time bonuses of $350,000 to his Employment Agreement), $2,500,000 forMr. Hollinger and $100,000 to Mr. Masuda to recognize the Chief Operating Officeradditional responsibilities and $1,250,000 for Regional General Managers. Restricted stock grants paid toduties that each assumed in connection with the Named Executive Officers for annual incentive awards are
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reflected in the table entitled “Summary Compensation Table” on pages 43-44.
Long-Term Incentive Compensation. Long-term incentive compensation is generally awarded in the form of stock option grants, restricted stock,Review and performance units. Stock option grants and restricted stock awards are intended to promote stock ownership by Company executives as well as to motivate executives to enhance the Company’s long-term stockholder value. Performance units are intended to motivate senior management to improve the Company’s current and future performance by providing incentives tied to specified long-term performance objectives of the Company.
As shown in the table entitled “Option/SAR Grants in Last Fiscal Year” on page 45, stock option grants were made in fiscal year 2005 to each of the Named Executive Officers. Continuing a practice begun in 2003, executives received a portion of their equity awards in shares of restricted stock to encourage direct share ownership by executives and to provide an additional retention incentive for members of the executive team. Prior to 2003, long-term equity awards consisted solely of stock option grants. The Named Executive Officers’ stock option and restricted stock grants are reflected in the table entitled “Summary Compensation Table” on pages 43-44.
In fiscal year 2005, the Committee also made awards of Performance Units under the Unit Performance Program, which was first implemented in 1996. Participants in the Unit Performance Program include all executive officers and certain other members of senior management.
The value of Performance Units awarded under the Unit Performance Program is determined over the three-year period that the Performance Units are outstanding by (1) the Company’s cumulative earnings per share and (2) the average pretax return on investment of the specific operations for which the participating executive is responsible. The weighting of both factors, as well as the individual performance targets for each executive, are established on an annual basis by the Committee. For all Performance Units awarded to corporate-based executives in 2005, diluted earnings per share will determine 75% of the value of the award and pretax return on investment will determine 25% of the value of the award. For awards to division-based executives, diluted earnings per share will determine 50% of the value of the award and pretax return on investment will determine 50% of the value of the award. Performance Unit payouts, if any, may be paid in cash, stock or stock equivalents, at the discretion of Company management. Please see “Long-Term Incentive Plans — Awards in Last Fiscal Year” on pages 46-47 for the Performance Units granted to each Named Executive Officer in fiscal year 2005.
The value of Performance Units awarded under the Unit Performance Program is realized, if at all, three years after the date of award. Performance Units awardedour leadership transition at the end of 2006.
Because Mr. Freed’s employment with us ended in July 2007, he did not receive any annual incentive-based compensation for 2007. Upon his termination of employment, Mr. Freed became entitled to an aggregate payment of $2,702,484 representing incentive compensation he earned in prior years. To comply with Internal Revenue Code Section 409A, this payment was made on February 1, 2008.
For our 2008 fiscal year, 2002 were paid outthe Compensation Committee has determined that the payment of annual incentive compensation to our NEOs — excluding Mr. Cecere, who has announced his retirement — will be subject to the achievement of an objective performance goal based on the level of our pre-tax income or loss for the year. For each NEO, the Compensation Committee can, in its discretion, reduce or eliminate the actual annual incentive compensation that the NEO may earn based on its subjective assessment of the NEO’s performance against stated objectives for the year. The Compensation Committee believes this approach appropriately balances current market conditions with the need to retain and motivate our NEOs to achieve sound financial and operational results, while preserving the potential tax deductibility of NEO compensation for our 2008 fiscal year.
Long-Term Incentives. We provide long-term incentive awards to our NEOs to attract and retain high-quality executives and to motivate them to achieve financial and operational performance goals measured over a multi-year
30
period. These awards consist primarily of grants of equity-based vehicles that are settled in cash based on results measured throughor stock and are designed to align NEO and stockholder interests. In 2007, the endCompensation Committee, with input from Semler Brossy and our management, established ranges of fiscal year 2005. Please seelong-term incentive award values by management level. In establishing these ranges, the table entitled “Summary Compensation Table” on pages 43-44 forCommittee considered the value of other compensation elements, market practices, outstanding grants and potential future realizable values of all long-term incentives. The Compensation Committee determined individual NEO award values within these ranges by considering the awards paid to eachNEOs’ current and expected future performance, internal equity by management level and the overall cost of the Named Executive Officers upongrants. Individual award values determined the vesting of their Performance Units in fiscal year 2005.
Stock Ownership Guidelines. In 1998, the Committee adopted an executive stock ownership policy designed to further the Company’s strategy of closely aligning the interests of management and stockholders. The policy requires the Named Executive Officers, as well as all other senior corporate and divisional managers, to achieve specified ownership levelssize of the Company’s Common Stock. The policy has been updated from timeactual grants made to time since its adoption. Current targets are ownership of stock with a value equal to five times base salary for all
35
participants except Mr. Karatz and Mr. Mezger. The target for Mr. Karatz is 15 times his base salary and the target for Mr. Mezger is 10 times his base salary. The amount of our Common Stock currently owned by each of our Named Executive Officers far exceeds their respective ownership guidelines.
Compensation of Chief Executive Officer in Fiscal Year 2005. In keeping with the Company’s compensation objectives, Mr. Karatz’s compensation is largely driven by cash and stock-based incentives that are directly tied to the Company’s financial performance. Mr. Karatz entered into an Employment Agreement with the Company in 1995 for a term of six years. In 2001, the Board of Directors amended and restated the 1995 agreement and extended the term for an additional seven years, until December 31, 2008. The amended and restated Employment Agreement provides that the Board of Directors may, in its discretion, increase or decrease Mr. Karatz’s base salary from time to time, provided that any decrease does not fall below $900,000. In January 2005, Mr. Karatz’s base salary was increased to $1,100,000.
Mr. Karatz also received an annual incentive bonus of cash and restricted stock for fiscal year 2005, the amount of which was determined by formulas in his Employment Agreement that areNEOs based on the Company’s pretax, pre-incentive profit and the achievementclosing price of specific performance hurdles. Mr. Karatz’s Employment Agreement specifies a $5,000,000 limitour common stock on the amount of his bonus that may be paid in cash. For fiscal year 2005, Mr. Karatz earned $24,056,696 over this cap. Accordingly, in lieu of a cash payment for this amount, Mr. Karatz received an award of 344,800 shares of restricted stock. Per his Employment Agreement,date the number of shares awarded was determined by the market price of the Company’s Common Stock on November 30, 2005.
In fiscal year 2005, theawards were granted. These long-term incentive compensation paid to Mr. Karatz under his Employment Agreement was made under and subject to the limitations set forth in the Company’s 2001 Stock Incentive Plan, which has been approved by the Company’s stockholders and is designed to qualify incentive compensation in excess of $1,000,000 paid to the Named Executive Officers for a tax deduction under Section 162(m) of the Internal Revenue Code.
Under his Employment Agreement, Mr. Karatz is also entitled to receive benefits afforded to other executives of the Company. In fiscal year 2005, Mr. Karatz received a discretionary award of 1,000 Performance Unitsgrants are described under the Unit Performance Program in accordance with the principles described above. Heheadings “Grant Delayed from 2006” and “October 2007 Grant” below. Our CEO also received an award of 250,000 options and 60,000 shares of restricted stocklong-term incentive awards in October 2005, representing his annual discretionary grant for fiscal 2006. Mr. Karatz also participates in the KB Home Retirement Plan and the KB Home Death Benefit Only Plan.
Policy on Deductibility of Compensation
The Company intends to comply with the requirements of Section 162(m) of the Internal Revenue Code with respect to maintaining federal tax deductibility for all executive compensation, except in circumstances when the Management Development and Compensation Committee believes2007 that such compliance would not be in the best interests of the Company or its stockholders. The Company believes that all executive officer compensation paid in 2005 met the deductibility requirements of Section 162(m).
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This report is respectfully submitted by the members of the Committee:
Dr. Ray R. Irani,Chairman
Mr. James A. Johnson
Mr. J. Terrence Lanni
Mr. Leslie Moonves
Mr. Luis G. Nogales
37
KB HOME
Common Stock Price Performance
The graph below compares the cumulative total return of KB Home Common Stock, the S&P Homebuilding Index, the Dow Jones Home Construction Index, and the S&P 500 Index for the last five fiscal year-end periods.
Last Five Fiscal Years
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2000 | | | 2001 | | | 2002 | | | 2003 | | | 2004 | | | 2005 | |
| | | | | | | | | | | | | | | | | | | |
| KB Home | | | 100 | | | | 108 | | | | 145 | | | | 224 | | | | 290 | | | | 467 | |
| S&P 500 Homebuilding Index | | | 100 | | | | 114 | | | | 137 | | | | 271 | | | | 313 | | | | 455 | |
| Dow Jones Home Construction Index | | | 100 | | | | 128 | | | | 152 | | | | 295 | | | | 336 | | | | 454 | |
| S&P 500 Index | | | 100 | | | | 88 | | | | 73 | | | | 84 | | | | 95 | | | | 103 | |
The above graph is based upon the Common Stock and index prices calculated as of the last trading day before December 1st of the fiscal year-end periods presented. Our November 30, 2005 closing Common Stock price on the New York Stock Exchange was $69.77 per share. On February 27, 2006, our Common Stock closed at $68.05 per share. The performance of our Common Stock depicted in the graphs above represents past performance only and is not indicative of future performance. Total return assumes $100 invested at market close on November 30, 2000 in KB Home, the S&P 500 Index, the S&P 500 Homebuilding Index, and the Dow Jones Home Construction Index including reinvestment of dividends.
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Employment Agreements, Change in Control Arrangements,
Retirement and Death Benefit Plans
Employment Agreements
Mr. Karatz, our Chairman and Chief Executive Officer, was employed under an Employment Agreement that he entered into with us in 1995 that provided for a term through November 30, 2001. In mid-2001, the 1995 agreement was amended and restated, pursuant to which, among other things, the term of the agreement was extended through December 31, 2008.
For fiscal year 2005,were established under the terms of his Employment Agreement, Mr. Karatz was entitledas described under the headings “CEO Promotion Grant” and “CEO Employment Agreement Grants” below.
Use of SARS and Phantom Shares. Except for specific grants to annualour CEO described below, all long-term incentive grants made in 2007 consisted of SARs and phantom shares that are settled in cash only. The Compensation Committee employed these cash-settled vehicles because we have a limited number of shares currently available for grant under our existing stockholder-approved equity compensation ranging from 1%plans. The SARs and phantom shares are designed to 2%mirror the attributes of stock options and restricted stock respectively, except that both instruments are settled in cash. Each SAR, if it vests, will provide a cash payment equal to the positive difference, if any, between its grant price and the closing price of our pretax, pre-incentive income dependingcommon stock on the specified returnexercise date, and will expire on equitythe tenth anniversary of its grant date. Each phantom share, if it vests, will provide a cash payment equal to the Company forclosing price of our common stock on the year. Mr. Karatz’sapplicable vesting date, plus the cumulative value of all cash dividends or other distributions paid in respect of a share of our common stock from and including its grant date through and including the vesting date.
CEO Promotion Grant. In conjunction with the approval of his Employment Agreement, provides that suchthe Compensation Committee approved a promotional stock option award to our CEO. Due to a blackout necessitated by the Review, however, this award was actually granted in July 2007. The promotional stock option award was in the amount of 325,050 shares.
CEO Employment Agreement Grants. At the same time as it granted the promotional stock option award, the Compensation Committee granted to our CEO a long-term incentive compensation will be paid 75%stock option award pursuant to the terms of his Employment Agreement. This award was in cash and 25% in sharesthe amount of restricted stock, unless the cash amount exceeds $5 million, in which case any excess will be paid in restricted stock. Accordingly, approximately 83% of Mr. Karatz’s fiscal year 2005 bonus was paid in restricted stock. Pursuant325,050 shares. The Compensation Committee also granted to its terms, any restricted stock grantedour CEO under his Employment Agreement vestsa long-term incentive award of 54,000 performance shares. The performance shares vest based on the third anniversary of the date of grant, but will vest earlier in the event of Mr. Karatz’s death, disability, involuntary termination without cause or his voluntary termination for good reason.
Under his Employment Agreement, Mr. Karatz is entitled toour total stockholder return (“TSR”) over a specified minimum annual base salary of $900,000, which is subject to annual adjustment at the discretion of the Board of Directors. Mr. Karatz is also entitled to a modified nonqualified retirement arrangement pursuant to which he will receive an annual pension equal to 100% of his average base salary during the final three years of his employment, payable for 25 years, if he continues his employment with us untilthree-year period ending November 30, 2008. If Mr. Karatz retires or his employment is terminated before such date, he will be entitled to a lesser amount pursuant to a defined formula. The retirement arrangement is structured so that upon Mr. Karatz’s death, we will recover the after-tax cost of his retirement benefit. The retirement arrangement also contemplates certain benefits prior to retirement in the event of death, disability, or a “change in ownership” of us. In addition, under his Employment Agreement, Mr. Karatz is entitled to receive other benefits generally awarded2009, relative to our executives, which, in fiscal year 2005, included a discretionary stock option and restricted stock grant, and an award under our Unit Performance Program. Please see “Compensation of Chief Executive Officer in Fiscal Year 2005” in the Management Development and Compensation Committee Report on Executive Compensationpeer group (as described on page 36 above for additional information on compensation paid to Mr. Karatz during the year.29 above) as follows:
In the event Mr. Karatz’s employment with us is terminated prior to the expiration of his Employment Agreement, Mr. Karatz or his estate, as applicable, will receive the following:
| | | | |
| | • | in the event his employment is terminatedPayout as a resultPercentage of his death or disability, an amount equal to two times the sum of his average annual base salary and incentive compensation, in each case for the three fiscal years prior to the date of the termination of his employment;
|
| Relative TSR Percentile Ranking | | Performance Shares Granted |
| |
| |
• <25th percentile | in the event his employment is terminated as a result of an involuntary termination of his employment without cause or his voluntary termination for good reason, an amount equal to three times the sum of his average annual |
39
| | 0 | % |
25-50th percentile | | base salary and incentive compensation, in each case for the three fiscal years prior to the date of the termination of his employment; and | 25 | % |
50-75th percentile | | | 100 | % |
>75th percentile | • | in the event his employment is terminated within 18 months following a “change of ownership,” an amount equal to three times the sum of his average annual base salary and incentive compensation for the three fiscal years prior to the date of the termination of his employment. If, in such event, Mr. Karatz is subject to an excise tax under Section 4999 of the Internal Revenue Code with respect to the payments or distributions in the nature of compensation we make to him in connection with a “change in ownership,” Mr. Karatz is entitled to an additional amount so as to place him in the same after-tax position he would have been in had the excise tax not applied. | 150 | % |
Upon Mr. Karatz’s termination
The amount of employmentany cash dividends paid on our common stock during the three-year performance period is equally and contemporaneously paid to our CEO on the 54,000 performance shares. Stock dividends or other non-cash dividends issued on or after the expirationin respect of his Employment Agreementour common stock will be equally and contemporaneously issued on or upon his earlier retirement with the consentin respect of the Board of Directors, Mr. Karatz’s Employment Agreement providesperformance shares, but will be held in escrow and subject to the restrictions and forfeiture conditions imposed on the performance shares.
Grant Delayed from 2006. Historically, our annual long-term incentive awards have been made in October for the subsequent fiscal year. Due to a blackout necessitated by the Review, the awards that we will continue to provide him and his family medical and dental benefits for Mr. Karatz’s lifetime at least equal to those which would have been provided undermade in October 2006 were delayed until July 2007. At that time, the Compensation Committee granted to our plan had Mr. Karatz not retired or otherwise terminated his employment with us. If Mr. Karatz is not eligible underNEOs other than the termsCEO a combination of SARs and phantom shares, the amounts of which are included in the “Grants
31
of Plan-Based Awards During Fiscal Year 2007” table on page 37 below. The Compensation Committee set as a performance vesting condition for these SARs and phantom share awards its determination that we achieved positive cash flow from our operations in the second half of our medical2007 fiscal year, excluding the effects of the sale of our French operations. In addition, to protect our cash flow, the maximum payout for each SAR is capped at four times the exercise price. If the performance condition is met, the phantom shares will vest in full three years after the grant date and dental plansthe SARs will vest in equal annual installments over a three-year period.
“Over-Cap” Awards Delayed from 2006. The 2006 fiscal year annual incentive compensation agreements for each of Messrs. Mezger, Cecere and Hollinger limited the amount of their annual incentive award payout for the year that could be paid in cash. The remaining “over-cap” amounts would have been deferred into three-year restricted stock granted in January 2007 when the cash portion was paid. Due to continue to be covered, we shall providea blackout necessitated by the Review, the “over-cap” grant of restricted stock was delayed until July 2007. The Compensation Committee granted phantom shares in lieu of restricted stock in the following amounts: Mr. Karatz with substantially similar coverage through other sources; provided, however,Mezger 55,264, Mr. Cecere 15,751, and Mr. Hollinger 1,037. These phantom shares vest in full three years from date of grant.
October 2007 Grant. Our CEO’s Employment Agreement specifies that the foregoing benefits will be reduced if Mr. Karatz becomes re-employed and to the extent he is eligible to participate in our equity compensation plans on terms and conditions that are generally applicable to our other senior officers and is eligible to receive comparable benefitsequity grants from another employer. In addition,time to time, in each case at the reasonable requestCompensation Committee’s discretion. Returning to our traditional practice of granting long-term incentive awards in October for the subsequent fiscal year, in October 2007, the Compensation Committee granted to our CEO 137,500 stock options and 412,500 SARs for his 2008 fiscal year long-term incentive award. The Compensation Committee also awarded 2008 fiscal year long-term incentive grants to our other NEOs, consisting of a combination of SARs and phantom shares, the amounts of which are included in the “Grants of Plan-Based Awards During Fiscal Year 2007” table on page 37 below. The Compensation Committee set as a performance vesting condition for these SARs and phantom share awards its determination that we generated cash flow such that the ratio of net debt (total debt less cash) to total capitalization (the sum of net debt and total stockholders’ equity) does not exceed 50% as of August 31, 2008. If the performance condition is met, the phantom shares and SARs will vest in the same manner as the phantom shares and SARs that were granted in July 2007, as described under the heading “Grant Delayed from 2006” on page 31 above.
Unit Performance Program. For several years, our long-term incentives have included performance unit grants under our Unit Performance Program (“UPP”). Each performance unit provides a payout to a recipient only if specific goals set by the Compensation Committee are achieved at the end of a three-year period with respect to the following two performance metrics: (a) our cumulative diluted earnings per share and (b) the average pre-tax return on investment of the operations for which the recipient is responsible. If applicable performance goals are achieved, the value of a performance unit at the end of the three-year performance period depends on the degree to which the performance goals are exceeded and the Compensation Committee’s weighting of the two performance metrics at the time the performance unit is awarded. Recipients must remain employed with us for the entire three-year period to which a performance unit relates to receive a payout.
In October 2004, the Compensation Committee granted performance units to each of our NEOs (other than Mr. Karatz,Barnard) and to other members of our senior management for the fiscal2005-2007 performance period, which ended on November 30, 2007. The cumulative diluted earnings per share metric determined 75% of the value of these performance units and the average pre-tax return on investment metric determined the remaining 25%. Based on the results for the performance period, our NEOs received the following payouts: Mr. Mezger $97,500, Mr. Cecere $38,500, Mr. Hollinger $33,000, and Mr. Masuda $5,500. Mr. Freed did not receive any payout with respect to these performance units due to the termination of his employment with us in July 2007.
The Compensation Committee did not make any new grants of performance units under the UPP in 2006 or 2007. There is one remaining grant of UPP performance units currently in effect, with a performance period ending on November 30, 2008. All current NEOs received performance units under that UPP grant.
Benefits. Most of our benefits are provided to all employees, including our NEOs. During 2007, our NEOs also (a) received a supplemental medical, dental and vision benefit that reimbursed anyout-of-pocket health care
32
expenses that qualify for a tax deduction under Internal Revenue Service guidelines; (b) participated in the KB Home Retirement Plan (except for Mr. Masuda), which is described under the heading “Retirement Programs” below; (c) were provided with a life insurance death benefit payable to their designated beneficiaries (beginning in 2004, only term life insurance, with a $750,000 benefit level, has been made available to incoming eligible executives); and (d) were entitled to participate in an unfunded nonqualified Deferred Compensation Plan, which allows pre-tax contributions of base salary and annual incentive compensation. We provide a dollar-for-dollar match of Deferred Compensation Plan and 401(k) Savings Plan contributions of up to an aggregate amount of six percent of a participant’s base salary. These benefits are offered to attract key executive talent, promote retention and to compensate for contribution limits applicable to our 401(k) Savings Plan. Our 401(k) Savings Plan is available to all full-time employees with a similar dollar-for-dollar match benefit. Messrs. Mezger and Cecere are participants in a program under which they are credited with a specific number of vacation hours that remains fixed throughout their employment with us, regardless of actual vacation time taken. When their employment with us ends, they are entitled to receive a payout of these vacation hours that is based on their then-current annual base salaries. This program is closed to new participants.
