FORESTAR GROUP INC.
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the Fiscal Year Ended December 31, 2009 | ||
|
or
|
||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the Transition Period From to | ||
Commission File Number:
001-33662
Forestar Group Inc.
(Exact Name of Registrant as
Specified in Its Charter)
| Delaware | 26-1336998 | |
| (State or Other Jurisdiction of | (I.R.S. Employer | |
| Incorporation or Organization) | Identification No.) |
6300 Bee Cave Road
Building Two, Suite 500
Austin, Texas 78746-5149
Building Two, Suite 500
Austin, Texas 78746-5149
(Address of Principal Executive
Offices, including Zip Code)
Registrant’s telephone number, including area code:
(512) 433-5200
Securities registered pursuant to Section 12(b) of the
Act:
|
Title of Each Class
|
Name of Each Exchange On Which Registered
|
|
|
Common Stock, par value $1.00 per share
Preferred Share Purchase Rights |
New York Stock Exchange
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes
o
No
þ
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or 15(d) of the Act.
Yes
o
No
þ
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2
of the
Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell
company (as defined in
Rule 12b-2
of the Exchange Act).
Yes
o
No
þ
The aggregate market value of the Common Stock held by
non-affiliates of the registrant, based on the closing sales
price of the Common Stock on the New York Stock Exchange on
June 30, 2009, was approximately $369 million. For
purposes of this computation, all officers, directors, and ten
percent beneficial owners of the registrant (as indicated in
Item 12) are deemed to be affiliates. Such
determination should not be deemed an admission that such
directors, officers, or ten percent beneficial owners are, in
fact, affiliates of the registrant.
As of February 25, 2010, there were 36,391,467 shares
of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Company’s definitive proxy
statement for the 2010 annual meeting of stockholders are
incorporated by reference into Part III of this
Form 10-K.
TABLE OF
CONTENTS
i
Table of Contents
| Item 1. | Business. |
Overview
Forestar Group Inc. is committed to maximizing long-term
shareholder value. We own directly or through ventures over
251,000 acres of real estate located in nine states and 12
markets and about 620,000 net acres of oil and gas mineral
interests. In 2009, we generated revenues of $146 million
and net income of $59 million. Unless the context otherwise
requires, references to “we,” “us,”
“our” and “Forestar” mean Forestar Group
Inc. and its consolidated subsidiaries. Unless otherwise
indicated, information is presented as of December 31,
2009, and references to acreage owned includes 74,000 acres
classified as assets held for sale in accordance with our
near-term strategic initiatives and all acres owned by ventures
regardless of our ownership interest in a venture.
Prior to December 28, 2007, we were a wholly-owned
subsidiary of Temple-Inland Inc. On December 28, 2007,
Temple-Inland distributed all of the issued and outstanding
shares of our common stock to its shareholders in a transaction
commonly referred to as a spin-off.
We manage our operations through three business segments:
| • | Real estate, | |
| • | Mineral resources, and | |
| • | Fiber resources. |
A summary of business segment assets, including assets owned
through ventures, follows:
Our real estate segment provided 64 percent of our 2009
consolidated revenues. We secure entitlements and develop
infrastructure, primarily for single-family residential and
mixed-use communities. We own about 188,000 acres in a
broad area around Atlanta, Georgia, with the balance located
primarily in Texas. We invest in projects principally in our
strategic growth corridors, regions across the southern half of
the United States
1
Table of Contents
that possess key demographic and growth characteristics that we
believe make them attractive for long-term real estate
investment.
We have 21 real estate projects representing over
31,000 acres in the entitlement process, principally in
Georgia. We also have 75 entitled, developed or under
development projects in seven states and 11 markets encompassing
over 16,000 remaining acres, comprised of land planned for
almost 30,000 residential lots and over 2,300 commercial acres,
principally in the major markets of Texas. We own and manage
projects both directly and through ventures. We sell land at any
point within the value chain when additional time required for
entitlement or investment in development will not meet our
return criteria. In 2009, we sold over 18,000 acres of
undeveloped land through our retail land sales program at an
average price of about $2,550 per acre.
Our mineral resources segment provided 25 percent of our
2009 consolidated revenues. We promote the exploitation,
exploration and development of oil and gas on our
620,000 net mineral acres. The four principal areas of
ownership are Texas, Louisiana, Alabama and Georgia. The
majority of our revenues are from lease bonus payments and oil
and gas royalties from over 470 producing wells owned and
operated by third parties in Texas and Louisiana. Historically,
these operations require low capital investment and are low risk.
Our fiber resources segment provided 11 percent of our 2009
consolidated revenues. We sell wood fiber from our land,
primarily in Georgia, and lease land for recreational uses. We
have about 227,000 acres of timber on our land and about
18,000 acres of timber under lease.