Perquisites. Perquisites provided to our NEOs previously included automobile allowances, company-paid automobile fuel cards, and reimbursement of expenses for automobile insurance, annual financial planning and tax preparation services, and one-time estate planning services. These perquisites were discontinued in 2007. Infrequently, family members accompanied NEOs on business trips on an aircraft we shall provideowned, subject to seat availability. We did not incur any additional incremental cost in providing this benefit. On a single occasion in 2007, we incurred incremental cost from a personal use of our aircraft. We sold our aircraft in December 2007. From time to time, we also make available to our employees, including our NEOs, for their personal use tickets to certain sporting events that are purchased as a season subscription for business purposes. We do not incur any additional incremental costs with such use. In our 2007 fiscal year, we paid legal expenses our CEO incurred in negotiating his Employment Agreement.
Employment Agreements and Post-Termination Payments
Employment Agreements and Severance Arrangements. Mr. Mezger is the only NEO with whom we have an employment agreement. His Employment Agreement provides him with an appropriate officecertain severance benefits, discussed under the heading “Employment Agreements and administrative support commensurate with his then-former status as our Chief Executive Officer, plus reimbursementPotential Payments upon Termination of reasonable expenses attendant to the maintenance of such office and retention of such administrative support. At Mr. Karatz’s request, we shall, in lieu of providing such an office and administrative support, reimburse him for expenses of such office and administrative support.
No other Named Executive Officer has an employment agreement with us.
Employment or Change in Control ArrangementsControl” on pages 44-47 below.
Following a review of executive severance policies at peer homebuilding companies and other similarly sized public companies, the Compensation Committee adopted an Executive Severance Plan in 2007 for non-change in control situations. All of our NEOs are currently participants under the plan. The plan provides a specified severance benefit that varies by seniority, as discussed further under the heading “Employment Agreements and Potential Payments upon Termination of Employment or Change in Control” on pages 44-47 below.
We havealso maintain a Change in Control Severance Plan (“CIC Plan”) that provides certain severance benefits on a change in which 13control of us, as discussed further under the heading “Employment Agreements and Potential Payments upon Termination of Employment or Change in Control” on pages 44-47 below. The objectives of the CIC Plan are to: (a) enable and encourage our management to focus its attention on obtaining the best possible deal for our stockholders in a change in control scenario and to make objective evaluations of all possible transactions, without being distracted by the possible impact such transactions may have on job security and benefits, (b) promote management continuity, and (c) provide income protection in the event of involuntary loss of employment.
Retirement Programs. Our 401(k) Savings Plan, a defined contribution plan, is the only program we offer to all full-time employees that provides post-employment benefits. Our NEOs and certain other senior corporate executives currently participate, including Mr. Mezger. Messrs. Karatz, Moss, Freed and Widner do not currentlyalso participate in our Deferred Compensation Plan, as discussed above. Details of NEO deferrals under the plan.Deferred Compensation Plan are provided in the “Non-Qualified Deferred Compensation During Fiscal Year 2007” table on page 44 below.
We maintain a Retirement Plan for selected executives that is now closed to new participants. Participation has been closed since 2004. The Retirement Plan provides each vested participant with a specific annual dollar amount
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for 20 years commencing following the later of (a) the participant’s reaching age 55, (b) the tenth anniversary of the date the participant commenced his or her participation, or (c) the termination of the participant’s employment with us. Mr. Mezger’s original annual benefit amount under the Retirement Plan was $450,000. For the other NEO participants (Mr. Masuda does not participate), the original annual benefit amount under the Retirement Plan was $100,000. For each participant, the annual benefit amount is increased by annualcost-of-living adjustments, starting with the plan year ending November 30, 2006. Vesting generally requires five years of participation and, once vested, the participant is designedentitled to encouragehis or her full benefit. Details of NEO participation in the retentionRetirement Plan are provided in the “Pension Benefits During Fiscal Year 2007” table on page 43 below.
Payments Due Upon Termination of senior executivesEmploymentand/or a Change in Control. In addition to the severance arrangements mentioned above, in the event of a change in control of us there is accelerated vesting of any unvested benefits under our Deferred Compensation Plan, our Retirement Plan and certain of our employee benefit plans, including our equity compensation plans. Further discussion of the payments to which could play a key role in our continuing success in the eventNEOs may be entitled on termination of their employmentand/or a change in control. The plan provides that if therecontrol of us is a “changeprovided under the heading “Employment Agreements and Potential Payments upon Termination of Employment or Change in control”Control” on pages 44-47 below.
Other Material Tax and a participating executive is terminated within a specified period after such change in ownership, other than for “cause” or “disability,” as defined in the plan, or if the executive voluntarily terminates his or her employment with us for “good reason,” the terminated executive will be entitled to receive an amount equal to one or two years’ average salary and cash incentive bonus, depending on the executive.
Under the KB Home 1988 Employee Stock Plan, the KB Home Performance-Based Incentive Plan for Senior Management, the KB Home 1998 Stock Incentive Plan, the KB Home 1999 Incentive Plan (and the Amended and Restated KB Home 1999 Incentive Plan, if approved by our stockholders) and the KB Home 2001 Stock Incentive Plan, all outstanding stock options will become fully exercisable and all restrictions on outstanding shares of restricted Common Stock or other awards shall lapse upon a “change of ownership.” A “change of ownership” will be deemed to occur if: (1) current membersAccounting Implications of the BoardExecutive Compensation Program
We generally structure our programs with the intent of Directors orcomplying with the requirements of Internal Revenue Code Section 162(m) in order to maintain federal tax deductibility for executive compensation. Section 162(m) generally disallows a tax deduction for compensation over $1 million paid to our highest paid executives unless it is qualifying performance-based compensation. The Compensation Committee considers these tax consequences when determining the mix of compensation paid to our NEOs and other directors elected by three-quarters ofsenior executives, and seeks to balance tax deductibility benefits with the current mem-
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bers or their respective replacements (excluding certain individuals who took office in connection with an acquisition of 20% or more of our voting securities or in connection with an election contest) ceaseneed to represent aprovide effective compensation packages. Although the Compensation Committee believes that the majority of the Board;potential compensation payable to our NEOs and other senior executives should be based on the achievement of qualified performance-based targets, it will approve compensation that may not be deductible under Section 162(m) where it believes it is in our and our stockholders’ best interests to do so. In 2007, the Compensation Committee believed that it was in our best interests to pay our CEO an annual discretionary bonus, as discussed under the heading “Annual Incentives and Discretionary Bonuses” onpages 29-30 above, even though the payment was not deductible under Section 162(m).
Other Compensation Policies
Equity Stock Ownership Policy. We have had an executive stock ownership policy since 1998. It is designed to encourage, and has encouraged, our executives to increase their ownership of our common stock over time and to align their interests with our stockholders’ interests. In February 2008, the Compensation Committee amended the policy, as described below. The policy continues to encourage meaningful long-term stock ownership as a key component of our executive compensation program.
The policy identifies specific levels of stock ownership that designated executives are expected to achieve, targeted from one-to-five times base salary. The targeted stock ownership levels for our NEOs range from two-to-five times base salary. Designated executives have five years to achieve these ownership levels and must make meaningful progress every year towards the achievement of these ownership levels. Benchmark survey data and multiples of average base salaries per level were used to determine the ownership expected for each position. Share ownership may include shares owned outright by a designated executive, shares owned indirectly through our 401(k) Savings Plan and 60% of unvested restricted stock grants or (2)phantom share rights. Phantom share rights are included due to the Board determines that a changelimited number of ownership has occurred.
The KB Home Unit Performance Program, which is administeredshares currently available for grant under our existing stockholder-approved equity compensation plans. Once required ownership levels are achieved, they must be maintained throughout the executive’s employment. Our policy provides both financial incentives to achieve ownership requirements as well as material consequences for non-compliance or failure to make meaningful progress toward compliance. The Compensation Committee may, from time to time, reevaluate and revise the ownership requirements to account for material changes in stock price. Our NEOs are currently in compliance with the policy or have made meaningful progress towards compliance.
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Equity-Based Award Grant Policy. On February 1, 2007, the Compensation Committee adopted a policy that governs the timing of equity-based awards and establishes certain internal controls over the grant of equity-based awards. The policy is designed to enhance the process by which we grant equity-based awards, including stock options SARs, phantom shares and restricted stock.
The policy requires all grants of equity-based awards, and their terms, to be approved by the Compensation Committee (or the Board). The policy does not permit any delegation of the Compensation Committee’s (or the Board’s) granting authority to our management. The grant date of any equity-based award will be the date on which the Compensation Committee met to approve the grant unless a written resolution sets a later date. The exercise price of any stock option award will not be less than the closing price of our common stock on the New York Stock Exchange on the grant date. All equity-based award grants made in 2007 were made in compliance with the policy and were approved at regular Compensation Committee meetings in July and October 2007, as discussed under the heading “Long-Term Incentives” on pages 30-32 above.
Recovery of Compensation. Under his Employment Agreement, our CEO is required to repay certain bonus and incentive- or equity-based compensation he receives if we are required to restate our financial statements as a result of his misconduct, consistent with Section 304 of the Sarbanes-Oxley Act of 2002.
Summary Compensation Table
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | Change in
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | Pension Value
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | and
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | Nonqualified
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | Non-Equity
| | | Deferred
| | | | | | | | |
| | | | | | | | | | | | | Stock
| | | Option
| | | Incentive Plan
| | | Compensation
| | | All Other
| | | | | |
Name and
| | | Fiscal
| | | Salary
| | | Bonus
| | | Awards
| | | Awards
| | | Compensation
| | | Earnings
| | | Compensation
| | | Total
| | |
| Principal Position | | | Year | | | ($) | | | ($)(a) | | | ($)(b) | | | ($)(c) | | | ($)(d) | | | ($)(e) | | | ($)(f) | | | ($) | | |
| Jeffrey T. Mezger | | | | 2007 | | | | $ | 1,000,000 | | | | $ | 6,000,000 | | | | $ | 4,181,624 | | | | $ | 3,743,258 | | | | $ | 97,500 | | | | $ | 388,632 | | | | $ | 972,604 | | | | $ | 16,383,618 | | | |
President and Chief Executive Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Domenico Cecere | | | | 2007 | | | | | 595,834 | | | | | 0 | | | | | 376,181 | | | | | 90,560 | | | | | 438,500 | | | | | 86,362 | | | | | 114,295 | | | | | 1,701,732 | | | |
Executive Vice President and Chief Financial Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| William R. Hollinger | | | | 2007 | | | | | 347,083 | | | | | 350,000 | | | | | 123,273 | | | | | 107,703 | | | | | 483,000 | | | | | 83,116 | | | | | 121,111 | | | | | 1,615,286 | | | |
Senior Vice President and Chief Accounting Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Glen W. Barnard | | | | 2007 | | | | | 289,168 | | | | | 0 | | | | | 98,662 | | | | | 96,478 | | | | | 600,000 | | | | | 79,716 | | | | | 95,069 | | | | | 1,259,093 | | | |
Senior Vice President,
KBnxt Group | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Kelly K. Masuda | | | | 2007 | | | | | 296,771 | | | | | 100,000 | | | | | 78,837 | | | | | 85,238 | | | | | 355,500 | | | | | 0 | | | | | 96,459 | | | | | 1,012,805 | | | |
Senior Vice President and Treasurer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Former NEO | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Robert Freed* | | | | 2007 | | | | | 256,500 | | | | | 0 | | | | | 640,057 | | | | | 95,803 | | | | | 0 | | | | | 86,362 | | | | | 2,821,997 | | | | | 3,900,719 | | | |
Senior Vice President,
Investment Strategy | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (a) | | Bonus: The amounts reported in this column reflect discretionary bonuses paid to Messrs. Mezger, Hollinger and Masuda. These are described under the heading “Annual Incentives and Discretionary Bonuses” on pages 29-30 above. |
|
| (b) | | Stock Awards: The amounts reported in this column reflect the aggregate compensation expense we recognized in our 2007 fiscal year for shares of restricted stock and phantom shares granted to our NEOs, computed in accordance with SFAS 123(R) (disregarding estimates of forfeitures related to service-based vesting conditions). Information used in determining these amounts can be found in Note 15 of the Notes to |
35
| | |
| | the Consolidated Financial Statements contained in our Annual report onForm 10-K for the fiscal year ended November 30, 2007. The “Outstanding Equity Awards at Fiscal Year-End 2007” table on pages 39-40 below and its associated footnotes contain additional information about our NEOs’ respective equity award holdings. The amount reported in this column for Mr. Freed reflects the aggregate compensation costs we recognized for his equity awards through the date on which his employment with us ended. |
|
| (c) | | Option Awards: The amounts reported in this column reflect the aggregate compensation expense we recognized in our 2007 fiscal year for stock option and SAR awards granted to our NEOs, computed in accordance with SFAS 123(R) (disregarding estimates of forfeitures related to service-based vesting conditions). Information used in determining these amounts can be found in Note 15 of the Notes to the Consolidated Financial Statements contained in our Annual Report onForm 10-K for the fiscal year ended November 30, 2007. The “Outstanding Equity Awards at Fiscal Year-End 2007” table on pages 39-40 below and its associated footnotes contain additional information about our NEOs’ respective option award holdings. The amount reported in this column for Mr. Freed reflects the aggregate compensation costs we recognized for his option awards through the date on which his employment with us ended. |
|
| (d) | | Non-Equity Incentive Plan Compensation: The amounts reported in this column reflect annual incentive compensation the respective NEOs earned based on achieving applicable 2007 fiscal year performance goals and payouts of UPP performance units corresponding to the2005-2007 performance period. Mr. Freed did not receive any non-equity incentive plan compensation due to the termination of his employment with us. |
|
| (e) | | Change in Pension Value and Nonqualified Deferred Compensation Earnings: The amounts reported in this column reflect the change in present value during our 2007 fiscal year of accumulated benefits we provide under our Retirement Plan. Above-market or preferential earnings are not provided under our Deferred Compensation Plan. |
|
| (f) | | All Other Compensation: The amounts reported in this column consist primarily of offsetting payments we made in 2007 to the NEOs and other employees who held stock options for which we increased the exercise price based on Internal Revenue Code Section 409A consequences resulting from the Review, as further discussed under the heading “Option Exercise Price Adjustment Payments” on page 38 below. For our NEOs, the aggregate offsetting payments were: Mr. Mezger $758,956, Mr. Cecere $85,921, Mr. Hollinger $87,393, Mr. Barnard $58,720, Mr. Masuda $65,583, and Mr. Freed $95,946. The remainder of the amounts reported in this column consist of the following items: |
| | |
| • | | Perquisites: Perquisites provided to the NEOs include automobile allowances, company-paid automobile fuel cards, and reimbursement of expenses for automobile insurance, annual financial planning and tax preparation services, and one-time estate planning services. These perquisites were discontinued, effective July 1, 2007. Included in the amounts reported for Mr. Mezger are $135,484 in legal expenses, which were incurred in negotiating his Employment Agreement, and $4,290 of incremental costs associated with personal use of an aircraft we owned in our 2007 fiscal year. We sold our aircraft in December 2007. |
|
| • | | Matching 401(k) Savings Plan and Supplemental Deferred Compensation Plan Contributions: We provide a dollar-for-dollar match of Deferred Compensation Plan and 401(k) Savings Plan contributions of up to an aggregate amount of six percent of a participant’s base salary. The aggregate 2007 fiscal year matching contributions we made to each NEO were as follows: Mr. Mezger $57,125, Mr. Cecere $13,500, Mr. Hollinger $20,825, Mr. Barnard $17,350, Mr. Masuda $9,550, and Mr. Freed $9,320. |
|
| • | | Premium Payments: We paid premiums on supplemental medical expense reimbursement plans and life insurance policies for the benefit of participating executives. These plans and policies are described under the heading “Benefits” on pages 32-33 above. The aggregate premiums we paid in our 2007 fiscal year for each NEO for these plans and policies were as follows: Mr. Mezger $9,043, Mr. Cecere $8,083, Mr. Hollinger $5,781, Mr. Barnard $8,552, Mr. Masuda $8,552, and Mr. Freed $4,934. |
|
| • | | Post-Employment Incentive Compensation Payout: When his employment with us ended in July 2007, Mr. Freed became entitled to an aggregate payment of $2,702,484 representing incentive compensation he earned in prior fiscal years. To comply with Internal Revenue Code Section 409A, this payment was made on February 1, 2008. |
| | |
| * | | Mr. Freed’s employment with us ended on July 15, 2007. |
36
Grants of Plan-Based Awards During Fiscal Year 2007
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Estimated Possible Payouts Under
| | | Estimated Future Payouts Under Equity
| | | | | | | | | | | | | | |
| | | | | | | | | | Non-Equity Incentive Plan Awards | | | Incentive Plan Awards(d) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | All Other
| | | All Other
| | | | | | Grant
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock
| | | Option
| | | | | | Date
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Awards:
| | | Awards:
| | | Exercise
| | | Fair
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Number
| | | Number of
| | | or Base
| | | Value of
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | of Shares
| | | Securities
| | | Price of
| | | Stock and
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | of Stock
| | | Underlying
| | | Option
| | | Option
| | |
| | | | Grant
| | | Type of
| | | Threshold
| | | Target
| | | Maximum
| | | Threshold
| | | Target
| | | Maximum
| | | or Units
| | | Options
| | | Awards
| | | Awards
| | |
| Name | | | Date(a) | | | Award | | | ($) | | | ($) | | | ($) | | | (#) | | | (#) | | | (#) | | | (#) | | | (#) | | | ($/Sh) | | | ($)(e) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Mezger | | | | | | | | | | | | | | | | (b) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | Stock Options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 325,050 | | | | $ | 36.19 | | | | $ | 3,819,695 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | Stock Options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 325,050 | | | | | 36.19 | | | | | 4,000,044 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | Restricted Stock | | | | | | | | | | | | | | | | | 13,500 | | | | | 54,000 | | | | | 81,000 | | | | | | | | | | | | | | | | | | | | 2,000,233 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | Phantom Shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 55,264 | | | | | | | | | | | | | | | 2,000,004 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/4/07 | | | | Stock Options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 137,500 | | | | | 28.10 | | | | | 1,177,210 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/4/07 | | | | SARs | | | | | | | | | | | | | | | | | | | | | | 412,500 | | | | | | | | | | | | | | | | | | | | | | | | | 3,355,028 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Cecere | | | | | | | | | | | | | | | | (c) | | | $ | 1,800,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | SARs | | | | | | | | | | | | | | | | | | | | | | 29,939 | | | | | | | | | | | | | | | | | | | | | | | | | 350,002 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | Phantom Shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 15,751 | | | | | | | | | | | | | | | 570,029 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | Phantom Shares | | | | | | | | | | | | | | | | | | | | | | 9,672 | | | | | | | | | | | | | | | | | | | | | | | | | 350,030 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Hollinger | | | | | | | | | | | | | | | | (c) | | | | 875,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | SARs | | | | | | | | | | | | | | | | | | | | | | 25,662 | | | | | | | | | | | | | | | | | | | | | | | | | 300,002 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | Phantom Shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,037 | | | | | | | | | | | | | | | 37,529 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | Phantom Shares | | | | | | | | | | | | | | | | | | | | | | 8,290 | | | | | | | | | | | | | | | | | | | | | | | | | 300,015 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/4/07 | | | | SARs | | | | | | | | | | | | | | | | | | | | | | 36,885 | | | | | | | | | | | | | | | | | | | | | | | | | 300,001 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/4/07 | | | | Phantom Shares | | | | | | | | | | | | | | | | | | | | | | 10,677 | | | | | | | | | | | | | | | | | | | | | | | | | 300,024 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Barnard | | | | | | | | | | | | | | | | (c) | | | | 1,250,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | SARs | | | | | | | | | | | | | | | | | | | | | | 21,385 | | | | | | | | | | | | | | | | | | | | | | | | | 250,001 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | Phantom Shares | | | | | | | | | | | | | | | | | | | | | | 6,908 | | | | | | | | | | | | | | | | | | | | | | | | | 250,001 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/4/07 | | | | SARS | | | | | | | | | | | | | | | | | | | | | | 36,885 | | | | | | | | | | | | | | | | | | | | | | | | | 300,001 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/4/07 | | | | Phantom Shares | | | | | | | | | | | | | | | | | | | | | | 10,677 | | | | | | | | | | | | | | | | | | | | | | | | | 300,024 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Masuda | | | | | | | | | | | | | | | | (c) | | | | 743,750 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | SARs | | | | | | | | | | | | | | | | | | | | | | 17,108 | | | | | | | | | | | | | | | | | | | | | | | | | 200,001 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | Phantom Shares | | | | | | | | | | | | | | | | | | | | | | 5,527 | | | | | | | | | | | | | | | | | | | | | | | | | 200,022 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/4/07 | | | | SARS | | | | | | | | | | | | | | | | | | | | | | 24,590 | | | | | | | | | | | | | | | | | | | | | | | | | 200,001 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/4/07 | | | | Phantom Shares | | | | | | | | | | | | | | | | | | | | | | 7,118 | | | | | | | | | | | | | | | | | | | | | | | | | 200,016 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Former NEO | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Freed | | | | | | | | | | | | | | | | (c) | | | | 2,280,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (a) | | Grant Date: The grant date for each award is the date the Compensation Committee approved the award. The exercise price for each award is equal to the closing price of our common stock on the date of grant (if applicable to the award granted). Mr. Freed was not granted any plan-based awards in our 2007 fiscal year. |
|
| (b) | | Mr. Mezger’s annual incentive for our 2007 fiscal year was based on a specified percentage of our pre-tax, pre-incentive profit, as discussed under the heading “Annual Incentives and Discretionary Bonuses” on pages 29-30 above. Therefore, this annual incentive at the time it was granted did not have an estimated possible threshold, target or maximum payout amount. We do not believe it is possible to provide a representative “target” amount for this annual incentive based on our 2006 fiscal year performance because Mr. Mezger served as our Executive Vice President and Chief Operating Officer for substantially all of that year and thus had different responsibilities and |
37
| | |
| | performance objectives. If his 2007 fiscal year annual incentive arrangement were applied to our 2006 fiscal year performance, however, the amount of the payout would have been $21,168,500. Because Mr. Mezger did not qualify for a payout under his 2007 fiscal year annual incentive, no payout amount is reported under the “Non-Equity Incentive Plan Compensation” column in the “Summary Compensation Table” on page 35 above. |
|
| (c) | | In setting annual incentive arrangements for Messrs. Cecere, Hollinger, Barnard and Masuda for our 2007 fiscal year, the Compensation Committee did not set any specific target payout amounts. Rather, it set only maximum payout amounts, as shown in the table above. These annual incentives are described under the heading “Annual Incentives and Discretionary Bonuses” on pages 29-30 above. The actual annual incentive payouts the Compensation Committee approved for these four NEOs were significantly lower, and were as follows: Mr. Cecere $400,000, Mr. Hollinger $450,000, Mr. Barnard $600,000, and Mr. Masuda $350,000. These payout amounts are reported under the “Non-Equity Incentive Plan Compensation” column in the “Summary Compensation Table” on page 35 above. The Compensation Committee also set an annual incentive for Mr. Freed for our 2007 fiscal year that was based on achieving specified performance goals relating to his roles as our Senior Vice President, Investment Strategy and as a regional manager for our Northern California operations. The Compensation Committee did not set a specific target payout for Mr. Freed’s annual incentive, only a maximum amount as shown in the table above. Since Mr. Freed’s employment with us ended during our 2007 fiscal year, he did not receive any payout under this annual incentive and no payout amount is reported under the “Non-Equity Incentive Plan Compensation” column in the “Summary Compensation Table.” |
|
| (d) | | Estimated Future Payouts Under Equity Incentive Plan Awards: Mr. Mezger will vest in the specified threshold, target and maximum amounts relating to the restricted stock/performance shares granted to him on July 12, 2007 depending on our total stockholder return relative to our peer group, as further discussed under the heading “CEO Employment Agreement Grants” on page 31 above. The SARs and phantom shares reported in this column that were granted to the NEOs on July 12, 2007 and October 4, 2007 will vest in the specified target amounts if the Compensation Committee determines that the applicable performance vesting conditions are satisfied, as further discussed under the heading “Long-Term Incentives” onpages 30-32 above. |
|
| (e) | | Grant Date Fair Value of Stock and Option Awards: The grant date fair value reported in this column for each award is computed in accordance with SFAS 123(R). |
Option Exercise Price Adjustment Payments
As described in our Annual Report onForm 10-K for the fiscal year ended November 30, 2006, the Review found that we used incorrect measurement dates with respect to eight annual employee stock option grants made between October 1998 and October 2005. In order to comply with Internal Revenue Code Section 409A, we increased the exercise prices of certain of these stock option grants in late 2006 and, in early 2007, made an offsetting payment to employees who held these adjusted stock options. These offsetting payments to our NEOs are reported in the “Summary Compensation Table” on page 35 above. The stock options reported in the “Outstanding Equity Awards at Fiscal Year-End 2007” table on pages 39-40 below reflect the adjusted exercise prices, as applicable.
38
Outstanding Equity Awards at Fiscal Year-End 2007
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Option Awards | | | | Stock Awards |
| | | | | | | | | | | | | | | | Options
| | | | | | | | | | | | | | | | | | | | Equity
| | | | | | | |
| | | | | | | | | | | | | | | | Awards
| | | | | | | | | | | | | | | | | | | | Incentive
| | | | Equity
| | | |
| | | | | | | | | | | | | | | | Equity
| | | | | | | | | | | | | | | | | | | | Plan
| | | | Incentive
| | | |
| | | | | | | | | | | | | | | | Incentive
| | | | | | | | | | | | | | | | Market
| | | | Awards:
| | | | Plan Awards:
| | | |
| | | | | | | | | | | | | | | | Plan Awards:
| | | | | | | | | | | | Number
| | | | Value of
| | | | Number of
| | | | Market or
| | | |
| | | | | | | | | | | | | | | | Number of
| | | | | | | | | | | | of Shares
| | | | Shares or
| | | | Unearned
| | | | Payout Value
| | | |
| | | | | | | | Number of
| | | | Number of
| | | | Securities
| | | | | | | | | | | | or Units
| | | | Units of
| | | | Shares,
| | | | of Unearned
| | | |
| | | | | | | | Securities
| | | | Securities
| | | | Underlying
| | | | | | | | | | | | of Stock
| | | | Stock
| | | | Units or
| | | | Shares, Units
| | | |
| | | | | | | | Underlying
| | | | Underlying
| | | | Unexercised
| | | | | | | | | | | | That
| | | | That
| | | | Other
| | | | or Other
| | | |
| | | | | | | | Unexercised
| | | | Unexercised
| | | | Unearned
| | | | Option
| | | | | | | | Have
| | | | Have
| | | | Rights That
| | | | Rights That
| | | |
| | | | | | | | Options
| | | | Options
| | | | Options/
| | | | Exercise
| | | | Option
| | | | Not
| | | | Not
| | | | Have Not
| | | | Have Not
| | | |
| | | | | | | | Exercisable
| | | | Unexercisable
| | | | SARs
| | | | Price
| | | | Expiration
| | | | Vested
| | | | Vested
| | | | Vested
| | | | Vested
| | | |
| Name | | | Grant Date | | | | (#) | | | | (#)(a) | | | | (#)(b) | | | | ($) | | | | Date | | | | (#) | | | | ($)(c) | | | | (#)(d) | | | | ($)(e) | | | |
| Mr. Mezger | | | | 10/30/01 | | | | | 431,122 | | | | | | | | | | | | | | $ | 13.95 | | | | | 10/30/16 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/30/01 | | | | | 68,878 | | | | | | | | | | | | | | | 13.95 | | | | | 10/30/16 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 2/13/02 | | | | | 102,090 | | | | | | | | | | | | | | | 20.07 | | | | | 2/13/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 5/8/02 | | | | | 44,516 | | | | | | | | | | | | | | | 25.63 | | | | | 5/8/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/7/02 | | | | | 400,000 | | | | | | | | | | | | | | | 21.51 | | | | | 10/7/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/24/03 | | | | | 74,667 | | | | | | | | | | | | | | | 33.24 | (f) | | | | 10/24/18 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/24/03 | | | | | 149,333 | | | | | | | | | | | | | | | 34.05 | (f) | | | | 10/24/18 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/22/04 | | | | | 80,750 | | | | | | | | | | | | | | | 40.90 | | | | | 10/22/19 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/22/04 | | | | | 119,250 | | | | | | | | | | | | | | | 40.90 | | | | | 10/22/19 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 1/14/05 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 51,150 | | | | $ | 1,068,524 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/18/05 | | | | | 50,000 | | | | | 25,000 | | | | | | | | | | 63.77 | | | | | 10/18/15 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/21/05 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 25,000 | | | | | 522,250 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 1/13/06 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 80,343 | | | | | 1,678,365 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | | | | | | | 325,050 | | | | | | | | | | 36.19 | | | | | 11/30/16 | (g) | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | | | | | | | 325,050 | | | | | | | | | | 36.19 | | | | | 7/12/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | | | | | | | | | | | | | | | | | | | | | | 7/12/17 | | | | | | | | | | | | | | | 54,000 | | | | $ | 1,128,060 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 55,264 | | | | | 1,154,465 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/4/07 | | | | | | | | | | 137,500 | | | | | | | | | | 28.10 | | | | | 10/4/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/4/07 | | | | | | | | | | | | | | | 412,500 | | | | | 28.10 | | | | | 10/4/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Cecere | | | | 4/23/02 | | | | | 100,000 | | | | | | | | | | | | | | $ | 25.17 | | | | | 4/23/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/7/02 | | | | | 80,000 | | | | | | | | | | | | | | | 21.51 | | | | | 10/7/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/24/03 | | | | | 14,934 | | | | | | | | | | | | | | | 33.24 | (f) | | | | 10/24/18 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/24/03 | | | | | 29,866 | | | | | | | | | | | | | | | 34.05 | (f) | | | | 10/24/18 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/22/04 | | | | | 20,000 | | | | | | | | | | | | | | | 40.90 | | | | | 10/22/19 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 1/14/05 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,924 | | | | $ | 61,082 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/18/05 | | | | | 4,000 | | | | | 2,000 | | | | | | | | | | 63.77 | | | | | 10/18/15 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/21/05 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,500 | | | | | 52,225 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 1/13/06 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 5,241 | | | | | 109,484 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | | | | | | | | | | | | 29,939 | | | | | 36.19 | | | | | 7/12/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 9,672 | | | | $ | 202,048 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 15,751 | | | | | 329,038 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
39
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Option Awards | | | | Stock Awards |
| | | | | | | | | | | | | | | | Options
| | | | | | | | | | | | | | | | | | | | Equity
| | | | | | | |
| | | | | | | | | | | | | | | | Awards
| | | | | | | | | | | | | | | | | | | | Incentive
| | | | Equity
| | | |
| | | | | | | | | | | | | | | | Equity
| | | | | | | | | | | | | | | | | | | | Plan
| | | | Incentive
| | | |
| | | | | | | | | | | | | | | | Incentive
| | | | | | | | | | | | | | | | Market
| | | | Awards:
| | | | Plan Awards:
| | | |
| | | | | | | | | | | | | | | | Plan Awards:
| | | | | | | | | | | | Number
| | | | Value of
| | | | Number of
| | | | Market or
| | | |
| | | | | | | | | | | | | | | | Number of
| | | | | | | | | | | | of Shares
| | | | Shares or
| | | | Unearned
| | | | Payout Value
| | | |
| | | | | | | | Number of
| | | | Number of
| | | | Securities
| | | | | | | | | | | | or Units
| | | | Units of
| | | | Shares,
| | | | of Unearned
| | | |
| | | | | | | | Securities
| | | | Securities
| | | | Underlying
| | | | | | | | | | | | of Stock
| | | | Stock
| | | | Units or
| | | | Shares, Units
| | | |
| | | | | | | | Underlying
| | | | Underlying
| | | | Unexercised
| | | | | | | | | | | | That
| | | | That
| | | | Other
| | | | or Other
| | | |
| | | | | | | | Unexercised
| | | | Unexercised
| | | | Unearned
| | | | Option
| | | | | | | | Have
| | | | Have
| | | | Rights That
| | | | Rights That
| | | |
| | | | | | | | Options
| | | | Options
| | | | Options/
| | | | Exercise
| | | | Option
| | | | Not
| | | | Not
| | | | Have Not
| | | | Have Not
| | | |
| | | | | | | | Exercisable
| | | | Unexercisable
| | | | SARs
| | | | Price
| | | | Expiration
| | | | Vested
| | | | Vested
| | | | Vested
| | | | Vested
| | | |
| Name | | | Grant Date | | | | (#) | | | | (#)(a) | | | | (#)(b) | | | | ($) | | | | Date | | | | (#) | | | | ($)(c) | | | | (#)(d) | | | | ($)(e) | | | |
| Mr. Hollinger | | | | 7/1/02 | | | | | 58,058 | | | | | | | | | | | | | | $ | 26.29 | | | | | 7/1/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/7/02 | | | | | 60,000 | | | | | | | | | | | | | | | 21.51 | | | | | 10/7/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/24/03 | | | | | 9,334 | | | | | | | | | | | | | | | 33.24 | (f) | | | | 10/24/18 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/24/03 | | | | | 18,666 | | | | | | | | | | | | | | | 34.05 | (f) | | | | 10/24/18 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/22/04 | | | | | 24,000 | | | | | | | | | | | | | | | 40.90 | | | | | 10/22/19 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/18/05 | | | | | 4,000 | | | | | 2,000 | | | | | | | | | | 63.77 | | | | | 10/18/15 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/21/05 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,500 | | | | $ | 52,225 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | | | | | | | | | | | | 25,662 | | | | | 36.19 | | | | | 7/12/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,037 | | | | | 21,663 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 8,290 | | | | $ | 173,178 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/4/07 | | | | | | | | | | | | | | | 36,885 | | | | | 28.10 | | | | | 10/4/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/4/07 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 10,677 | | | | | 223,043 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Barnard | | | | 3/1/04 | | | | | 30,000 | | | | | | | | | | | | | | $ | 38.24 | | | | | 3/1/19 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/22/04 | | | | | 20,000 | | | | | | | | | | | | | | | 40.90 | | | | | 10/22/19 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/18/05 | | | | | 2,667 | | | | | 1,333 | | | | | | | | | | 63.77 | | | | | 10/18/15 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/21/05 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,000 | | | | $ | 41,780 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | | | | | | | | | | | | 21,385 | | | | | 36.19 | | | | | 7/12/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,908 | | | | $ | 144,308 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/4/07 | | | | | | | | | | | | | | | 36,885 | | | | | 28.10 | | | | | 10/4/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/4/07 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 10,677 | | | | | 223,043 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Masuda | | | | 9/2/03 | | | | | 10,000 | | | | | | | | | | | | | | $ | 28.71 | | | | | 9/2/18 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/24/03 | | | | | 3,334 | | | | | | | | | | | | | | | 33.24 | (f) | | | | 10/24/18 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/24/03 | | | | | 6,666 | | | | | | | | | | | | | | | 34.05 | (f) | | | | 10/24/19 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/22/04 | | | | | 20,000 | | | | | | | | | | | | | | | 40.90 | | | | | 10/22/19 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/18/05 | | | | | 3,334 | | | | | 1,666 | | | | | | | | | | 63.77 | | | | | 10/18/15 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/21/05 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,000 | | | | $ | 41,780 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | | | | | | | | | | | | 17,108 | | | | | 36.19 | | | | | 7/12/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 7/12/07 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 5,527 | | | | $ | 115,459 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/4/07 | | | | | | | | | | | | | | | 24,590 | | | | | 28.10 | | | | | 10/4/17 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 10/4/07 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7,118 | | | | | 148,695 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (a) | | Number of Securities Underlying Unexercised Options - Unexercisable: Stock option awards generally vest in equal installment amounts over a three-year period. |
|
| (b) | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options/SARs: The items reported in this column consist of SARs that are subject to a performance-vesting condition, as discussed under the heading “Long-Term Incentives” on pages 30-32 above. |
40
| | |
| (c) | | Market Value of Shares That Have Not Vested: The market value specified in this column is based on the closing price of our common stock on November 30, 2007, which was $20.89. |
|
| (d) | | Equity Incentive Plan Awards: Number of Unearned Shares That Have Not Vested: The 54,000 shares of restricted stock granted to Mr. Mezger on July 12, 2007 are performance shares that vest as described under the heading “CEO Employment Agreement Grants” on page 31 above. The remaining rights reported in this column consist of phantom shares that are subject to a performance-vesting condition, as discussed under the heading “Long-Term Incentives” on pages 30-32 above. |
|
| (e) | | Equity Incentive Plan Awards: Market Value of Unearned Shares That Have Not Vested: The market value specified in this column is based on the closing price of our common stock on November 30, 2007, which was $20.89. |
|
| (f) | | As discussed under the heading “Option Exercise Price Adjustment Payments” on page 38 above, as a result of the Review, we adjusted the exercise price of certain stock options held by our employees. In order to comply with Internal Revenue Code Section 409A, the exercise price for a certain portion of the stock option grant made on October 24, 2003 was not adjusted. |
|
| (g) | | The expiration date for these promotional stock options is set under Mr. Mezger’s Employment Agreement. These promotional stock options are further discussed under the heading “CEO Promotion Grant” on page 31 above. |
41
Option Exercises and Stock Vested During Fiscal Year 2007
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Option Awards | | | | Stock Awards |
| | | | Number
| | | | | | | | Number
| | | | | | | |
| | | | of Shares
| | | | Value
| | | | of Shares
| | | | Value
| | | |
| | | | Acquired
| | | | Realized
| | | | Acquired
| | | | Realized
| | | |
| | | | on Exercise
| | | | on Exercise
| | | | on Vesting
| | | | on Vesting
| | | |
| Name | | | (#) | | | | ($)(a) | | | | (#)(b) | | | | ($)(c) | | | |
| Mr. Mezger | | | | 0 | | | | $ | 0 | | | | | 67,958 | | | | $ | 2,926,323 | | | |
| | | | | | | | |
| Mr. Cecere | | | | 0 | | | | | 0 | | | | | 10,000 | | | | | 448,140 | | | |
| | | | | | | | |
| Mr. Hollinger | | | | 0 | | | | | 0 | | | | | 2,400 | | | | | 65,256 | | | |
| | | | | | | | |
| Mr. Barnard | | | | 0 | | | | | 0 | | | | | 5,000 | | | | | 202,460 | | | |
| | | | | | | | |
| Mr. Masuda | | | | 0 | | | | | 0 | | | | | 1,000 | | | | | 27,190 | | | |
| | | | | | | | |
Former NEO | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Freed | | | | 35,732 | | | | | 334,731 | | | | | 24,790 | | | | | 1,220,164 | | | |
| | | | | | | | |
| | |
| (a) | | Value Realized on Exercise: The amount reported in this column for Mr. Freed reflects our payment to him for stock options he exercised and reflects the aggregate gross dollar value corresponding to those stock options (i.e., the difference between the market price of the underlying shares at exercise and the exercise price). |
|
| (b) | | Number of Shares Acquired on Vesting: The amounts reported in this column for Messrs. Mezger and Cecere reflect the vesting of restricted stock awards on January 16, 2007 and October 23, 2007. The amounts reported in this column for Messrs. Hollinger and Masuda reflect the vesting of restricted stock awards on October 23, 2007. The amounts reported in this column for Mr. Barnard reflect the vesting of restricted stock awards on March 1, 2007 and October 23, 2007. The amount reported in this column for Mr. Freed reflects the vesting of a restricted stock award on January 16, 2007. In each case, the amount reported reflects the gross number of shares of our common stock that vested. However, each NEO returned shares to us to cover applicable tax withholding obligations, resulting in the NEO holding fewer shares of our common stock than reflected in the table. |
|
| (c) | | Value Realized on Vesting: The amounts reported in this column reflect the gross dollar value realized upon the vesting of each applicable award (i.e., the number of shares times the closing price of our common stock on the vesting date). However, as noted in footnote (b) to this table, each NEO returned shares of our common stock to us to cover tax withholding obligations and, therefore, actually realized a lower total value than the amount reported in this column. |
42
Pension Benefits During Fiscal Year 2007
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Number
| | | | Present
| | | | Payments
| | | |
| | | | | | | | of Years
| | | | Value of
| | | | During
| | | |
| | | | | | | | Credited
| | | | Accumulated
| | | | Last Fiscal
| | | |
| | | | Plan
| | | | Service
| | | | Benefit
| | | | Year
| | | |
| Name | | | Name | | | | (#)(a) | | | | ($)(b) | | | | ($) | | | |
| Mr. Mezger | | | | Retirement Plan | | | | | 14 | | | | $ | 6,548,847 | | | | $ | 0 | | | |
| | | | | | | | |
| Mr. Cecere | | | | Retirement Plan | | | | | 6 | | | | | 1,455,299 | | | | | 0 | | | |
| | | | | | | | |
| Mr. Hollinger | | | | Retirement Plan | | | | | 20 | | | | | 1,400,596 | | | | | 0 | | | |
| | | | | | | | |
| Mr. Barnard | | | | Retirement Plan | | | | | 13 | | | | | 1,343,291 | | | | | 0 | | | |
| | | | | | | | |
Former NEO | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Freed | | | | Retirement Plan | | | | | 13 | | | | | 1,455,299 | | | | | 0 | | | |
| | | | | | | | |
| | |
| (a) | | Number of Years of Credited Service: These amounts are as of the valuation date. As discussed under the heading “Retirement Programs” on pages 33-34 above, full entitlement to the Retirement Plan benefit occurs upon the completion of five years of participation. As of November 30, 2007, all the participating NEOs had five years of participation, except for Mr. Barnard who had four years of participation. Mr. Masuda is not a participant in the plan. |
|
| (b) | | Present Value of Accumulated Benefit: The amounts reported in this column represent the actuarial present value of the total retirement benefit that would be payable to each respective NEO under the Retirement Plan as of November 30, 2007. The following are the key actuarial assumptions and methodology used to calculate this present value: the base benefit for each participant is assumed to begin as of the earliest possible date for each participant (generally the later of age 55 or the 10th anniversary of the commencement of participation); the base benefit is adjusted by past and future cost of living adjustments of three percent in the plan year ending November 30, 2006, 3.3% in the plan year ending November 30, 2007, and then an assumed three percent each year thereafter, until the last year benefits are paid for each participant; and the discount rate is six percent. |
43
Non-Qualified Deferred Compensation During Fiscal Year 2007
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Executive
| | | | Registrant
| | | | Aggregate
| | | | | | | | Aggregate
| | | |
| | | | Contributions
| | | | Contributions
| | | | Earnings
| | | | Aggregate
| | | | Balance
| | | |
| | | | in Last
| | | | in Last
| | | | in Last
| | | | Withdrawals/
| | | | at Last
| | | |
| | | | Fiscal Year
| | | | Fiscal Year
| | | | Fiscal Year
| | | | Distributions
| | | | Fiscal Year
| | | |
| Name | | | ($)(a) | | | | ($)(b) | | | | ($)(c) | | | | ($)(d) | | | | ($)(e) | | | |
| Mr. Mezger | | | $ | 57,125 | | | | $ | 43,625 | | | | $ | 7,978 | | | | $ | 22,678 | | | | $ | 297,002 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Hollinger | | | | 297,208 | | | | | 11,200 | | | | | 119,522 | | | | | 0 | | | | | 1,715,258 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Barnard | | | | 117,350 | | | | | 10,825 | | | | | 36,407 | | | | | 0 | | | | | 391,468 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Former NEO | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Freed | | | | 0 | | | | | 0 | | | | | 55,440 | | | | | 1,045,450 | | | | | 525,083 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (a) | | Executive Contributions in Last Fiscal Year: The amounts reported in this column reflect compensation the respective NEOs earned in our 2007 fiscal year that they have voluntarily deferred. These amounts are included in the “Salary,” “Bonus” or “Non-Equity Incentive Plan Compensation” columns to the “Summary Compensation Table” on page 35 above. Messrs. Cecere and Masuda have not made any deferrals. |
|
| (b) | | Registrant Contributions in Last Fiscal Year: The amounts reported in this column reflect the matching contributions we made to the respective NEOs’ individual voluntary contributions to our Deferred Compensation Plan. These amounts are included in the “Summary Compensation Table.” |
|
| (c) | | Aggregate Earnings in Last Fiscal Year: The amounts reported in this column do not include any above-market or preferential earnings. Accordingly, these amounts are not reported in the “Summary Compensation Table.” |
|
| (d) | | Aggregate Withdrawals/Distributions: Mr. Mezger’s distribution was a short term payout at his election. The amount reported for Mr. Freed represents a distribution, for his account prior to December 31, 2004, taken in connection with the termination of his employment with us in July 2007. |
|
| (e) | | Aggregate Balance at Last Fiscal Year End: The amounts reported in this column reflect compensation the NEOs earned in our 2007 fiscal year or in prior years, but which they voluntarily elected to defer receipt. |
Employment Agreements and Potential Payments upon Termination of Employment or Change in Control
As described further below, the CEO’s Employment Agreement and certain of our employee benefit plans, including our equity compensation plans, provides that uponprovide for payments and other benefits to our NEOs on a change of ownership each outstanding Performance Unit will be paid in cash at the target level.