Our real estate origins date back to the 1955 incorporation of
Lumbermen’s Investment Corporation, which in 2006 changed
its name to Forestar (USA) Real Estate Group Inc. We have a
decades-long legacy of residential and commercial real estate
development operations, primarily in Texas. Our mineral
resources origins date back to the mid-1940s when we started
leasing our oil and gas mineral interests to third-party
exploration and production companies. In 2006, Temple-Inland
began reporting Forestar Real Estate Group as a separate
business segment. On December 28, 2007, Temple-Inland
distributed all of the issued and outstanding shares of our
common stock to the holders of record of Temple-Inland common
stock as of the close of business on December 14, 2007,
which we will refer to in this Annual Report on
Form 10-K
as the “spin-off” or the “separation.”
Leveraging years of real estate, oil and gas, and other natural
resources experience, we believe our management team brings
extensive knowledge and expertise which better positions us to
maximize long-term value for our shareholders.
Strategy
Our strategy is to maximize and grow long-term shareholder value
through:
| • | Entitlement and development of real estate; | |
| • | Realization of value from minerals, water and fiber resources; and | |
| • | Strategic and disciplined investment in our business. |
We are focused on maximizing real estate values through the
entitlement and development of strategically-located residential
and mixed-use communities. We secure entitlements by delivering
thoughtful plans and balanced solutions that meet the needs of
the communities where we operate. Moving land through the
entitlement and development process creates significant real
estate value. Residential development activities target lot
sales to national and regional home builders who build quality
products and have strong and effective marketing and sales
programs. The lots we deliver in the majority of our communities
are for mid-priced homes, predominantly in the first and second
move-up
categories. We also actively market and sell undeveloped land.
Commercial tracts are either sold to or ventured with commercial
developers that specialize in the construction and operation of
income-producing properties.
We seek to maximize value from our oil and gas mineral interests
by increasing the acreage leased, lease rates, royalty interests
and additional participation in production in the form of
non-operating working
2
Table of Contents
interests. In addition, we realize value from our undeveloped
land by selling fiber and by managing it for future real estate
development and conservation uses. We also generate cash flow
and create additional value through recreational leases.
We are committed to disciplined investment in our business.
Approximately 70 of our real estate projects were acquired in
the open market, with the remainder coming from the entitlement
efforts associated with our low-basis lands principally located
in and around Atlanta, Georgia. In 2009, given the continued
decline in residential and commercial construction activity, we
did not acquire additional real estate projects.
Our portfolio of assets in combination with our strategy,
management expertise, stewardship and reinvestment in our
business, position Forestar to maximize and grow long-term value
for shareholders.
Strategic
Initiatives
In first quarter 2009, we announced our near-term strategic
initiatives to enhance shareholder value by generating
significant cash flow, principally from the sale of about
175,000 acres of higher and better use (HBU) timberland,
and reducing debt by $150 million.
In 2009, we sold about 95,000 acres of timber and
timberland in Georgia and Alabama for approximately
$160 million generating net cash proceeds of
$154 million, which were principally used to reduce debt
and pay taxes, resulting in a gain on sale of assets of
$104 million.
At year-end 2009, assets held for sale include 74,000 acres
of undeveloped land that is actively being marketed for sale in
accordance with our strategic initiatives.
2009
Highlights
In addition to the strategic initiative land sales described
above, activities during 2009 include:
| • | Receiving $24.9 million in reimbursements from special public improvement districts; | |
| • | Leasing over 25,800 net mineral acres to oil and gas companies for exploration and production activities; | |
| • | Investing approximately $19 million in the resort and real estate development at our Cibolo Canyons mixed-use project located in San Antonio, Texas. Forestar will receive proceeds related to hotel occupancy and sales revenues through 2034 from the 1,002 room JW Marriott ® San Antonio Hill Country Resort & Spa, which opened January 22, 2010; and | |
| • | Reducing total debt by over 35 percent or $121 million since year-end 2008. |
Real
Estate
In our real estate segment, we conduct a wide array of project
planning and management activities related to the acquisition,
entitlement, development and sale of real estate, primarily
residential and mixed-use communities. We own and manage our
projects either directly or through ventures, which we use to
achieve a variety of business objectives, including more
effective capital deployment, risk management, and leveraging a
partner’s local market contacts and expertise.
We have real estate in nine states and 12 markets encompassing
over 251,000 acres, including about 188,000 acres
located in a broad area around Atlanta, Georgia, with the
balance located primarily in Texas. Our development projects are
principally located in the major markets of Texas.
3
Table of Contents
Our strategy for creating value in our real estate segment is to
move acres up the value chain by moving land located in growth
corridors but not yet entitled, through the entitlement process,
and into development. The chart below depicts our real estate
value chain, including real estate owned through ventures.