The KB Home Non-Employee Directors Stock Plan provides that upon a “change in control,” all Stock Units will be paid in cash or shares of Common Stock, in accordance with the prior election made by each participating Director. The KB Home Directors’ Legacy Program provides that upon a change of ownership, all participating Directors shall become immediately vested under the program, and we shall create an irrevocable trust into which it shall transfer sufficient assets (including the Directors’ life insurance policies) to make the designated charitable contributions for the participating Directors.
We also maintain a non-qualified Executive Deferred Compensation Plan. From 1985 to 1992, pursuant to the plan, Mr. Karatz and certain other executives deferred receipt of a certain amount of pretax income, plus a Company matching contribution, until retirement, termination or certain other events, including a “change in control.” A change in control is defined in the plan to include the acquisition by a person or “group” of 25% usand/or more of our voting power, a transaction which results in a change in a majority of the then-incumbent Board or the Company ceasing to be publicly owned. No new contributions to the Executive Deferred Compensation Plan may be made, but we continue to pay interest on prior contributions still held in the plan.
Under the KB Home Retirement Plan, which is described in more detail below under the heading “Retirement Plan”, participants become fully vested in their Retirement Plan benefits, and may elect a lump sum distribution of Retirement Plan benefits, in the event of a “change in control.” A “change in control” under the Retirement Plan is generally defined to include certain changes in control that must be reported pursuant to federal securities laws, the acquisition by a person or “group” of 15% or more of our voting power, and certain changes in a majority of the Board.
We also maintain the KB Home Death Benefit Only Plan (the “DBO Plan”), which is described in more detail below under the heading “Death Benefit Only Plan.” Participants become fully vested in their DBO Plan benefits and, as described more fully below, will receive a distribution of the insurance policy on their life in cash in the event of a “change in control.” A “change in control” under the DBO Plan is generally defined to include certain changes in control that must be reported pursuant to federal securities laws, the acquisition by a person or “group” of 20% or more of our voting power, and certain changes in a majority of the Board.
Retirement Plan
We adopted the KB Home Retirement Plan in 2002. The Retirement Plan provides certain supplemental retirement benefits to selected executives. Currently, 28 executives, including all of the Named Executive Officers, participate in the Retirement Plan. We establish an “annual benefit amount” for each participant in the Retirement Plan. A participant becomes entitled to benefits under the Retirement Plan only if the participant releases us from any and all claims that he or she may then have
41
against us and only if the participant’s termination of employment with us occurs either (1) on or after the fifth anniversaryunder certain circumstances. Some of the date the participant commenced participationour employee benefit plans are in the Retirement Plan, or (2) beforeprocess of being modified to comply with the Internal Revenue Code Section 409A, which in certain cases requires that date, duepayments to the participant’s death or disability. A participant is eligiblekey employees (such as our NEOs) not commence for six months following a reduced leveltermination of benefitsemployment.
CEO Employment Agreement. Under his Employment Agreement, if we terminate the participant’sMr. Mezger’s employment without cause after“Cause” or he resigns with “Good Reason,” he is entitled to the fourth, butfollowing benefits, subject to a release of claims against us:
| | |
| • | a lump sum cash payment equal to two times his annual salary plus average annual bonus for the prior three years, with the total payment capped at $6 million; |
|
| • | a pro-rated bonus earned, if any, for the year in which Mr. Mezger’s employment terminates; |
|
| • | health coverage that we pay for two years; |
|
| • | with respect to equity compensation granted to him on or after February 28, 2007, (a) two years of additional service credited to compute equity vesting plus full vesting for any equity issued to him in lieu of cash |
44
| | |
| | bonuses, and (b) 36 months to exercise any outstanding equity granted to him on or after February 28, 2007 (subject to the original term duration of each equity grant); |
| | |
| • | performance shares (other than the performance share grant made in 2007) paid as if the performance period closed on the termination date if the performance period would otherwise close in the next 24 months; and |
|
| • | payment of his performance share grant made in 2007. |
Outstanding equity awards granted to Mr. Mezger before the fifth, anniversaryeffective date of the date the participant commenced participationEmployment Agreement are governed by their respective terms and conditions with respect to his termination of employment.
The following benefits are payable to Mr. Mezger in the Retirement Plan.case of a “Change in Control”:
| | |
| • | full vesting of unvested equity granted to him on or after February 28, 2007, with earlier equity awards governed by their respective terms and conditions; |
|
| • | performance shares paid as earned with the applicable performance period closing as of the date of the Change in Control; |
|
| • | full vesting and lump sum cash payment of deferred compensation, retirement or other employee benefits; |
|
| • | if his employment is involuntarily terminated in connection with a Change in Control (generally, during the period starting three months before and ending twelve months after a Change in Control), payment of the same severance as provided above, except the applicable multiple is three times his annual salary and average bonus rather than two times and the total payment is capped at $12 million. Mr. Mezger’s termination of employment for any reason during the thirteen month period following a Change in Control will be treated as an involuntary termination; and |
|
| • | additionalgross-up payment to compensate for any excise taxes under Internal Revenue Code Section 280G (“Section 280G”). |
“Cause” is generally defined in the Employment Agreement as a felony conviction materially harming us; willful failure to follow reasonable Board directions; material breach of the Employment Agreement; acts of fraud or dishonesty or misappropriation intended to result in personal enrichment at our expense; and willful misconduct likely to materially damage our financial position or reputation. The Employment Agreement provides Mr. Mezger with a30-day notice/cure period and gives him an opportunity to present his case to the full Board with respect to a possible for-cause termination of his employment. “Good Reason” under the Employment Agreement includes a forced relocation of more than 50 miles; any reduction in Mr. Mezger’s base pay or his annual bonus opportunity that causes these pay components to become materially uncompetitive; any material diminution of Mr. Mezger’s duties or responsibilities; our material breach of the Employment Agreement; or the failure of a successor to assume the Employment Agreement.
“Change in Control” is defined under the Employment Agreement to include reorganizations in which our controlling shareholders, if any, no longer hold a majority of our voting stock, or a sale of substantially all of our assets with substantially the same effect; a change in the majority of the Board without approval of the incumbent directors; and any transaction in which a third party becomes the beneficial owner of 35% or more of our total voting power.
Executive Severance Plan. Under our Executive Severance Plan, no severance will be payable to a NEO or other participant if he or she voluntarily terminates employment or his or her employment is terminated by us with cause. If the employment of a NEO or other participant is involuntarily terminated by us without cause, the plan provides a cash severance payment equal to a multiple of base salary and average bonus, as discussed below.
For Messrs. Cecere and Hollinger, the severance amount is equal to two times the sum of base salary and average bonus. With respect to other participants (including our other NEOs), the severance amount is equal to one times base salary and average bonus. The severance amount is reduced by any other severance payments that a participant is entitled to receive from us.
45
If a participant becomesis entitled to Retirement Plan benefits, weseverance under the plan, the applicable base salary will paybe the participant’s base salary in effect at the time of the termination of his or her employment, and the average bonus will be the average of the bonuses paid to the participant a series of installment payments over a period of 20for the three fiscal years commencing following the later of (1) the participant’s attainment of age 55, (2) the tenth anniversary of the date the participant commenced participation in the Retirement Plan or (3)prior to the termination of the participant’s employment with us. The annual benefit(or such shorter time as the participant has been employed by us). However, the average bonus amount is limited to be paid(a) three times base salary for participants entitled to a severance of two times base salary and average bonus, and (b) two times base salary for participants entitled to a severance of one times base salary and average bonus.
Participants entitled to a severance under the plan are also entitled to a continuation of health benefits that we will pay for a period of years equal to their particular severance multiple. The definition of “cause” under the plan is generally the same as the definition under our CEO’s Employment Agreement. All benefits under the plan are subject to execution of a release and covenants regarding non-solicitation, non-disparagement and confidential information.
Change in Control Severance Plan. The CIC Plan provides specified benefits to designated participants, which are limited to our top management. All of our NEOs were participants in the CIC Plan as of the end of our 2007 fiscal year, except for Mr. Barnard, who was added to the CIC Plan in February 2008. Mr. Mezger’s Employment Agreement limits the payments and benefits that he might be entitled to under the CIC Plan. Accordingly, he is entitled only to CIC Plan benefits that do not duplicate benefits provided under his Employment Agreement in a change in control of us, and the total severance payment benefit that he may be entitled to under the CIC Plan is capped at $12 million.
A participant whoin the CIC Plan is either a Group A or a Group B Participant. Messrs. Mezger, Cecere, Hollinger, and Barnard are Group A Participants, and Mr. Masuda and other senior executives are Group B Participants. If a change in control of us occurs, a Group A Participant is entitled to Retirementthe following benefits, subject to execution of a standard release, if the participant’s employment is terminated other than for cause or disability, or the participant terminates his or her employment for good reason:
| | |
| • | a severance benefit equal to two times the sum of the participant’s average base salary and average actual annual cash bonus for the three fiscal years prior to the year in which the change in control occurs; |
|
| • | accelerated vesting of any options and the lapse of any restricted period with respect to any restricted stock or other equity awards awarded to the participant; |
|
| • | full vesting in any benefits under our Death Benefit Only Plan (which is described on the next page) if the participant also participates in that plan; and |
|
| • | an additionalgross-up payment to compensate for any Section 280G excise taxes imposed on payments under the CIC Plan or on payments under any other plan. |
A Group B Participant is entitled to the same benefits as a Group A Participant, except that the severance payment is equal to one times the sum of the participant’s average base salary and average actual annual bonus and no Section 280Ggross-up payment is payable.
A “change in control” is generally defined under the CIC Plan benefits (toto include any change in control that would be paid each year overrequired to be reported to the twenty-year payment period) equalsSecurities and Exchange Commission on an Annual Report onForm 10-K, the “annual benefit amount” we determine for that participant. Messrs. Karatz, Mezger, Freed, Moss,replacement of a majority of the Board by individuals whose election or nomination was not approved by three-quarters of the incumbent directors, and Widner commenced participationa person’s acquiring 15% or more of our combined voting power unless such acquisition was approved by a majority of the incumbent Board.
The CIC Plan defines “cause” to include (a) acts of fraud or misappropriation intended to result in substantial personal enrichment at our expense and (b) willful and deliberate violations of the participant’s obligations to us which result in material injury to us. “Good reason” is defined under the CIC Plan to include materially inconsistent changes in the Retirement Planparticipant’s duties and responsibilities as they were prior to the change in control; any reduction in the participant’s salary or aggregate incentive compensation opportunities; any required relocation of July 11, 2002more than 50 miles; a material increase in the participant’s business travel obligations; or a successor’s failure to assume the CIC Plan.
46
Other Change in Control and in 2005, their annual benefit amounts were $800,000, $450,000, $100,000, $100,000Employment Termination Provisions. The individual award agreements governing outstanding unvested stock options and $75,000, respectively. We may electSARs provide for accelerated vesting upon a change of control and upon retirement, as defined under the agreements. The individual award agreements governing outstanding restricted stock awards and phantom shares provide for accelerated vesting upon a change of control, as defined under the agreements. The provisions governing the payment of performance shares granted to payour CEO are described under the heading “CEO Employment Agreement” onpages 44-45 above.
In addition, different provisions govern the length of time a participant the actuarial equivalenthas to exercise a stock option or SAR after termination of his or her benefitsemployment, depending upon the reason for termination and the particular agreement. For example, in the case of a lump sum payment as opposedtermination of employment for cause, the time to installments over twenty years. A participant’s benefits willexercise may be paidlimited to five days. In the participant’s beneficiary ifcase of a termination of employment for retirement, the participant dies.
Death Benefit Only Plan
In 2001, we implementedmay have until the DBO Plan. Currently 56 executives, including all of the Named Executive Officers, participate in the DBO Plan. The beneficiaryend of a DBO Plan participant isstock option’s or SAR’s original term in which to exercise.
Recipients of performance units under the UPP may be entitled to DBO Plan benefits ifcertain cash awards based on our performance over the participant either (1) dies while actively employed by us or an affiliate or (2) dies after completing 10 years of service with us or an affiliate, including at least 5 consecutive years of service while a DBO Plan participant. Each participant is provided a net after-tax benefit from $500,000 to $1 million. The death benefit of each of Messrs. Karatz, Mezger, Freed, Moss and Widner is $1 million.
We have purchased life insurance policies on the lives of the participants in the DBO Plan.three-year performance period ending November 30, 2008. In the event of a change in control we will pay(as defined under the UPP), these awards are immediately paid out at target. In the event of retirement, death, or permanent disability (as defined under the UPP), these awards also vest and are paid out at target, except that the maximum award is pro-rated to reflect the insurance company, on behalfnumber of each participant, an amount large enough so that, aftermonths a recipient worked during the payment, the policy is “fully paid up.” For this purpose, the term “fully paid up” means that, after the payment describedthree-year performance period.
Our Deferred Compensation Plan and Retirement Plan provide for full vesting of benefits for participants in the preceding sentenceevent of a change in control, as that term is paiddefined under the plans. The Retirement Plan further provides that, if an advance election has been made, a participant may immediately receive the actuarial value (as specified under the plan) of his or her vested plan benefits.
Our Death Benefit Only Plan (in which Messrs. Mezger, Cecere, and Hollinger participate) provides a death benefit to a participant’s designated beneficiary of $500,000 or $1 million (plus an additional gross-up amount sufficient to pay taxes on the benefit and the additional amount). In the event of a change in control, as a premium to the insurer, the value of the policy is such that the policy is projected (based on assumptions set forthdefined in the DBO Plan)plan, the plan provides for (a) distribution of an insurance contract to be ablea participant sufficient to pay at least the basicdeath benefit applicable to the participant if(if the participant dies at any time after the change in controlbefore age 100) and prior to age 100. The policy will then be transferred to the participant along with a cash payment large enough(b) an additional gross-up amount sufficient to pay any federal or state or local income or payroll taxes (including excise taxes, such as the excise tax under Section 4999 of the Internal Revenue Code, if applicable) attributable tocaused by the distribution of the policyinsurance contract and the cash payment.additional amount.
We also maintain term life insurance policies for certain NEOs as follows: Mr. Mezger $400,000, Mr. Barnard $750,000, and Masuda $750,000.
The following tables illustrate payments we may be required to make under various employment termination andchange-in-control scenarios. The tables assume that the employment termination orchange-in-control occurred November 30, 2007, at which time the closing price of our common stock was $20.89.
47
42
Executive CompensationPost-Employment Payments — Mr. Mezger
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Executive
| | | | | | | | | | | Involuntary
| | | | | | | | Change in
| | | | | | | | | | | |
Payments and
| | | | | | | | | | | Termination
| | | | | | | | Control With
| | | | | | | | | | | |
Benefits upon
| | | | | | | | | | | Without Cause/
| | | | Change in
| | | | Termination
| | | | | | | | | | | |
Termination
| | | | | | | Involuntary
| | | | Termination
| | | | Control
| | | | for Good
| | | | | | | | | | | |
or Change
| | | Voluntary
| | | | Termination
| | | | for Good
| | | | Without
| | | | Reason or
| | | | | | | | | | | |
| in Control | | | Termination | | | | for Cause | | | | Reason | | | | Termination | | | | Without Cause | | | | Death | | | | Disability | | | |
Compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Severance | | | $ | 0 | | | | $ | 0 | | | | $ | 6,000,000 | (a) | | | $ | 0 | | | | $ | 12,000,000 | (b) | | | $ | 0 | | | | $ | 0 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Long-term Incentives | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash LTI Awards (c) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| - UPP - 10 | | | | 97,500 | | | | | 97,500 | | | | | 97,500 | | | | | 750,000 | | | | | 750,000 | | | | | 750,000 | | | | | 750,000 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| - UPP - 11 | | | | 0 | | | | | 0 | | | | | 0 | | | | | 1,000,000 | | | | | 1,000,000 | | | | | 666,667 | | | | | 666,667 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Acceleration of Unvested Equity (d) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| - Restricted Stock | | | | 0 | | | | | 0 | | | | | 0 | | | | | 3,269,139 | | | | | 3,269,139 | | | | | 0 | | | | | 0 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| - Performance Shares | | | | 0 | | | | | 0 | | | | | 1,552,168 | (e) | | | | 1,552,168 | (e) | | | | 1,552,168 | (e) | | | | 0 | | | | | 0 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| - Phantom Shares | | | | 0 | | | | | 0 | | | | | 1,182,097 | | | | | 1,182,097 | | | | | 1,182,097 | | | | | 0 | | | | | 0 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vested Equity (d) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| - Stock Options | | | | 3,553,714 | | | | | 3,553,714 | | | | | 3,553,714 | | | | | 3,553,714 | | | | | 3,553,714 | | | | | 3,553,714 | | | | | 3,553,714 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Benefits & Perquisites | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Retirement Plan | | | | 6,548,847 | (f) | | | | 6,548,847 | (f) | | | | 6,548,847 | (f) | | | | 7,535,751 | (g) | | | | 7,535,751 | (g) | | | | 6,548,847 | (f) | | | | 6,548,847 | (f) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vested Deferred Compensation | | | | 297,002 | (h) | | | | 297,002 | (h) | | | | 297,002 | (h) | | | | 0 | | | | | 297,002 | (h) | | | | 297,002 | (h) | | | | 297,002 | (h) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Death Benefit Only Plan | | | | 0 | | | | | 0 | | | | | 0 | | | | | 903,305 | (i) | | | | 903,305 | (i) | | | | 1,724,404 | (j) | | | | 0 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Life Insurance | | | | 0 | | | | | 0 | | | | | 0 | | | | | 0 | | | | | 0 | | | | | 400,000 | | | | | 0 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | �� | | | | | | |
| Outplacement | | | | 0 | | | | | 0 | | | | | 20,000 | (k) | | | | 0 | | | | | 0 | | | | | 0 | | | | | 0 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Health Benefits | | | | 0 | | | | | 0 | | | | | 50,869 | (l) | | | | 0 | | | | | 50,869 | (l) | | | | 0 | | | | | 0 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Credited Vacation Benefits (m) | | | | 76,923 | | | | | 76,923 | | | | | 76,923 | | | | | 0 | | | | | 76,923 | | | | | 76,923 | | | | | 76,923 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | $ | 10,573,986 | | | | $ | 10,573,986 | | | | $ | 19,379,120 | | | | $ | 19,746,174 | | | | $ | 32,170,968 | | | | $ | 14,017,557 | | | | $ | 11,893,153 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Summary Compensation Table
The following Summary Compensation Table sets forth the total compensation earned by each of the Named Executive Officers for the fiscal years ended November 30, 2005, 2004 and 2003.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Long-Term Compensation | | |
| | | | | | | | | | | | | |
| | | | | | | Awards Payouts | | |
| | | | | Annual Compensation | | | | |
| | | | | | | | | Securities | | | | |
| | | | | | | Other Annual | | Restricted | | Underlying | | LTIP | | All Other |
| | | Fiscal | | | | Bonus | | Compensation | | Stock | | Options/ | | Payouts | | Compensation |
| Name and Position | | Year | | Salary($) | | ($)(a) | | ($)(b) | �� | Awards($) | | SARs(#) | | ($)(c) | | ($)(d) |
| |
| Bruce Karatz | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Chairman and | | | 2005 | | | $ | 1,091,667 | | | $ | 5,000,000 | | | $ | 296,077 | | | $ | 27,913,496 | | | | 250,000 | | | $ | 3,527,250 | | | $ | 102,401 | |
| | Chief Executive | | | 2004 | | | | 1,000,000 | | | | 5,000,000 | | | | 165,263 | | | | 14,045,340 | | | | 560,000 | | | | 3,865,455 | | | | 101,528 | |
| | Officer | | | 2003 | | | | 994,667 | | | | 5,000,000 | | | | —0— | | | | 9,995,580 | | | | 560,000 | | | | 2,432,478 | | | | 95,995 | |
| |
| Jeffrey T. Mezger | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Executive Vice | | | 2005 | | | | 498,333 | | | | 2,500,000 | | | | —0— | | | | 7,212,531 | | | | 75,000 | | | | 2,519,442 | | | | 29,900 | |
| | President and | | | 2004 | | | | 478,333 | | | | 2,000,000 | | | | —0— | | | | 3,524,962 | | | | 200,000 | | | | 2,761,071 | | | | 28,800 | |
| | Chief Operating | | | 2003 | | | | 458,333 | | | | 2,000,000 | | | | —0— | | | | 2,473,948 | | | | 224,000 | | | | 1,737,475 | | | | 27,500 | |
| | Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Jay Moss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Regional General | | | 2005 | | | | 269,167 | | | | 1,250,000 | | | | —0— | | | | 2,548,362 | | | | 8,000 | | | | 1,259,681 | | | | 16,419 | |
| | Manager | | | 2004 | | | | 259,167 | | | | 1,250,000 | | | | —0— | | | | 1,862,689 | | | | 25,000 | | | | 1,380,426 | | | | 15,600 | |
| | | | | 2003 | | | | 249,167 | | | | 1,449,165 | | | | —0— | | | | 662,132 | | | | 33,600 | | | | 868,806 | | | | 14,450 | |
| |
| Robert Freed | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Regional General | | | 2005 | | | | 266,667 | | | | 1,250,000 | | | | —0— | | | | 1,772,264 | | | | 8,000 | | | | 1,007,808 | | | | 16,175 | |
| | Manager | | | 2004 | | | | 229,167 | | | | 1,250,000 | | | | —0— | | | | 1,107,985 | | | | 25,000 | | | | 1,380,426 | | | | 13,800 | |
| | | | | 2003 | | | | 219,167 | | | | 1,774,697 | | | | —0— | | | | 968,435 | | | | 33,600 | | | | 868,806 | | | | 550 | |
| |
| James Widner | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Regional General | | | 2005 | | | | 246,667 | | | | 1,250,000 | | | | —0— | | | | 1,869,037 | | | | 6,000 | | | | 251,873 | | | | 14,800 | |
| | Manager | | | 2004 | | | | 229,167 | | | | 1,250,000 | | | | —0— | | | | 605,009 | | | | 16,000 | | | | —0— | | | | 12,900 | |
| | | | | 2003 | | | | 206,033 | | | | 1,216,189 | | | | —0— | | | | 59,823 | | | | 16,800 | | | | —0— | | | | 12,362 | |
| |
| | |
| (a) | The | Severance based on a multiple of two times current annual base salary plus average bonus earned for fiscal years ending November 30, 2006, November 30, 2005 bonus reported forand November 30, 2004, with benefit capped at $6,000,000, as provided by Mr. Karatz is comprised of the cash portion of his annual incentive bonus. Mr. Karatz’s annual incentive bonus is determined by a performance-based formula set forth in hisMezger’s Employment Agreement. The formula requires, among other things, that any amount |
|
| (b) | | Severance based on a multiple of three times current annual base salary plus average bonus earned over $5,000,000 must befor fiscal years ending November 30, 2006, November 30, 2005 and November 30, 2004, with benefit capped at $12,000,000, as provided by Mr. Mezger’s Employment Agreement. |
|
| (c) | | Assumes awards paid at target performance levels for a change in sharescontrol. For death and disability, amounts reflect a pro-rated target payment based on the number of three-year restricted stock. Accordingly, in 2005, $5,000,000 of Mr. Karatz’s incentive bonus was paid in cash, and $24,056,696 was paid in shares of restricted stock andmonths the award is reported separately inoutstanding.“UPP-10” represents UPP performance units granted for the table above under “Restricted Stock Awards.” The amount of shares of restricted stock issued to Mr. Karatz was determined by reference tofiscal 2005-2007 performance period, which ended on November 30, 2007.“UPP-11” represents UPP performance units granted for the fiscal 2006-2008 performance period, which ends on November 30, 2008. |
|
| (d) | | Equity awards valued using closing price of our Common Stock$20.89 as of November 30, 2007. Phantom share values include accrued dividends on awards. |
|
| (e) | | Assumes payout of 133.60% of target award plus reinvested dividends in accordance with the New York Stock Exchange of $69.77 per share ontotal stockholder return calculation specified in the last day of our fiscal year (November 30, 2005). Please see “Employment Agreements” above on pages 39 – 40award agreement for a description of the performance-based incentive compensation formula in Mr. Karatz’s Employment Agreement. The remaining $3,856,800 of the restricted stock awards reported for Mr. Karatz in 2005 is a grant ofperformance shares. |
48
43
The Audit and Compliance Committee of the Board of Directors acts under a written Audit and Compliance Committee Charter. The Charter was first adopted in 1999, and was amended and restated in October 2005. The Charter is included with this Proxy Statement at Attachment B.charter.
In this context, the Audit and Compliance Committee has reviewed and discussed with management and Ernst & Young LLP the Company’s audited financial statements. The Audit and Compliance Committee has discussed with Ernst & Young LLP the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees), as amended. In addition, the Audit and Compliance Committee has received from Ernst & Young LLP the written disclosures required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and discussed with Ernst & Young LLP its independence from the Company and the Company’s management.
In reliance on the reviews, reports and discussions referred to above, the Audit and Compliance Committee recommended to the Board, and the Board approved, that the audited financial statements be included in the Company’s Annual Report onForm 10-K for the fiscal year ended November 30, 2005,2007, for filing with the Securities and Exchange Commission.
This report is respectfully submitted by the members of the Audit and Compliance Committee:
Mr. Michael G. McCaffery,Chairman
Mr. Ronald W. Burkle
Mr. Timothy W. Finchem
Mr. Luis G. Nogales
Section 16(a) Beneficial Ownership Reporting Compliance
Based uponsolely on written representations furnished to us from reporting persons and our review of Forms 3, 4 and 5 and any amendments thereto furnished to us, in compliance withwe believe all such Forms required to be filed during our 2007 fiscal year under Section 1616(a) of the Securities Exchange Act, of 1934, as amended, all such Forms were filed on a timely basis by our reporting persons during fiscal year 2005, except for a late filing by Mr. Robert Freed regarding the acquisition from us of 18,506 restricted shares of our Common Stock on January 14, 2005, and a late filing by Ms. Melissa Lora regarding her November 29, 2004 acquisition of 3 shares of common stock through her individual brokerage account effected pursuant to an August 6, 2004 instruction given in accordance with Rule 10b5-1.persons.
Financial StatementsOther Business
Our audited consolidated financial statements and notes thereto, including selected financial information and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended November 30, 2005 are included on pages 37 through 68 of our Annual Report on Form 10-K for that period. The Form 10-K was mailed to stockholders on March 6, 2006. The financial statements, the report of the independent auditors thereon, selected financial information, and management’s discussion and analysis of financial condition and results of operations in the Form 10-K are incorporated by reference herein.Additional copies of the Form 10-K are available without charge upon request to the Corporate Secretary at KB Home, 10990 Wilshire Boulevard, Los Angeles, CA 90024. Exhibits to the Form 10-K will be provided upon request and payment of copying charges. You may also view and download copies of the 2005 Annual Report on Form 10-K from our website at: http://www.kbhome.com/investor/main.
Other Business
The Board of Directors knows of no business other than that described in this Proxy Statement that will be presented for consideration at the Annual Meeting. If other business shall properly come before the Annual Meeting, shares of our common stock represented by valid proxies will be voted on such matters in accordance with the best judgment of the persons named as proxies on the Proxy Cards,proxy cards for the Annual Meeting, or their duly authorized designees.
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Stockholder Proposals for 2007Our 2009 Annual Meeting of Stockholders
For inclusion in the Proxy Statement and form of proxy for our 20072009 Annual Meeting of Stockholders, we must receive no later than November 6, 20065, 2008 any proposal of a stockholder intended to be presented at that meeting. Further, managementthe Board-designated proxies for our 20072009 Annual Meeting of Stockholders will use their discretionary voting authority with respect to any proposal presented at the meeting by a stockholder who does not provide us with written notice of the proposal on or prior to January 20, 2007.19, 2009.
By Order of the Board of Directors,
Charles F. Carroll
Wendy C. Shiba
Executive Vice President, General Counsel and
Corporate Secretary
Los Angeles, California
March 6, 2006
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Attachment A
Corporate Governance Principles
(revised December 8, 2005)
KB Home’s Board of Directors believes that sound corporate governance practices provide an important framework to assist the Board in fulfilling its responsibilities. Accordingly, the Board has adopted the following Corporate Governance Principles relating to its functions, structure and operations. The Board will periodically review and revise these Principles and other aspects of KB Home’s corporate governance from time to time to reflect evolving governance practices.
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I. | Role, Conduct and Function of the Board |
A. General Roles of Board and Management. The Board of Directors is elected by the Company’s shareholders to oversee the management of the business and affairs of the Company and to assure that the long-term interests of the shareholders are being served. The Company’s business is conducted by its employees under the direction of the Chief Executive Officer, and the oversight of the Board, to enhance the long-term value of the Company for its shareholders.
B. Board Conduct. In carrying out their responsibilities, Directors are expected to exercise appropriate diligence and their business judgment to act in good faith and in what they reasonably believe to be in the best interests of the Company and its shareholders, consistent with their fiduciary duties under applicable law.
C. Functions of Board. The primary functions of the Board are to oversee management performance on behalf of shareholders, to monitor adherence to Company standards and policies, to promote responsible and ethical corporate practices, and generally to perform the duties and responsibilities assigned to the Board by the laws of the State of Delaware, the state where the Company is incorporated.
In addition to its general oversight of management, the Board as a whole or through its Committees also performs a number of specific functions, including:
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• | Providing advice and counsel to the Chief Executive Officer and senior management; |
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• | Selecting, evaluating and establishing the compensation of senior officers of the Company and planning for senior management succession, including for the Chief Executive Officer; |
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• | Reviewing, approving and monitoring the implementation of the Company’s financial, personnel development, and business and strategic plans; |
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• | Reviewing and approving significant corporate actions and major transactions; |
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• | Overseeing the establishment of, and monitoring compliance with, internal policies, controls and processes designed to ensure the integrity of the Company’s actions and operations, including its financial statements and financial and other regulatory reporting, its relationships with custom- |
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| ers, subcontractors, suppliers and other constituencies, and its compliance with law and its Ethics Policy; and |
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• | Reviewing assessments of, and senior management’s plans with respect to, significant risks facing the Company. |
II. Selection and Qualifications of Directors
A. Board Membership Qualifications. Directors should possess the highest personal and professional ethics, integrity, judgment and values, and be committed to representing the long-term interests of the Company’s shareholders. Directors should also have an inquisitive and objective perspective, and be able and willing to dedicate the time necessary to Board and Committee service. All Directors should be financially literate, as determined by the Board in its business judgment.
The Nominating and Corporate Governance Committee of the Board is responsible for reviewing on a regular basis the requisite skills and characteristics of Board members, as well as the composition of the Board as a whole. Current Directors are re-evaluated by the Committee prior to standing for re-election. The Committee assesses current and potential Directors in view of the perceived needs of the Board at the time the assessment is made and may consider the following attributes, among others:
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• | Personal qualities, accomplishments and reputation in the business community; |
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• | Financial literacy, financial and accounting expertise, and significant business, academic or government experience in leadership positions or at senior policy-making levels; |
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• | Geographical representation in areas relevant to the Company; |
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• | Diversity of background and personal experience; |
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• | The fit of the individual’s abilities and personality with those of current and potential Directors in building a Board that is effective, collegial and responsive to the needs of the Company; and |
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• | Independence as defined in these Principles and an absence of conflicting time commitments. |
B. Director Nominations. The Nominating and Corporate Governance Committee is responsible for recommending a slate of Directors for election to the Board and for identifying, investigating and recommending qualified Director candidates to the Board to fill openings that may arise due to vacancies, resignations, retirements or other reasons. The Committee identifies potential Director candidates through a variety of means, including the recommendations of current Board members, professional search firms, shareholders or other persons. Shareholders may nominate a candidate for the Committee’s consideration by submitting the nominee’s name and qualifications to the Company’s Corporate Secretary at the address set forth below.
C. Invitations to Potential Directors. The invitation to a potential new Director to join the Board should be extended by the entire Board through the Chairman of the Board or the Chair of the Nominating and Corporate Governance Committee.
D. New Director Orientation and Education. The Corporate Secretary is responsible for arranging initial orientations for new Directors, and for periodically providing materials or briefings to Directors on subjects that will assist them in discharging their duties. Within six (6) months of election to the Board, each new Director will spend a day at corporate headquarters for a personal briefing by senior management on the Company’s
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strategic plans, its financial statements, and its key policies and practices. Directors are encouraged to attend continuing education programs that are relevant to their duties as a Director of the Company.
III. Board Leadership, Composition and Performance
A. Role of Chairman of the Board and Chief Executive Officer. The Board has no fixed rule as to whether these offices should be vested in the same person or two different people, or whether the Chairman of the Board should be an employee of the Company or should be elected from among the non-employee Directors. The Board believes that the Board and the Company are currently well served by a structure in which the Chief Executive Officer also serves as Chairman of the Board.
B. Presiding Director and Non-Employee Directors Executive Session. Non-employee Directors shall meet in executive session without management present at least twice each year. The Chair of the Nominating and Corporate Governance Committee will preside at such meetings, and will serve as the Presiding Director in performing such other functions as the Board may direct. The non-employee Directors may meet without management present at such other times as they may determine.
C. Size of the Board. The Company’s Bylaws limit the maximum number of Directors to 12. The Board is divided into three classes that serve staggered three-year terms and are as nearly equal in number as possible. The Nominating and Corporate Governance Committee will periodically evaluate and make recommendations to the Board as to the Board’s appropriate size and structure.
D. Independence of Directors. A substantial majority of Directors shall be independent as defined under these Principles and the rules of the New York Stock Exchange (NYSE), as each may be amended from time to time.
To be considered independent, the Board shall affirmatively determine that each Director does not have any direct or indirect material commercial or charitable relationship with the Company based on all relevant facts and circumstances. Such determination will be made annually based on information supplied by Directors and other sources, and the prior review and recommendation of the Nominating and Corporate Governance Committee.
The Board has established the following guidelines to assist it in determining Director independence:
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• | A Director is not independent if, within the three (3) years preceding the determination: |
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| (i) | the Director was an employee, or an immediate family member was an executive officer, of the Company or any of its subsidiaries; |
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| (ii) | the Director or an immediate family member of the Director received more than $100,000 in direct compensation from the Company or any of its subsidiaries during any twelve-month period, other than (1) fees for service on the Board or on a subsidiary’s board and (2) pension and other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service); |
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| (iii) | the Director or immediate family member was (but is no longer) a partner or employee of a firm that is the Company’s internal or external auditor and personally worked on the Company’s audit within that time; and |
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| (iv) | a Company executive officer was on the compensation committee of the board of directors of a company which at the same time employed as an executive officer the Director or an immediate family member of the Director. |
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• | In addition, a Director is not independent if (i) the Director is a current partner or employee, or an immediate family member is a current partner, of a firm that is the Company’s internal or external auditor; or (ii) the Director has an immediate family member who is a current employee of such a firm and who participates in the auditor’s audit, assurance or tax compliance (but not tax planning) practice. |
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• | Except in their capacity and for their service as Directors, Audit and Compliance Committee members may not (i) accept any direct or indirect compensation of any kind from the Company or any subsidiary thereof, excluding fixed amounts of compensation under a retirement plan (provided such compensation is not contingent in any way on continued service), and (ii) be affiliated persons of the Company. |
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• | A Director’s independence will not be impaired if the Director: |
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| (i) | is an employee of, or an immediate family member is an executive officer of, another company that does business with or provides professional services to the Company or any of its subsidiaries and the annual revenue derived from that business or such services by either company, in any of the last three (3) fiscal years, does not exceed the greater of (1) $1,000,000 or (2) two percent (2%) of the consolidated gross revenues of either such company; |
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| (ii) | serves as an officer, director or trustee of a charitable organization, and the Company’s discretionary charitable contributions in any single fiscal year to the organization within the three (3) years preceding a determination do not exceed the greater of (1) $100,000 or (2) two percent (2%) of the organization’s consolidated gross revenues; and |
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| (iii) | or an immediate family member is an executive officer of another company which is indebted to the Company, or to which the Company is indebted, where the total amount of indebtedness (to and of the Company) does not exceed two percent (2%) of the total consolidated assets of such other company or the Company at the end of the previous fiscal year. |
The Board retains the sole right to interpret and apply the foregoing guidelines in determining the materiality of any relationship. For a relationship with a Director that is not covered by the foregoing guidelines or Section III.F below, the materiality of the relationship shall be determined by the non-employee Directors. The Company will explain in its next proxy statement the basis for any Board determination that a relationship was immaterial despite the fact that it did not meet one of the specific guidelines set forth in this section.
E. Employee Directors. No more than one (1) Director may be an employee of the Company. Employee Directors do not receive any additional compensation for Board service.
F. Ineligible Individuals. Consultants, lawyers or bankers who do a significant amount of business with the Company are not eligible to serve as a Director. Determinations regarding the eligi-
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bility of candidates in this regard are made by the Nominating and Corporate Governance Committee.
G. Former Chairman or Chief Executive Officer’s Board Membership. The Board believes that the determination of whether a former Chairman of the Board or Chief Executive Officer should serve on the Board is a matter to be decided in each individual instance. When the Chairman of the Board or a Chief Executive Officer who is also a Director resigns, he or she will also resign from the Board at that time. Whether the individual continues to serve on the Board is a matter to be considered by the Board.
H. Director Job Change. When a Director’s principal occupation or business association changes from that which the Director held when he or she originally joined the Board, the Director shall tender a letter of resignation to the Chair of the Nominating and Corporate Governance Committee. The Committee will review whether the new occupation, or retirement, of the Director is consistent with the needs and composition of the Board at that time. The Committee will recommend action to the full Board based on the results of the review.
I. Term Limits. The Board does not believe in arbitrary term limits on Board service. While term limits may help ensure that fresh ideas and view points are available to the Board, they may force the Company to lose the contribution of Directors who, over time, have developed valuable insight into the Company’s business and operations.
J. Retirement Age. Directors must retire as of the first Annual Stockholders Meeting following their 72nd birthday.
K. Limitation on Other Board Service. A Director who also serves as a chief executive officer or in equivalent position for a public company should not serve on more than two (2) other boards of public companies in addition to the Board. A Director who is not an active chief executive officer or in an equivalent position for a public company should not serve on more than five (5) other boards of public companies in addition to the Board. Regardless of the foregoing limits, a current Director should consider whether accepting a new directorship would compromise the Director’s ability to perform his or her present Board responsibilities and must consult with the Chairman of the Board or the Chair of Nominating and Corporate Governance Committee prior to joining another board of directors. The Chairman of the Board and the Chair of Nominating and Corporate Governance Committee will together assess whether the new directorship would present a conflict or otherwise compromise the ability of that Director to dedicate the time necessary to serve on the Board.
L. Stock Ownership Requirement. Each Director is required to own at least 5,000 shares of KB Home common stock or common stock equivalents within three (3) years of joining the Board.
M. Self-Evaluation. The Board and each of the Committees will perform an annual self-evaluation. Directors are requested to provide their assessments of the effectiveness of the Board as a whole, as well as the individual Committees on which they serve. The individual assessments are organized and summarized by the Corporate Secretary, and the Chair of the Nominating and Corporate Governance Committee discusses the results of the evaluation with the full Board. Each Committee likewise discusses the results of its own evaluations, with afollow-up report to the full Board by the Chair of that Committee.
N. Director Compensation. The Nominating and Corporate Governance Committee is
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responsible for recommending to the full Board compensation for non-employee Directors. In discharging this duty, the Committee is guided by three goals: the compensation should be sufficient to assist in the recruiting of the highest caliber Directors to the Board; compensation should align Directors’ interests with the long-term interests of the Company’s shareholders; and compensation should fairly pay Directors for work required to diligently serve the interests of shareholders given the Company’s size, scope and complexity of operations.
O. Attendance at Annual Stockholder, Board and Committee Meetings. Directors are expected to use their best efforts to attend all Annual Meetings of Stockholders and all meetings of the Board and Committees on which they serve.