We have nearly 204,000 undeveloped acres located in the path of
population growth. As markets grow and mature, we intend to
secure the necessary entitlements, the timing for which varies
depending upon the size, location, use and complexity of a
project. We have over 31,000 acres in the entitlement
process, which includes obtaining zoning and access to water,
sewer and roads. Additional entitlements, such as flexible land
use provisions, annexation, and the creation of local financing
districts, provide us the right to reimbursement of major
infrastructure costs and generate additional value for our
business. We have over 16,000 acres entitled, developed and
under development, comprised of land planned for almost 30,000
residential lots and over 2,300 commercial acres. We use return
criteria, which include return on cost, internal rate of return,
and cash multiple, when determining whether to invest initially
or make additional investment in a project. When investment in
development meets our return criteria, we will initiate the
development process with subsequent sale of lots to homebuilders
or, for commercial parcels, sale to or venture with commercial
developers. We sell land at any point within the value chain
when additional time required for entitlement or investment in
development will not meet our return criteria. In 2009, we sold
over 18,000 acres of undeveloped land through our retail
land sales program at an average price of about $2,550 per acre.
4
Table of Contents
A summary of our real estate projects in the entitlement
process
(a)
at
year-end 2009 follows:
|
Project
|
||||||||
|
Project
|
County
|
Market
|
Acres
(b)
|
|||||
|
California
|
||||||||
|
Hidden Creek Estates
|
Los Angeles | Los Angeles | 700 | |||||
|
Terrace at Hidden Hills
|
Los Angeles | Los Angeles | 30 | |||||
|
Georgia
|
||||||||
|
Ball Ground
|
Cherokee | Atlanta | 500 | |||||
|
Burt Creek
|
Dawson | Atlanta | 970 | |||||
|
Crossing
|
Coweta | Atlanta | 230 | |||||
|
Dallas Highway
|
Haralson | Atlanta | 1,060 | |||||
|
Fincher Road
|
Cherokee | Atlanta | 3,890 | |||||
|
Fox Hall
|
Coweta | Atlanta | 960 | |||||
|
Garland Mountain
|
Cherokee/Bartow | Atlanta | 350 | |||||
|
Home Place
|
Coweta | Atlanta | 1,510 | |||||
|
Jackson Park
|
Jackson | Atlanta | 700 | |||||
|
Martin’s Bridge
|
Banks | Atlanta | 970 | |||||
|
Mill Creek
|
Coweta | Atlanta | 770 | |||||
|
Serenity
|
Carroll | Atlanta | 440 | |||||
|
Waleska
|
Cherokee | Atlanta | 150 | |||||
|
Wolf Creek
|
Carroll/Douglas | Atlanta | 12,230 | |||||
|
Yellow Creek
|
Cherokee | Atlanta | 1,060 | |||||
|
Texas
|
||||||||
|
Lake Houston
|
Harris/Liberty | Houston | 3,700 | |||||
|
San Jacinto
|
Montgomery | Houston | 150 | |||||
|
Entrada
(c)
|
Travis | Austin | 240 | |||||
|
Woodlake
Village
(c)
|
Montgomery | Houston | 840 | |||||
|
Total
|
31,450 | |||||||
| (a) | A project is deemed to be in the entitlement process when customary steps necessary for the preparation and submittal of an application, like conducting pre-application meetings or similar discussions with governmental officials, have commenced, or an application has been filed. Projects listed may have significant steps remaining, and there is no assurance that entitlements ultimately will be received. | |
| (b) | Project acres, which are the total for the project regardless of our ownership interest, are approximate. The actual number of acres entitled may vary. | |
| (c) | We own a 50 percent interest in these projects. |
Products
The majority of our projects are single-family residential and
mixed-use communities. In some cases, commercial land uses
within a project enhance the desirability of the community by
providing convenient locations for resident support services. We
sometimes undertake projects consisting exclusively of
commercial tracts and, on occasion, we invest in a venture to
develop a single commercial project.
We develop lots for single-family homes and commercial tracts
that are substantially ready for construction of buildings for
retail, multifamily, office, industrial or other commercial
uses. We sell residential lots primarily to national and
regional homebuilders and, to a lesser extent, local
homebuilders. We have 75 entitled, developed or under
development projects in seven states and 11 markets, principally
in the major markets of Texas, encompassing over 16,000
remaining acres, comprised of land planned for almost 30,000
residential lots and over 2,300 commercial acres. We focus our
lot sales on the first and second
move-up
5
Table of Contents
primary housing categories. First and second
move-up
segments are homes priced above entry-level products yet below
the high-end and custom home segments. We reduced investment in
real estate development activity in 2009 as we focused
development on markets and products which continued to generate
sales activity. We also actively market and sell undeveloped
land.