P. Majority Vote Requirement. Any Director elected to the Board at an Annual Meeting of Stockholders in an uncontested election with less than the affirmative vote of a majority of shares present in person or by proxy shall promptly tender his or her resignation to the Chair of the Nominating and Corporate Governance Committee. The Committee will then promptly evaluate all relevant factors (including, but not limited to, the underlying reasons why a majority of affirmative votes was not received (if ascertainable), the Director’s length of service and qualifications, the Director’s contributions to the Company, and compliance with regulatory requirements, listing standards and the Company’s Corporate Governance Principles) and recommend to the full Board whether to accept the resignation or, if appropriate, to adopt another course of action to remedy the underlying cause(s) of the election result. Subject to any applicable legal or regulatory requirements, the Board shall within ninety (90) days following certification of the stockholder vote decide whether to accept the resignation, reject the resignation or, if appropriate, reject the resignation but adopt measures designed to address the issues underlying the election result. A full explanation of the Board’s decision will be promptly publicly disclosed in a periodic or current report filed with the Securities and Exchange Commission. A Director who tenders his or her resignation pursuant to this principle and any non-independent Director will not participate in the deliberations and decisions made hereunder. The foregoing guidelines will be summarized or included in the Company’s annual proxy statement.
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IV. | Board Relationship to Senior Management and Outside Advisors |
A. Access to Senior Management and Independent Advisors. Directors are encouraged to contact senior managers of the Company directly to discuss matters related to the Company’s business. Directors shall be entitled to rely in good faith on the advice, reports and opinions of the Company’s officers, employees, outside advisors (including counsel) and independent auditors. The Board and its Committees shall have the right at any time to retain independent outside financial, legal or other advisors.
B. Attendance of Non-Directors at Board Meetings. The Company’s current practice is to invite the Chief Operating Officer, the Chief Legal Officer, the Chief Financial Officer, the Senior Vice President, Human Resources and the Corporate Secretary of the Company to attend meetings of the Board, as well as meetings of the Committees for which these officers provide support. Other members of management are invited from time to time to participate in meetings of the Board or its Committees.
V. Meeting Procedures
A. Selection of Agenda Items for Board Meetings. The Chairman of the Board and Chief Executive Officer establishes the agenda for each
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Board meeting. Each Board member is encouraged to suggest the inclusion of item(s) for the agenda.
B. Board Materials Distributed in Advance. Information and data that is important to the Board’s understanding of the Company’s business or a specific agenda item are distributed in writing approximately one week before each regular Board and/or Committee meeting.
C. Number of Board Meetings. The Board currently schedules five (5) regular meetings per year, with additional meetings to occur (or action to be taken by unanimous written consent) as deemed necessary. It is the practice of the Board to have at least one meeting per year in one of the Company’s primary geographical markets to visit various KB Home communities in that market.
VI. Board Committees
A. Number, Structure and Independence of Committees. From time to time, the Board may want to form a new Committee or disband a current Committee depending upon the circumstances. The current four Committees are: Audit and Compliance, Management Development and Compensation, Nominating and Corporate Governance and Executive. Except for the Executive Committee, Committee membership will consist only of independent Directors as defined in these Principles. The Executive Committee shall consist of at least a majority of independent Directors and be chaired by an independent Director.
B. Assignment and Rotation of Committee Members. The Nominating and Corporate Governance Committee is responsible, after consultation with the Chairman of the Board and in consideration of the desires of individual Board members, for the assignment of Directors to various Committees. It is the sense of the Board that consideration should be given to rotating Committee members at five year intervals, but the Board does not feel that such rotation should be required since there may be reasons at a given point in time to maintain an individual Director’s Committee membership for a longer period.
C. Committee Meetings and Reports to the Board. The Chair of each Committee, in consultation with the other members of the Committee, determines the frequency and length of the meetings of that Committee. Each Committee Chair reports on the activities of their Committee to the full Board. Committee meetings are generally held in conjunction with meetings of the full Board, although additional Committee meetings may be held fromtime-to-time between Board meetings.
D. Committee Agenda. The Chair of each Committee, in consultation with the members of the Committee and senior management, will develop the Committee’s agenda for each Committee meeting.
E. Committee Charters. The Audit and Compliance, Management Development and Compensation, Nominating and Corporate Governance Committees shall each have a Charter that is consistent with these Principles and which further articulates the roles and responsibilities of each Committee. Each Charter is approved by the full Board and is reviewed regularly by the relevant Committee to assure that it reflects developments in corporate governance and the practices of the Committee.
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VII. | Leadership Development |
A. Chief Executive Officer and Senior Management Evaluation. The Management Development and Compensation Committee annually reviews the performance of the Chief Executive Officer and other members of senior management, and the Chair of the Committee reports the results of that review to the full Board. In this regard, the Committee also annually reviews the compensation
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of the Chief Executive Officer, and significant changes in his compensation are presented to the full Board for consideration and approval. Senior executives are evaluated by the Chief Executive Officer and the Committee receives reports on such evaluations.
B. Succession Plans. The Board approves and maintains succession plans for the Chief Executive Officer and senior executives, as well as programs for the professional development of key members of senior management, based upon recommendations from the Management Development and Compensation Committee.
A. Website Posting. These Principles, as well as the Charters of each Committee of the Board and the Company’s Ethics Policy, are to be posted on the Company’s web site (www.kbhome.com), and copies are to be made available upon request to the Corporate Secretary of the Company at the address set forth below.
B. Communicating with the Board. Shareholders and other individuals may communicate with the Board or specifically with non-employee Directors by writing to the Corporate Secretary, KB Home, 10990 Wilshire Boulevard, Los Angeles California 90024. The Corporate Secretary reviews all such correspondence promptly upon receipt. Correspondence concerning matters within a specific Director’s, Board Committee’s or the Board’s purview, per the Corporate Secretary’s determination, is forwarded to the appropriate individual Director, Committee Chair, and/or to the Presiding Director. Board recipients of such correspondence determine how to address any subject therein, including responses to senders and/or related parties, Committee and/or full Board action andfollow-up with senior management.
C. Company Communications. The Board believes that management, and, in particular, the Chief Executive Officer, speaks for the Company.
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Attachment B
Audit and Compliance Committee Charter
(Amended and Restated October 5, 2005)
The Audit and Compliance Committee (the “Committee”) represents and assists the Board of Directors in fulfilling the Board’s oversight responsibilities to shareholders relating to the Company’s:
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• | corporate accounting and reporting practices, including the quality and integrity of its financial statements and reports; |
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• | internal control over financial reporting and disclosure controls and procedures; |
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• | audit process, including the qualifications, independence, retention, compensation, and performance of the independent registered public accounting firm employed for the purpose of preparing or issuing an audit report or performing other audit, review, attest or other services for the Company (the “Independent Accountants”), and the performance of the Company’s Internal Audit Department (the “Audit Department”); and |
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• | compliance with legal and regulatory requirements and management of matters in which the Company has or may have material liability exposure. |
The Committee also oversees the preparation of a report required by the Securities and Exchange Commission’s (the “SEC”) rules to be included in the Company’s annual proxy statement.
Although the Committee must fulfill the responsibilities and duties allocated to it under this Charter, the Committee is not responsible for planning and conducting audits, for the preparation, presentation and integrity of the Company’s financial statements, or for determining whether the Company’s financial and related disclosures are complete, accurate and are in accordance with generally accepted accounting principles (“GAAP”) and applicable rules and regulations; such responsibilities rest with Company management and the Independent Accountants. Accordingly, the Committee, in carrying out its oversight responsibilities, is not providing any special or expert assurance as to the Company’s financial statements, nor is it providing any professional certification as to the Independent Accountants’ work.
A. The Committee shall consist of no fewer than three (3) Directors, each of whom shall, in the judgment of the Board, be (1) independent in accordance with the Company’s Corporate Governance Principles and any applicable laws, regulations or listing standards (including, but not limited to, applicable SEC rules), and (2) financially literate in accordance with New York Stock Exchange (“NYSE”) listing standards. In addition, at least one (1) member of the Committee shall, in the judgment of the Board, be an audit committee financial expert in accordance with SEC rules.
B. The Chair and members of the Committee shall be appointed by the Board annually, upon the recommendation of the Nominating and Corporate Governance Committee.
C. No Committee member shall serve simultaneously on the audit committee of more than two
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(2) other public companies; provided, that the Committee shall determine whether a member’s service on the audit committees of more than three (3) public companies impairs that member’s ability to serve on this Committee and, to the extent required, make a disclosure regarding such determination in the Company’s annual proxy statement.
A. The Committee shall meet at least four (4) times annually, or more frequently as circumstances dictate, and may hold meetings by telephone and take action by unanimous written consent.
B. The Committee shall meet periodically in separate executive sessions with the Chief Legal Officer, the chief officer of the Audit Department, the Independent Accountants, the Chief Financial Officer and the Chief Accounting Officer.
C. The Chair shall regularly report upon the matters discussed at each Committee meeting to the Board of Directors.
D. In addition to Committee members and the audit partner of the Independent Accountants, the Chief Executive Officer, the Chief Legal Officer, the Chief Financial Officer, the Chief Accounting Officer, the chief officer of the Audit Department and the Corporate Secretary of the Company are generally expected to attend Committee meetings. The Committee may invite any other member of management or other Company employee or outside advisor (either to the Company or to the Committee) to attend any Committee meeting.
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IV. | Responsibilities and Duties |
A. Committee Review and Evaluation
On an annual basis, the Committee shall review and reassess the adequacy of this Charter, and evaluate its performance.
B. Independent Accountants
To fulfill its responsibilities and duties under this Charter, the Committee shall:
1. In its capacity as a Committee of the Board, be directly responsible for the appointment (subject to ratification by the Company’s shareholders), compensation, engagement terms, retention and oversight of the work of the Independent Accountants.
2. Establish and amend as necessary, policies and procedures for pre-approving the retention of the Independent Accountants for audit, review, attest and any permitted non-audit services, and approve in advance the Independent Accountants’ provision of any such services to the Company in accordance with such policies and procedures. In addition, the Committee shall review the fees and other compensation to be paid to the Independent Accountants.
3. Evaluate the Independent Accountants’ qualifications, independence and effectiveness, and present its evaluation to the full Board. In this regard, the Committee will receive and review, at least annually, a report by the Independent Accountants describing:
(a) the Independent Accountants’ internal quality-control procedures;
(b) any material issues raised by the most recent internal quality-control review, peer review, or Public Company Accounting Oversight Board review, of the Independent Accountants, or by any inquiry or investigation by governmental or professional authorities, within the preceding five (5) years, respecting one (1) or more independent audits carried out by the Independent Accountants, and any steps taken to deal with any such issues; and
(c) all relationships between the Independent Accountants and the Company, as delineated in a formal written statement from the Independent Accountants that meets Independence Board Standard No. 1 — “Independence Discussions with Audit Committees,” and the Committee shall
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engage in active dialogue with the Independent Accountants regarding any relationship that might compromise the Independent Accountants’ objectivity or independence.
4. Review and discuss with the Independent Accountants (a) the scope and plan of their independent audit of the Company, and (b) any audit problems or difficulties that the Independent Accountants encountered in the course of their audit work and Company management’s response thereto.
5. Receive timely direct reports from the Independent Accountants describing, among other things: (a) critical accounting policies and practices used in the Independent Accountants’ audit; (b) all alternative treatments of financial information within GAAP discussed with Company management, including the ramifications of such treatment and the treatment preferred by the Independent Accountants; and (c) all other material written communications between the Independent Accountants and Company management.
6. Establish policies for the hiring of employees and former employees of the Independent Accountants.
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C. | Financial Reporting Processes and Disclosure Procedures |
To fulfill its responsibilities and duties under this Charter, the Committee shall:
1. Consider the Independent Accountants’ judgments about the Company’s internal control environment and the appropriateness of the Company’s accounting principles as applied to its financial reporting.
2. Consider and approve, if appropriate, major changes to the Company’s auditing and accounting principles and practices as suggested by the Independent Accountants, Company management or the Audit Department.
3. Review any significant disagreement among Company management and the Independent Accountants or the Audit Department in connection with the Company’s internal control environment or preparation of the financial statements or other financial reporting matters.
4. Review with Company management and the Independent Accountants the results of their timely analysis of significant financial reporting issues and developments, including changes in, or adoptions of, accounting principles and disclosure practices. Such review shall also include confirming that (a) management disclose its critical accounting policies that have a material impact on the Company’s financial presentations in its public disclosures, and (b) in the event that the Company’s public disclosures contain any pro forma financial information, the presentation of such information complies with the SEC rules regarding the accuracy of pro forma financial information.
5. Review and discuss with Company management, the chief officer of the Audit Department and the Independent Accountants the adequacy and effectiveness of, and management’s report on, the Company’s internal control over financial reporting, including with respect to (a) any significant deficiencies or material weaknesses in the design and operation of such controls and procedures that could adversely affect the Company’s ability to record, process, summarize and report financial information, and any special audit steps adopted to address any material control deficiencies, (b) any fraud, whether or not material, that involves Company management or other employees who have a significant role in the Company’s internal control over financial reporting, and (c) the Independent Accountants’ annual attestation to, and report on, management’s internal controls assessment pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.
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6. Review, at least annually, the adequacy of internal controls and procedures related to (a) executive expense accounts, including the use of Company assets, and (b) compensation of Board members and senior executives of the Company.
7. Review and discuss with Company management and the Independent Accountants the Company’s annual audited and quarterly financial statements to be filed with the SEC, including (a) in each case the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and (b) the matters required to be discussed with the Independent Accountants by Statement of Auditing Standards No. 100 (as in effect at that time) with respect to quarterly statements, and by Statement of Auditing Standards No. 61 (as in effect at that time) with respect to annual statements. In addition, the Committee will recommend, through the Chair, to the full Board whether, based on the information available to the Committee, the Company’s audited financial statements should be filed with the Company’s Annual Report on SEC Form 10-K.
8. Discuss the Company’s earnings press releases, as well as financial information and earnings guidance provided to analysts and ratings agencies as appropriate.
9. Review the Company’s policies with respect to risk assessment and risk management and the steps Company management has taken to monitor and address significant operational risks.
D. Ethical and Legal Compliance
To fulfill its responsibilities and duties the Committee shall:
1. At least annually, review and approve the Company’s Ethics Policy, as may be materially revised from time to time by Company management subject to Committee approval, and discuss with management the Company’s system to monitor and enforce the Ethics Policy.
2. Establish procedures for (a) the treatment of complaints received by the Committee regarding accounting, internal accounting controls or auditing matters, and (b) the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.
3. Review the staffing, organizational structure and qualifications of, and internal audit reports prepared by, the Audit Department at least annually.
4. Meet with the Company’s Chief Legal Officer at each Committee meeting (and, at least annually, meet with the Chief Legal Officer in an executive session), and review any matters of legal liability exposure that could reasonably be anticipated to have a material impact on the Company’s financial statements.
5. Perform any other activities consistent with this Charter, the Company’s By-laws and governing law or exchange listing standards, as the Committee or the Board of Directors deems necessary or appropriate.
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E. | Authority to Engage Independent Counsel and Advisers; Funding of Independent Accountants |
The Committee shall have the authority to retain, on such terms and conditions (including fees) as it determines to be appropriate, any outside advisors, including independent legal counsel, as it deems necessary to assist it in fulfilling its responsibilities and duties under this Charter, and such retained advisors shall report directly to the Committee. The Company shall, as determined by the Committee, provide appropriate funding for payment of compensation to the Independent Accountants and to any outside advisors retained by the Committee, and for payment of administrative expenses of the Committee that are necessary and appropriate in carrying out its duties.
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Attachment C
Amended and Restated KB HOME 1999 Incentive Plan
(as amended and restated on February 9, 2006)
Section 1. Purpose. The purposes of the KB Home Amended and Restated 1999 Incentive Plan (the “Plan”) are to promote the interests of KB Home and its stockholders by (i) attracting and retaining exceptional employees; (ii) motivating such employees by means of performance-related incentives to achieve long-range performance goals; (iii) enabling such employees to participate in the long-term growth and financial success of the Company; and (iv) qualifying compensation paid under the Plan for deductibility under Section 162(m) of the Internal Revenue Code of 1986, as amended. The Plan is an amendment and restatement of the KB Home 1999 Incentive Plan which shall be effective as of the Effective Date, subject to approval by the Company’s stockholders as set forth in Section 16(a) hereof.
Section 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below:
“Award” shall mean any Performance-Based Bonus opportunity granted under the Plan, as well as any Option, Stock Appreciation Right, share of Restricted Stock, Performance Share, Stock Unit, Other Stock-Based Award or a Performance-Based Award granted under the Plan or granted in payment or settlement of a Performance-Based Bonus.
“Award Agreement” shall mean any written agreement, contract, or other instrument or document (which may include, if so designated by the Committee, an Employment Agreement, as defined herein), including through electronic medium, evidencing any Award, which may, but need not, be executed or acknowledged by a Participant.
“Board” shall mean the Board of Directors of the Company.
“Change of Ownership” means and includes each of the following:
(a) Individuals who, as of the Effective Date of this Plan, constitute the Board of Directors of the Company (the “Board of Directors” generally and as of the date hereof the “Incumbent Board”) cease for any reason to constitute at least a majority of the directors constituting the Board of Directors, provided that any person becoming a director subsequent to the Effective Date of this Plan whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least three-quarters (3/4) of the then directors who are members of the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is (i) in connection with the acquisition by a third person, including a “group” as such term is used in Section 13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly, of 20% or more of the combined voting securities ordinarily having the right to vote for the election of directors of the Company (unless such acquisition of beneficial ownership was approved by a majority of the Board of Directors who are members of the Incumbent Board), or (ii) in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board; or
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(b) The Board of Directors (a majority of which shall consist of directors who are members of the Incumbent Board) has determined that a Change of Ownership triggering the exercisability of Options and the lapse of restrictions on other Awards as described in Section 13 hereof shall have occurred.
“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.
“Committee” shall mean the committee of the Board described in Section 3(a) hereof.
“Company” shall mean KB Home, together with any successor thereto.
“Covered Employee” shall mean an Employee who is, or could be, a “covered employee” within the meaning of Section 162(m) of the Code.
“Disability” shall mean a Participant’s disability, as determined by the Committee in its sole discretion.
“Effective Date” shall have the meaning set forth in Section 16(a) hereof.
“Eligible Individual” shall mean any person who is an Employee, as determined by the Committee.
“Employee” shall mean any employee (as defined in accordance with Section 3401(c) of the Code) of the Company or any Subsidiary.
“Employment Agreement” shall mean, with respect to Awards relating to performance in any fiscal year of the Company, an agreement between the Company and a Participant entered into prior to the end of the first fiscal quarter of such fiscal year.
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
“Fair Market Value” shall mean, as of any given date, (a) if Shares are traded on a securities exchange, the closing price of a Share as reported in theWall Street Journalfor the first trading date immediately prior to such date during which a sale occurred; or (b) if Shares are not traded on a securities exchange, (i) the last sales price (if Shares are then listed as a National Market Issue under the NASD National Market System) or (ii) the mean between the closing representative bid and asked prices (in all other cases) for Shares on the date immediately prior to such date on which sales prices or bid and asked prices, as applicable, are reported by a national quotation system; or (c) if Shares are not publicly traded, or with respect to any non-Share based Award or settlement of an Award, the fair market value established by the Committee acting in good faith.
“Full Value Award” means any Award other than an Option or Stock Appreciation Right or other Award for which the Participant pays the intrinsic value (whether directly or by forgoing a right to receive a payment from the Company).
“Incentive Stock Option” means an Option that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto.
“Non-Qualified Stock Option” shall mean an Option that is not intended to be an Incentive Stock Option.
“Option” shall mean a right granted to a Participant pursuant to Section 7 of the Plan to purchase a specified number of Shares at a specified price during specified time periods. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option.
“Other Stock-Based Award” shall mean any right granted under Section 10 of the Plan.
“Participant” shall mean any Eligible Individual who has been granted an Award pursuant to the Plan.
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“Performance-Based Award” shall mean an Award granted to selected Covered Employees pursuant to Sections 6, 8, 9 or 10 hereof, but which is subject to the terms and conditions set forth in Section 11 hereof. All Performance-Based Awards are intended to qualify as Qualified Performance-Based Compensation.
“Performance-Based Bonus” shall mean a bonus opportunity awarded in accordance with Section 6 of the Plan.
“Performance Criteria” shall mean the criteria that the Committee selects for purposes of establishing the Performance Goal or Performance Goals for a Participant for a Performance Period. The Performance Criteria that may be used to establish Performance Goals are limited to the following: economic value-added, sales or revenue, net income (either before or after interest, taxes, depreciation and amortization), operating earnings, cash flow (including, but not limited to, operating cash flow and free cash flow), cash flow return on capital, return on net assets, return on stockholders’ equity, return on assets, return on capital, stockholder returns, return on sales, return on investments, productivity, expense, margins, operating efficiency, customer satisfaction, working capital, earnings per Share, price per Share, market share, unit volume, net sales and service quality, any of which may be measured either in absolute terms or as compared to any incremental change or as compared to results of a peer group. The Committee shall define in an objective fashion the manner of calculating the Performance Criteria it selects to use for such Performance Period for such Participant.
“Performance Goals” shall mean, for a Performance Period, the goals established in writing by the Committee for the Performance Period based upon one or more of the Performance Criteria, as selected by the Committee. Depending on the Performance Criteria used to establish such Performance Goals, the Performance Goals may be expressed in terms of overall Company performance or the performance of a division, business unit, or an individual. The Committee, in its discretion, may, within the time prescribed by Section 162(m) of the Code, adjust or modify the calculation of Performance Goals for such Performance Period in order to prevent the dilution or enlargement of the rights of Participants (a) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event, or development, or (b) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Company, or the financial statements of the Company, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or business conditions.
“Performance Period” shall mean the one or more periods of time, which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to, and the payment of, a Performance-Based Award.
“Performance Share” shall mean a right granted to a Participant pursuant to Section 10(a) hereof, to receive Shares, the payment of which is contingent upon achieving certain Performance Goals or other performance-based targets established by the Committee.
“Person” shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity.
“Qualified Performance-Based Compensation” shall mean any compensation that is intended to qualify as “qualified performance-based compensation” as described in Section 162(m)(4)(C) of the Code.
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“Restricted Stock” shall mean any Share awarded to a Participant pursuant to Section 9 of the Plan that is subject to certain restrictions and may be subject to risk of forfeiture.
“Rule 16b-3” shall mean Rule 16b-3 as promulgated and interpreted by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time.
“SEC” shall mean the Securities and Exchange Commission or any successor thereto and shall include the Staff thereof.
“Securities Act” shall mean the Securities Act of 1933, as amended.
“Shares” shall mean shares of the Common Stock, $1 par value, of the Company, and such other securities of the Company that may be substituted for the Shares pursuant to Section 13 of the Plan.
“Stock Appreciation Right” shall mean any right granted under Section 8 of the Plan.
“Stock Unit” shall mean any right granted under Section 10(b) of the Plan.
“Subsidiary” shall mean any “subsidiary corporation” as defined in Section 424(f) of the Code and any applicable regulations promulgated thereunder or any other entity of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company.
Section 3 Administration.
(a) Committee. The Plan shall be administered by the Committee. The Committee shall consist solely of two or more members of the Board each of whom is an “outside director,” within the meaning of Section 162(m) of the Code, a member of the Board who qualifies as a “Non-Employee Director” as defined in Rule 16b-3(b)(3) under the Exchange Act, or any successor rule, and an “independent director” under the rules of the New York Stock Exchange (or other principal securities market on which the Shares are traded), as the same may be amended from time to time. Appointment of Committee members shall be effective upon acceptance of appointment. In its sole discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan except with respect to matters which under Section 162(m) of the Code or Rule 16b-3, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee.
(b) Authority of Committee. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant; (iii) determine the number of Awards to be granted and the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv) determine the terms and conditions of any Award granted pursuant to the Plan, including, but not limited to, the grant date, the exercise price, grant price, or purchase price, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, any provisions related to non-competition and recapture of gain on an Award, based in each case on such considerations as the Committee in its sole discretion determines;provided, however, that the Committee shall not have the authority to accelerate the vesting or waive the forfeiture of any Performance-Based Awards; (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited, or sus-
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pended and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended; (vi) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (vii) recommend to the Board any amendment, alteration, suspension, discontinuance or termination of the Plan, and subject to the stockholder approval requirement set forth in Section 14(a) hereof, to take any such action not required by applicable law to be taken by the Board, (viii) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan.
(c) Action by the Committee. A majority of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present, and acts approved in writing by all members of the Committee in lieu of a meeting, shall be deemed the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any Employee of the Company or any Subsidiary, the Company’s independent registered public accounting firm, or any executive compensation consultant or other professional retained by the Company or the Committee to assist in the administration of the Plan.
(d) Committee Decisions Binding. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including, but not limited to, the Company, any Subsidiary, any Participant, any holder or beneficiary of any Award, any stockholder and any Employee.
(e) Delegation. To the extent permitted by applicable law, the Committee may from time to time delegate to a committee of one or more members of the Board or to one or more officers of the Company the authority to grant or amend Awards to Participants other than Participants who are (a) senior executives of the Company who are subject to Section 16 of the Exchange Act, (b) Covered Employees, or (c) officers of the Company (or members of the Board) to whom authority to grant or amend Awards has been delegated hereunder. Any delegation hereunder shall be subject to the restrictions and limits that the Committee specifies at the time of such delegation, and the Committee may at any time rescind the authority so delegated or appoint a new delegatee. At all times, the delegatee appointed under this Section 3(e) shall serve in such capacity at the pleasure of the Committee.
Section 4. Award Limits.
(a) Plan Shares. Subject to Section 4(b) and Section 13 hereof, the aggregate number of Shares which may be granted pursuant to Awards under the Plan shall only be the Shares which are available or may become available for grant under the KB Home 1999 Incentive Plan as in effect immediately prior to the Effective Date;provided, however, that such aggregate number of Shares available for grant under the Plan shall be reduced by 1.25 Shares for each Share granted pursuant to any Full Value Award and shall be reduced by 1.0 Share for each Share granted pursuant to any Option or Stock Appreciation Right Award.
(b) Shares Available for Grant. To the extent that an Award terminates, expires, or lapses for any reason, or is settled in cash, any Shares subject to the Award shall again be available for the grant of
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an Award pursuant to the Plan. Any Shares tendered or withheld to satisfy the grant or exercise price or tax withholding obligation pursuant to any Award shall not be available for the grant of an Award pursuant to the Plan. To the extent permitted by applicable law or securities exchange rule, Shares issued in assumption of, or in substitution for, any outstanding awards of any entity acquired in any form of combination by the Company or any Subsidiary shall not be counted against Shares available for grant pursuant to this Plan. Notwithstanding the provisions of this Section 4(b), no Shares may again be optioned, granted or awarded if such action would cause an Incentive Stock Option to fail to qualify as an incentive stock option under Section 422 of the Code.
(c) Individual Stock-Based Awards. Subject to adjustment as provided in Section 13 hereof, no Participant may be granted stock-based Awards under the Plan in any fiscal year that relate to more than 1,000,000 Shares. No provision of this Section 4(c) shall be construed as limiting the amount of any cash-based Award which may be granted to any Participant.
(d) Sources of Shares Deliverable Under Awards. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of Shares acquired by the Company on the open market or otherwise.
(e) Cash Award Limits. (i) Any Participant who is the Chief Executive Officer at the time of payment of an Award or Awards under the Plan (other than a stock-based Award) shall be eligible to be paid in cash in any fiscal year an amount not in excess of $5,000,000 in respect of any such Award(s), and (ii) no Participant other than a Participant described in clause (i) of this Section 4(e) shall be eligible to be paid more than $3,000,000 in cash in any fiscal year in respect of any Award(s) under the Plan. No provision of this Section 4(e) shall be construed as limiting the number of stock-based Awards, or other cash-based compensation for employment, that a Participant may receive.
Section 5. Eligibility and Participation.
(a) Eligibility. Each Eligible Individual shall be eligible to be granted one or more Awards pursuant to the Plan.
(b) Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from among all Eligible Individuals, those to whom Awards shall be granted and shall determine the nature and amount of each Award. No Eligible Individual shall have any right to be granted an Award pursuant to this Plan.
Section 6. Performance-Based Bonuses.
(a) Grant. At such times and in such manner as the Committee deems appropriate, the Committee may select Participants and, subject to Section 4(e) hereof, award to such Participants the opportunity to earn a cash bonus (a “Performance-Based Bonus”), which shall be contingent upon the attainment of Performance Goals or other specific performance goals that are established by the Committee and relate to one or more of the Performance Criteria or other specific performance criteria, in each case on a specified date or dates or over any period or periods determined by the Committee. Any such Performance-Based Bonus paid to a Covered Employee shall be a Performance-Based Award and be based upon objectively determinable bonus formulas established in accordance with Section 11(c) hereof.
(b) Employment Agreement. Notwithstanding Section 6(a) above, the formula for determining a Performance-Based Bonus to any Participant may, if so determined by the Committee, be governed by the terms of an Employment Agreement applicable to such Participant;provided, however, that such
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formula is in accordance with Section 162(m) of the Code.
Section 7. Stock Options.
(a) General. The Committee is authorized to grant Options to Participants on the following terms and conditions:
(1) Exercise Price. The exercise price per Share subject to an Option shall be determined by the Committee and set forth in the Award Agreement; provided, however, that subject to Section 7(b)(3) hereof, the exercise price for any Option shall not be less than 100% of the Fair Market Value of a Share on the date of grant.
(2) Time and Conditions of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part; provided, however, that the term of any Option granted under the Plan shall not exceed ten years. The Committee shall also determine the performance or other conditions, if any, that must be satisfied before all or part of an Option may be exercised; provided, however, that no Option granted under the Plan shall become exercisable after ten years from the date of grant.
(3) Payment. The Committee shall determine the methods by which the exercise price of an Option may be paid, the form of payment, including, without limitation: (i) cash, (ii) Shares held for such period of time as may be required by the Committee in order to avoid adverse accounting consequences and having a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof, or (iii) other property acceptable to the Committee (including through the delivery of a notice that the Participant has placed a market sell order with a broker with respect to Shares then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price; provided, however, that payment of such proceeds is then made to the Company upon settlement of such sale), and the methods by which Shares shall be delivered or deemed to be delivered to Participants. In the event that the Company establishes, for itself or using the services of a third party, an automated system for the exercise of Awards, such as a system using an internet website or interactive voice response, then the paperless exercise of Awards by a Participant may be permitted through the use of such an automated system. Notwithstanding any other provision of the Plan to the contrary, no Participant shall be permitted to pay the exercise price of an Option with a loan from the Company or a loan arranged by the Company in violation of Section 13(k) of the Exchange Act.
(4) Evidence of Grant. All Options shall be evidenced by an Award Agreement between the Company and the Participant. The Award Agreement shall include such additional provisions as may be specified by the Committee.
(5) Prohibition on Reload Grants. The Committee shall not have the authority to grant or provide for the automatic grant of an Option to any Participant to replace Shares a Participant delivers in payment of the exercise price of any Option granted hereunder in accordance with Section 7(a)(3) hereof, or in the event that the withholding tax liability arising upon exercise of any Option by a Participant is satisfied through the withholding by the Company of Shares otherwise deliverable upon exercise of the Option.
(b) Incentive Stock Options. Incentive Stock Options shall be granted only to Employees and the terms of any Incentive Stock Options granted pursuant to the Plan, in addition to the requirements of Section 7(a) above, must comply with the provisions of this Section 7(b).
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(1) Expiration. Subject to Section 7(b)(3) below, an Incentive Stock Option shall expire and may not be exercised to any extent by any Participant (or permitted beneficiary or representative of such Participant) after the first to occur of the following events:
(i) Ten years from the date it is granted, unless an earlier time is set in the Award Agreement;
(ii) Ninety days after the Participant’s termination of employment as an Employee for any reason other than Disability or death; and
(iii) One year after the date of the Participant’s termination of employment as an Employee on account of Disability or death. Upon the Participant’s Disability or death, any Incentive Stock Options exercisable at the Participant’s Disability or death may be exercised by the Participant’s legal representative or representatives, by the person or persons entitled to do so pursuant to the Participant’s last will and testament, or, if the Participant fails to make testamentary disposition of such Incentive Stock Option or dies intestate, by the person or persons entitled to receive the Incentive Stock Option pursuant to the applicable laws of descent and distribution.
(2) Dollar Limitation. The aggregate Fair Market Value (determined as of the time the Option is granted) of all Shares with respect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed $100,000 or such other limitation as imposed by Section 422(d) of the Code, or any successor provision. To the extent that Incentive Stock Options are first exercisable by a Participant in excess of such limitation, the excess shall be considered Non-Qualified Stock Options.
(3) Ten Percent Owners. An Incentive Stock Option may be granted to any Participant who, at the date of grant, owns Shares possessing more than ten percent of the total combined voting power of all classes of Shares only if such Option is granted at a price that is not less than 110% of Fair Market Value on the date of grant and the Option is exercisable for no more than five years from the date of grant.
(4) Notice of Disposition. The Participant shall give the Company prompt notice of any disposition of Shares acquired by exercise of an Incentive Stock Option within (i) two years from the date of grant of such Incentive Stock Option or (ii) one year after the transfer of such Shares to the Participant.
(5) Right to Exercise. Except as provided in Section 7(b)(1)(iii) above, during a Participant’s lifetime, an Incentive Stock Option may be exercised only by the Participant.
(6) Failure to Meet Requirements. Any Option (or portion thereof) purported to be an Incentive Stock Option, which, for any reason, fails to meet the requirements of Section 422 of the Code shall be considered a Non-Qualified Stock Option.
Section 8. Stock Appreciation Rights.
(a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Participants to whom Stock Appreciation Rights shall be granted, the number of Shares to be covered by each Stock Appreciation Right Award, the grant price thereof and the conditions and limitations applicable to the exercise thereof. Stock Appreciation Rights may be granted in tandem with another Award, in addition to another Award, or freestanding and unrelated to another Award. Stock Appreciation Rights granted in tandem with or in addition to an Award may be granted either at the same time as the Award or at a later time. A Stock Appreciation Right shall be
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subject to such terms and conditions not inconsistent with the Plan as the Committee shall impose and shall be evidenced by an Award Agreement.
(b) Exercise and Payment. The Committee shall determine the time or times at which a Stock Appreciation Right may be exercised in whole or in part;provided, however, that the term of any Stock Appreciation Right granted under the Plan shall not exceed ten years. The Committee shall also determine the performance or other conditions, if any, that must be satisfied before all or part of a Stock Appreciation Right may be exercised;provided, however, that no Stock Appreciation Right granted under the Plan shall become exercisable after ten years from the date of grant. A Stock Appreciation Right shall entitle the Participant (or other person entitled to exercise the Stock Appreciation Right pursuant to the Plan) to exercise all or a specified portion of the Stock Appreciation Right (to the extent then exercisable pursuant to its terms) and to receive from the Company an amount equal to the product of (i) the excess of (A) the Fair Market Value of Shares on the date the Stock Appreciation Right is exercised over (B) the Fair Market Value of Shares on the date the Stock Appreciation Right was granted and (ii) the number of Shares with respect to which the Stock Appreciation Right is exercised, subject to any limitations the Committee may impose and any applicable tax withholding. Payment of the amounts determined under this Section 8(b) shall be made in cash, in Shares (based on their Fair Market Value as of the date the Stock Appreciation Right is exercised) or a combination of both, as determined by the Committee in the Award Agreement.
(c) Other Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine, at or after the grant of a Stock Appreciation Right, the term, methods of exercise, methods and form of settlement, and any other terms and conditions of any Stock Appreciation Right. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted or exercised prior to such determination as well as Stock Appreciation Rights granted or exercised thereafter. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate.
Section 9. Restricted Stock.
(a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Participants to whom Shares of Restricted Stock shall be granted, the number of Shares of Restricted Stock to be granted to each Participant, the duration of the period during which, and the conditions under which, the Restricted Stock may be forfeited to the Company, and the other terms and conditions of such Awards. Subject to Section 13(b) hereof, the period during which such Awards may be forfeited to the Company shall terminate in three equal annual installments from the date of grant of such Awards;provided, however, that the Committee may determine to have such period terminate after the first anniversary of the date of grant of any such Award if the Committee has established conditions for the earning of such Award that relate to performance of the Company or one or more divisions or units thereof. All awards of Restricted Stock shall be evidenced by an Award Agreement.
(b) Forfeiture. Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, upon termination of employment during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited.
(c) Certificates for Restricted Stock. Restricted Stock granted pursuant to the Plan may be evi-
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denced in such manner as the Committee shall determine. If certificates representing shares of Restricted Stock are registered in the name of the Participant, certificates must bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company may, at its discretion, retain physical possession of the certificate until such time as all applicable restrictions lapse.
(d) Dividends and Distributions. Dividends and other distributions paid on or in respect of any Shares of Restricted Stock may be paid directly to the Participant, or may be reinvested in additional Shares of Restricted Stock, as determined by the Committee in its sole discretion.
Section 10. Other Stock-Based Awards. The Committee shall have authority to grant to any Participant an “Other Stock-Based Award”, which shall consist of any right which is (i) not an Award described in Section 6 through Section 9 hereof and (ii) an Award of Shares or an Award denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as deemed by the Committee to be consistent with the purposes of the Plan;provided, however, that any such rights must comply, to the extent deemed desirable by the Committee, with applicable law and/or securities exchange listing requirements. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of any such Other Stock-Based Award. Other-Stock Based Awards shall include, but not be limited to, Performance Share Awards and Stock Unit Awards.
(a) Performance Share Awards. Any Participant selected by the Committee may be granted one or more Performance Share awards which shall be denominated in a number of Shares and which may be linked to any one or more of the Performance Criteria or other specific performance criteria determined appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of award) the contributions, responsibilities and other compensation of the particular Participant.
(b) Stock Unit Awards.
(1) Grant of Stock Unit Awards. The Committee shall have authority to grant to Participants Stock Unit Awards, the value of which is based, in whole or in part, on the Fair Market Value of Shares. Each Stock Unit shall consist of a bookkeeping entry representing an amount equivalent to the Fair Market Value of one Share. Such Stock Units represent an unfunded and unsecured obligation of the Company, except as otherwise provided for by the Committee. Stock Units may be granted as additional compensation or in lieu of any other compensation, as specified by the Committee, or may be issued upon exercise of Options or Stock Appreciation Rights, or in lieu of a Performance Share Award or Restricted Stock Award, provided that for any Share to be purchased in connection with a Stock Unit Award other than upon exercise of an Option or Stock Appreciation Right or in settlement of a Performance Share Award or Restricted Stock Award, the purchase price or the amount of consideration paid or of other compensation foregone shall be equal to at least 100% of the Fair Market Value of such Share on the date such Award is granted. Subject to the provisions of the Plan, Stock Unit Awards shall be subject to such terms, restrictions, conditions, vesting requirements and payment rules as the Committee may determine in its sole discretion.
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(2) Settlement of Stock Units. Unless provided otherwise by the Committee, settlement of Stock Units shall be made by issuance of Shares and shall occur within 60 days after a Participant’s termination of employment for any reason. The Committee may provide for Stock Units to be settled in cash (at the election of the Company or the Participant, as specified by the Committee) and to be made at such other times as it determines appropriate or as it permits a Participant to choose. The amount of Shares, or other settlement medium, to be so distributed may be increased by an interest factor or by dividend equivalents, which may be valued as if reinvested in Shares. Until a Stock Unit is settled, the number of Shares represented by a Stock Unit shall be subject to adjustment pursuant to Section 13 hereof.
(c) Term. Except as otherwise provided herein, the term of any Award of Performance Shares, Stock Units or Other Stock-Based Awards shall be set by the Committee in its discretion.
(d) Exercise or Purchase Price. The Committee may establish the exercise or purchase price, if any, of any Award of Performance Shares, Stock Units or Other Stock-Based Awards;provided, however, that such price shall not be less than the par value of a Share on the date of grant, unless otherwise permitted by applicable state law.
(e) Exercise Upon Termination of Employment. An Award of Performance Shares, Stock Units or Other Stock-Based Awards shall only be exercisable or payable while the Participant is an Employee;provided, however, that the Committee in its sole and absolute discretion may provide that an Award of Performance Shares, Stock Units or Other Stock-Based Awards may be exercised or paid subsequent to a termination of employment, as applicable, or following a Change of Ownership of the Company, or because of the Participant’s retirement, death or Disability, or otherwise;provided, further, that any such provision with respect to Performance Shares or Stock Units shall be subject to the requirements of Section 162(m) of the Code that apply to Qualified Performance-Based Compensation, where applicable for Company deductibility purposes.
(f) Form of Payment. Payments with respect to any Awards granted under this Section 10 shall be made in cash, in Shares or a combination of both, as determined by the Committee.
(g) Award Agreement. All Awards under this Section 10 shall be subject to such additional terms and conditions as determined by the Committee and shall be evidenced by an Award Agreement.
Section 11.Performance-Based Awards
(a) Purpose. The purpose of this Section 11 is to provide the Committee the ability to qualify Awards other than Options and that are granted pursuant to Sections 6, 8, 9 and 10 hereof as Performance-Based Awards. If the Committee, in its discretion, decides to grant a Performance-Based Award to a Covered Employee, the provisions of this Section 11 shall control over any contrary provision contained in Section 6, 8, 9 or 10 hereof;provided, however, that the Committee may in its discretion grant Awards to Covered Employees that are based on Performance Criteria or Performance Goals but that do not satisfy the requirements of this Section 11.
(b) Applicability. This Section 11 shall apply only to those Covered Employees selected by the Committee to receive Performance-Based Awards. The designation of a Covered Employee as a Participant for a Performance Period shall not in any manner entitle the Participant to receive an Award for the period. Moreover, designation of a Covered Employee as a Participant for a particular Performance Period shall not require designation of such Covered Employee as a Participant in any subsequent Performance Period and designation of one
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Covered Employee as a Participant shall not require designation of any other Covered Employees as a Participant in such period or in any other period.
(c) Procedures with Respect to Performance-Based Awards. To the extent necessary to comply with the Qualified Performance-Based Compensation requirements of Section 162(m)(4)(C) of the Code, with respect to any Award granted under Section 6, 8, 9 or 10 hereof which may be granted to one or more Covered Employees, no later than ninety (90) days following the commencement of any fiscal year in question or any other designated fiscal period or period of service (or such other time as may be required or permitted by Section 162(m) of the Code), the Committee shall, in writing, (1) designate one or more Covered Employees, (2) select the Performance Criteria applicable to the Performance Period, (3) establish the Performance Goals, and amounts of such Awards, as applicable, which may be earned for such Performance Period, and (4) specify the relationship between Performance Criteria and the Performance Goals and the amounts of such Awards, as applicable, to be earned by each Covered Employee for such Performance Period. Following the completion of each Performance Period, the Committee shall certify in writing whether the applicable Performance Goals have been achieved for such Performance Period. In determining the amount earned by a Covered Employee, the Committee shall have the right to reduce or eliminate (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the Performance Period.
(d) Payment of Performance-Based Awards. Unless otherwise provided in the applicable Award Agreement, a Covered Employee must be employed by the Company or a Subsidiary on the day a Performance-Based Award for such Performance Period is paid to the Covered Employee. Furthermore, a Covered Employee shall be eligible to receive payment pursuant to a Performance-Based Award for a Performance Period only if the Performance Goals for such period are achieved. In determining the amount earned under a Performance-Based Award, the Committee may reduce or eliminate the amount of the Performance-Based Award earned for the Performance Period, if in its sole and absolute discretion, such reduction or elimination is appropriate.
(e) Additional Limitations. Notwithstanding any other provision of the Plan, any Award which is granted to a Covered Employee and is intended to constitute Qualified Performance-Based Compensation shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as Qualified Performance-Based Compensation, and the Plan shall be deemed amended to the extent necessary to conform to such requirements.
Section 12. Provisions Applicable to Awards.
(a) Stand-Alone and Tandem Awards. Awards granted pursuant to the Plan may, in the discretion of the Committee, be granted either alone, in addition to, or in tandem with, any other Award granted pursuant to the Plan. Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards.
(b) Beneficiaries. Notwithstanding Section 15(b) hereof, a Participant may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant’s death. A beneficiary, legal guardian, legal representative, or other person claiming any rights pursuant to the Plan is subject to all
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terms and conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If no beneficiary has been designated or survives the Participant, payment shall be made to the person entitled thereto pursuant to the Participant’s will or the laws of descent and distribution. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Committee.
Section 13. Changes in Capital Structure.
(a) Adjustments.
(1) In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off, recapitalization or other distribution (other than normal cash dividends) of Company assets to stockholders, or any other change affecting the Shares or the price of the Shares, the Committee shall make such proportionate adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such change with respect to (i) the aggregate number and kind of shares that may be issued under the Plan (including, but not limited to, adjustments of the limitations in Section 4(a) and Section 4(c) hereof; (ii) the terms and conditions of any outstanding Awards (including, without limitation, any applicable performance targets or criteria with respect thereto); and (iii) the grant or exercise price per Share for any outstanding Awards under the Plan. Any adjustment affecting an Award intended as Qualified Performance-Based Compensation shall be made consistent with the requirements of Section 162(m) of the Code.
(2) In the event of any transaction or event described in this Section 13 or any unusual or nonrecurring transactions or events affecting the Company, any Subsidiary, any affiliate of the Company, or the financial statements of the Company or any Subsidiary or affiliate, or of changes in applicable laws, regulations or accounting principles, the Committee, in its sole and absolute discretion, and on such terms and conditions as it deems appropriate, either by the terms of the Award or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Participant’s request, is hereby authorized to take any one or more of the following actions whenever the Committee determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any Award under the Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles:
(i) To provide for either (A) termination of any such Award in exchange for an amount of cash, if any, equal to the amount that would have been attained upon the exercise of such Award or realization of the Participant’s rights (and, for the avoidance of doubt, if as of the date of the occurrence of the transaction or event described in this Section 13 the Committee determines in good faith that no amount would have been attained upon the exercise of such Award or realization of the Participant’s rights, then such Award may be terminated by the Company without payment) or (B) the replacement of such Award with other rights or property selected by the Committee in its sole discretion;
(ii) To provide that such Award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices;
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(iii) To make adjustments in the number and type of Shares (or other securities or property) subject to outstanding Awards, and in the number and kind of outstanding Restricted Stock, Performance Shares or Stock Units and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding options, rights and awards and options, rights and awards which may be granted in the future;
(iv) To provide that such Award shall be exercisable or payable or fully vested with respect to all Shares covered thereby, notwithstanding anything to the contrary in the Plan or the applicable Award Agreement; and
(v) To provide that the Award cannot vest, be exercised or become payable after such event.
(b) Acceleration Upon a Change of Ownership. Notwithstanding Section 13(a) above, and except as may otherwise be provided in any applicable Award Agreement or other written agreement entered into between the Company and a Participant, if a Change of Ownership occurs and a Participant’s Awards are not converted, assumed, or replaced by a successor entity, then immediately prior to the Change of Ownership such Awards shall become fully exercisable and all forfeiture restrictions on such Awards shall lapse. Upon, or in anticipation of, a Change of Ownership, the Committee may cause any and all Awards outstanding hereunder to terminate at a specific time in the future, including but not limited to the date of such Change of Ownership, and shall give each Participant the right to exercise such Awards during a period of time as the Committee, in its sole and absolute discretion, shall determine;provided, however, that the Committee may not extend the original exercise periods for Options or Stock Appreciation Rights if such extension would cause such Options or Stock Appreciation Rights to constitute non-qualified deferred compensation subject to Section 409A of the Code. In the event that the terms of any agreement between the Company or any Subsidiary or affiliate of the Company and a Participant contains provisions that conflict with and are more restrictive than the provisions of this Section 13(b), this Section 13(b) shall prevail and control and the more restrictive terms of such agreement (and only such terms) shall be of no force or effect.
(c) No Other Rights. Except as expressly provided in the Plan, no Participant shall have any rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend, any increase or decrease in the number of shares of stock of any class or any dissolution, liquidation, merger, or consolidation of the Company or any other corporation. Except as expressly provided in the Plan or pursuant to action of the Committee under the Plan, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of Shares subject to an Award or the grant or exercise price of any Award.
Section 14. Amendment and Termination.
(a) Amendments to the Plan. Subject to Section 15(s) hereof, with the approval of the Board, at any time and from time to time, the Committee may terminate, amend or modify the Plan;provided, however, that (1) to the extent necessary and desirable to comply with any applicable law, regulation, or securities exchange rule, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required, and (2) stockholder approval is required for any amendment to the Plan that (i) increases the number of shares available under the Plan (other than any adjustment as provided by Sec-
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tion 13 hereof), (ii) permits the Committee to grant Options with an exercise price that is below Fair Market Value on the date of grant, (iii) permits the Committee to extend the exercise period for an Option beyond ten years from the date of grant, or (iv) expands the class of persons who are eligible to participate in the Plan. Notwithstanding any provision in this Plan to the contrary, no Option may be amended to reduce the per Share exercise price of the Shares subject to such Option below the per Share exercise price as of the date the Option is granted and, except as permitted by Section 13 hereof, no Option may be granted in exchange for, or in connection with, the cancellation or surrender of an Option having a higher per Share exercise price.
(b) Amendments to Awards. Except with respect to amendments made pursuant to Section 15(s) hereof, no termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted pursuant to the Plan without the prior written consent of the Participant.
(c) Cancellation. Any provision of this Plan or any Award Agreement to the contrary notwithstanding, the Committee may cause any Award granted hereunder to be canceled in consideration of a cash payment or alternative Award made to the holder of such canceled Award equal in value to the Fair Market Value of such canceled Award;provided, however, that no Option may be amended to reduce the per Share exercise price of the Shares subject to such Option below the per Share exercise price as of the date the Option is granted and, except as permitted by Section 13 hereof, no Option may be granted in exchange for, or in connection with, the cancellation or surrender of an Option having a higher per Share exercise price.
Section 15. General Provision
(a) Dividend Equivalents. In the sole and complete discretion of the Committee, any Award (other than Award made as an Option or a Stock Appreciation Right) may provide the Participant with dividends or dividend equivalents, payable in cash, Shares, other securities or other property on a current or deferred basis.
(b) Nontransferability. No Award shall be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant, except by will or the laws of descent and distribution and except by gift or a domestic relations order to members of the Participant’s family, or trusts or other entities whose beneficiaries or beneficial owners are the Participant or members of the Participant’s family, without approval of the stockholders of the Company.
(c) No Rights to Awards. Except as may be provided in an Employment Agreement, no Eligible Individual or other person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Employees, Participants, or holders or beneficiaries of Awards. The terms and conditions of Awards need not be the same with respect to each recipient.
(d) Share Certificates; Book Entry Procedures.
(1) Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any certificates evidencing Shares pursuant to the exercise of any Award, unless and until the Board has determined, with advice of counsel, that the issuance and delivery of such certificates is in compliance with all applicable laws, regulations of governmental authorities and, if applicable, the requirements of any securities exchange on which the Shares are listed or traded. All Share certificates delivered pursuant to the Plan are subject to any stop-transfer orders and other
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restrictions as the Committee deems necessary or advisable to comply with federal, state, or foreign jurisdiction, securities or other laws, rules and regulations and the rules of any securities exchange or automated quotation system on which the Shares are listed, quoted, or traded. The Committee may place legends on any Share certificate to reference restrictions applicable to the Shares. In addition to the terms and conditions provided herein, the Committee may require that a Participant make such reasonable covenants, agreements, and representations, or do or refrain from such acts, as the Committee, in its discretion, deems advisable in order to comply with any such laws, regulations, or requirements. The Committee shall have the right to require any Participant to comply with any timing or other restrictions with respect to the settlement or exercise of any Award, including a window-period limitation, as may be imposed in the discretion of the Committee.
(2) Notwithstanding any other provision of the Plan, unless otherwise determined by the Committee or required by any applicable law, rule or regulation, the Company shall not deliver to any Participant certificates evidencing Shares issued in connection with any Award and instead such Shares shall be recorded in the books of the Company (or, as applicable, its transfer agent or stock plan administrator).
(e) Withholding. The Company or any Subsidiary shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local and foreign taxes (including the Participant’s employment tax obligations) required by law to be withheld with respect to any taxable event concerning a Participant arising as a result of this Plan. The Committee may in its discretion and in satisfaction of the foregoing requirement allow a Participant to elect to have the Company withhold Shares otherwise issuable under an Award (or allow the return of Shares) having a Fair Market Value equal to the sums required to be withheld. Notwithstanding any other provision of the Plan, the number of Shares which may be withheld with respect to the issuance, vesting, exercise or payment of any Award (or which may be repurchased from the Participant of such Award within six months (or such other period as may be determined by the Committee) after such Shares were acquired by the Participant from the Company) in order to satisfy the Participant’s federal, state, local and foreign income and payroll tax liabilities with respect to the issuance, vesting, exercise or payment of the Award shall be limited to the number of Shares which have a Fair Market Value on the date of withholding or repurchase equal to the aggregate amount of such liabilities based on the minimum statutory withholding rates for federal, state, local and foreign income tax and payroll tax purposes that are applicable to such supplemental taxable income.
(f) Award Agreements. Each Award hereunder shall be evidenced by an Award Agreement which shall be delivered to the Participant and shall specify the terms and conditions of the Award and any rules applicable thereto, including but not limited to the effect on such Award of the death, Disability, retirement or other termination of employment of a Participant, and the Company’s authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind an Award.
(g) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Subsidiary from adopting or continuing in effect other compensation arrangements, which may, but need not, provide for the grant of bonuses, options, restricted stock, Shares and other types of Awards provided for hereunder (subject to stockholder approval if such approval is required), and such arrangements may be either generally applicable or applicable only in specific cases.
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(h) No Right to Employment. Nothing in the Plan or any Award shall be construed as giving a Participant the right to be retained in the employ of the Company or any Subsidiary. Further, the Company or a Subsidiary may at any time dismiss a Participant from employment, with or without cause, free from any liability or any claim under the Plan.
(i) No Rights as Stockholder. Subject to the provisions of the applicable Award, no Participant or holder or beneficiary of any Award shall have any rights as a stockholder with respect to any Shares to be distributed under the Plan until he or she has become the record or beneficial owner of such Shares. Notwithstanding the foregoing, in connection with each grant of Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Participant shall not be entitled to the rights of a stockholder in respect of such Restricted Stock.
(j) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan and any Award Agreement shall be determined in accordance with the laws of the State of California, except to the extent that the General Corporation Law of the State of Delaware is applicable.
(k) Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect.
(l) Other Laws. The obligation of the Company to make payment of awards in Shares or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by government agencies as may be required. The Company may refuse to issue or transfer any Shares or other consideration under an Award if, acting in its sole discretion, it determines that the issuance or transfer of such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary. Without limiting the generality of the foregoing, no Award granted hereunder shall be construed as an offer to sell securities of the Company, and no such offer shall be outstanding, unless and until the Committee in its sole discretion has determined that any such offer, if made, would be in compliance with all applicable requirements of the U.S. federal securities laws and any other laws to which such offer, if made, would be subject. The Company shall be under no obligation to register pursuant to the Securities Act any of the Shares paid pursuant to the Plan. If Shares paid pursuant to the Plan may in certain circumstances be exempt from registration pursuant to the Securities Act, the Company may restrict the transfer of such shares in such manner as it deems advisable to ensure the availability of any such exemption.
(m) No Trust or Fund Created. The Plan is intended to be an “unfunded” plan for incentive compensation. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Subsidiary or any
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affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Subsidiary pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Subsidiary.
(n) Indemnification. To the extent allowable pursuant to applicable law, each member of the Committee and each member of the Board shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action or failure to act pursuant to the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such action, suit, or proceeding against him or her;provided, however, that he or she gives the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled pursuant to the Company’s Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.
(o) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash shall be paid in lieu of any fractional Shares or whether such fractional Shares shall be eliminated by rounding up or down as it deems appropriate.
(p) Expenses. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries.
(q) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof and, in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
(r) Limitations Applicable to Section 16 Persons. Notwithstanding any other provision of the Plan, the Plan, and any Award granted or awarded to any Participant who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, the Plan and Awards granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.
(s) Section 409A. To the extent that the Committee determines that any Award granted under the Plan is subject to Section 409A of the Code, the Award Agreement evidencing such Award shall incorporate the terms and conditions required by Section 409A of the Code. To the extent applicable, the Plan and Award Agreements shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued or amended after the Effective Date. Notwithstanding any provision of the Plan to the contrary, in the event that following the Effective Date the Committee determines that any Award may be subject to Section 409A of the Code and related Department of Treasury guidance (including such Department of Treasury guidance as may be issued after the Effective Date), the Committee may adopt such
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amendments to the Plan and the applicable Award Agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Committee determines are necessary or appropriate to (1) exempt the Award from Section 409A of the Code and/or preserve the intended tax treatment of the benefits provided with respect to the Award, or (2) comply with the requirements of Section 409A of the Code and related Department of Treasury guidance.
Section 16. Term of the Plan.
(a) Effective Date. The Plan shall become effective on the date the Plan is approved by the Company’s stockholders (the “Effective Date”). The Plan will be deemed to be approved by the stockholders if it receives the affirmative vote of the holders of a majority of the Shares of the Company present or represented and entitled to vote at a meeting duly held in accordance with the applicable provisions of the Company’s Bylaws. If the stockholders of the Company do not approve the Plan as amended and restated on February 9, 2006, the KB Home 1999 Incentive Plan shall continue in full force and effect in accordance with its terms as in effect prior to this amendment and restatement.
(b) Expiration Date. The Plan will expire on, and no Option or Award shall be granted under the Plan after, April 2, 2009, or after such earlier date as the Committee may determine, in its sole discretion. Any Awards that are outstanding on April 2, 2009 shall remain in force according to the terms of the Plan and the applicable Award Agreement.
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10990 Wilshire Boulevard, Los Angeles, California 90024
kbhome.com / kbcasa.com
57
KB HOME10990 WILSHIRE BOULEVARDLOS ANGELES, CALIFORNIA 90024kbhome.com 888-KB-HOMES | | |
| | As part of KB Home’s commitment to sustainability and the responsible use of natural resources, this report has been printed on paper certified by the Forest Stewardship Council (FSC). This certification supports the development of responsible forest management worldwide by adhering to strict standards for paper sources. The wood in this paper comes from FSC-certified well-managed forests, company-controlled sources and/or recycled material. |
PROXY
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
APRIL 6, 20063, 2008
CONFIDENTIAL INSTRUCTIONS TO FIDELITY MANAGEMENT TRUST COMPANY
TRUSTEE FOR THE KB HOME 401(k) SAVINGS PLAN
The undersigned hereby appoints Bruce KaratzPROXY SOLICITED BY THE BOARD OF DIRECTORS
Receipt of proxy material for the above Annual Meeting is acknowledged. I instruct you to vote (in person or by proxy) all shares of Common Stock of KB Home (the “Company”) held by you for my account under the Company’s Amended and Charles F. Carroll,Restated 401(k) Savings Plan at the Company’s Annual Meeting of Stockholders to be held on April 3, 2008, and at all adjournments or postponements thereof, on the matters as indicated on the reverse side of this card. If this card is signed and returned, but no choice is specified, I instruct you to vote this proxy FOR Proposals 1 and 2 and AGAINST Proposals 3 and 4, if properly presented at the Annual Meeting, and on such other business as may come before the Annual Meeting in accordance with the judgment of Jeffrey T. Mezger and Wendy C. Shiba, and each of them, as proxies with full power of substitution and revocation, to vote all of the shares of KB Home Common Stock the undersigned is entitled to vote at the KB Home Annual Meeting of Stockholders to be held on April 6, 2006, or at any adjournment or postponement thereof, upon the Proposals set forth on the reverse side of this Proxy Card and described in the accompanying Proxy Statement, and upon such other business as may properly come before the meeting or any adjournment or postponement thereof.revocation.
PLEASE MARK, DATE AND SIGN THESE INSTRUCTIONS AND RETURN THEM PROMPTLY, OR SUBMIT THESE INSTRUCTIONS BY TELEPHONE OR THE INTERNET AS INDICATED ON THE REVERSE SIDE OF THIS CARD, EVEN IF YOU PLAN TO ATTEND THE ANNUAL MEETING.
(Continued, and to be marked, dated and signed, on the other side)
Address Change/Comments(Mark (Mark the corresponding box on the reverse side)
p5Detach here from proxy voting cardp5
ANNUAL MEETING OF STOCKHOLDERS APRIL 3, 2008
Dear Fellow Employee:
As a reminder, your vote and your investment in KB Home are very important. If you intend to vote by mail, please complete and return your Confidential Instruction Card for tabulation by no later than March 29, 2008 to ensure that your vote is counted.
Jeffrey T. Mezger
President and Chief Executive Officer
[Note: This proxy card is printed with a green color band]
| | | | | |
| | | Mark here | | |
| | for address | |
| | change or | |
| | comments. | | o |
| | | PLEASE SEE REVERSE SIDE |
| | | | | |
| YOUR DIRECTORS RECOMMEND A VOTE“FOR” | | | | |
| | | | | | | | FOR | | WITHHOLD AUTHORITY |
| | | | | | | | (EXCEPT AS MARKED | | TO VOTE FOR |
YOUR DIRECTORS RECOMMEND A VOTE"FOR" | | TO THE CONTRARY) | | NOMINEES LISTED |
| | | | | | | | | | |
| 1. | | ELECTION OF DIRECTORS | | | | |
| | NOMINEES IN CLASS II: | | |
| | | | 01 BRUCE KARATZ | | 03 MELISSA LORA |
| | | | 02 KENNETH M. JASTROW, II | | 04 MICHAEL G. MCCAFFERY |
TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THE NOMINEE’S NAME.
| | | | | | | | | |
| | | | | FOR | | AGAINST | | ABSTAIN |
| 01 | | STEPHEN F. BOLLENBACH | | o | | o | | o |
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2.02 | | PROPOSAL TO AMEND THE AMENDED CERTIFICATE OF INCORPORATION OF KB HOME TO DECREASE THE NUMBER OF AUTHORIZED SHARES OF KB HOME COMMON STOCK FROM 300 MILLION SHARES TO 290 MILLION SHARES.TIMOTHY W. FINCHEM | | o | | o | | o |
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| 03 | | J. TERRENCE LANNI | | o | | o | | o |
| | | | | | | | | |
| | | | | FOR | | AGAINST | | ABSTAIN |
| 2. | | PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS KB HOME’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING NOVEMBER 30, 2008. | | o | | o | | o |
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3.YOUR DIRECTORS RECOMMEND A VOTE“AGAINST” | | PROPOSAL TO APPROVE THE AMENDED AND RESTATED KB HOME 1999 INCENTIVE PLAN. | | | | | | |
| | | | | | | | | |
| | | | | FOR | | AGAINST | | ABSTAIN |
| 3. | | STOCKHOLDER PROPOSAL RELATING TO EXECUTIVE COMPENSATION | | o | | o | | |
4. | | PROPOSAL TO RATIFY ERNST & YOUNG LLP AS KB HOME’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING NOVEMBER 30, 2006. | | | | | | |
| | | | You may consent to receive all future annual meeting materials and stockholder communications electronically. Enroll at www.melloninvester.com/ISD for secure online access to your proxy materials, statements, tax documents and other stockholder correspondence.
This proxy, when properly executed, will be voted in the manner directed herein by the undersigned stockholder. If no direction is made, this proxy will be voted FOR proposals 1, 2, 3 and 4. |
| | | o |
| | | | | FOR | | AGAINST | | ABSTAIN |
| 4. | | STOCKHOLDER PROPOSAL RELATING TO STOCKHOLDER APPROVAL OF SEVERANCE AGREEMENTS. | | o | | o | | o |
This proxy, when properly executed, will be voted in the manner directed herein by the undersigned. If no direction is made, this proxy will be voted FOR proposals 1 and 2, and AGAINST proposals 3 and 4, if properly presented at the annual meeting.