Commercial tracts are either sold to or ventured with commercial
developers that specialize in the construction and operation of
income-producing properties, such as apartments, retail centers,
or office buildings. We sell land designated for commercial uses
to national retailers and to regional and local commercial
developers. We have over 2,300 acres of entitled land
designated for commercial use.
One of our current significant mixed-use projects is Cibolo
Canyons in the San Antonio market area. Cibolo Canyons is a
2,100 acre mixed-use development planned to include
approximately 1,700 residential lots, of which 590 have been
sold as of year-end 2009 at an average price of $63,000 per lot.
The residential component will include not only traditional
single-family homes but also an active adult section and
condominiums. Our commercial component is planned to include
about 145 acres designated for multifamily and retail uses,
of which 64 acres have been sold as of year-end 2009. At
Cibolo Canyons is the JW
Marriott
®
San Antonio Hill Country Resort & Spa, a 1,002
room destination resort and two PGA
Tour
®
Tournament Players
Club
®
(TPC) golf courses designed by Pete Dye and Greg Norman. The
resort hotel began operations on January 22, 2010. We have
the right to receive from a legislatively created Special
Purpose Improvement District (SPID) 9 percent of hotel
occupancy revenues and 1.5 percent of other resort sales
revenues collected as taxes by the SPID through 2034 and to
reimbursement of certain infrastructure costs related to the
mixed-use development.
6
Table of Contents
A summary of activity within our projects in the development
process, which includes
entitled
(a)
,
developed and under development real estate projects, at
year-end 2009 follows:
| Residential Lots (c) | Commercial Acres (d) | |||||||||||||||||||||||
|
Lots Sold
|
Acres Sold
|
|||||||||||||||||||||||
|
Interest
|
Since
|
Lots
|
Since
|
Acres
|
||||||||||||||||||||
| Project | County | Market | Owned (b) | Inception | Remaining | Inception | Remaining | |||||||||||||||||
|
Projects we own
|
||||||||||||||||||||||||
|
California
|
||||||||||||||||||||||||
|
San Joaquin River
|
Contra Costa/ Sacramento | Oakland | 100% | — | — | — | 288 | |||||||||||||||||
|
Colorado
|
||||||||||||||||||||||||
|
Buffalo Highlands
|
Weld | Denver | 100% | — | 164 | — | — | |||||||||||||||||
|
Johnstown Farms
|
Weld | Denver | 100% | 115 | 493 | 2 | 8 | |||||||||||||||||
|
Pinery West
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Douglas | Denver | 100% | — | — | — | 115 | |||||||||||||||||
|
Stonebraker
|
Weld | Denver | 100% | — | 603 | — | 13 | |||||||||||||||||
|
Westlake Highlands
|
Jefferson | Denver | 100% | 6 | 15 | — | — | |||||||||||||||||
|
Texas
|
||||||||||||||||||||||||
|
Arrowhead Ranch
|
Hays | Austin | 100% | — | 232 | — | 6 | |||||||||||||||||
|
Caruth Lakes
|
Rockwall | Dallas/Fort Worth | 100% | 279 | 370 | — | — | |||||||||||||||||
|
Cibolo Canyons
|
Bexar | San Antonio | 100% | 590 | 1,157 | 64 | 81 | |||||||||||||||||
|
Harbor Lakes
|
Hood | Dallas/Fort Worth | 100% | 199 | 250 | — | 14 | |||||||||||||||||
|
Harbor Mist
|
Calhoun | Corpus Christi | 100% | — | 200 | — | — | |||||||||||||||||
|
Hunter’s Crossing
|
Bastrop | Austin | 100% | 322 | 169 | 38 | 68 | |||||||||||||||||
|
La Conterra
|
Williamson | Austin | 100% | 60 | 449 | — | 60 | |||||||||||||||||
|
Maxwell Creek
|
Collin | Dallas/Fort Worth | 100% | 672 | 339 | 10 | — | |||||||||||||||||
|
Oak Creek Estates
|
Comal | San Antonio | 100% | 67 | 581 | 13 | — | |||||||||||||||||
|
The Colony
|
Bastrop | Austin | 100% | 410 | 2,242 | 22 | 49 | |||||||||||||||||
|
The Gables at North Hill
|
Collin | Dallas/Fort Worth | 100% | 195 | 88 | — | — | |||||||||||||||||
|
The Preserve at Pecan Creek
|
Denton | Dallas/Fort Worth | 100% | 264 | 554 | — | 9 | |||||||||||||||||
|
The Ridge at Ribelin Ranch
|
Travis | Austin | 100% | — | — | 179 | 16 | |||||||||||||||||
|
Westside at Buttercup Creek
|
Williamson | Austin | 100% | 1,290 | 231 | 66 | — | |||||||||||||||||
|
Other projects (7)
|
Various | Various | 100% | 1,550 | 19 | 197 | 23 | |||||||||||||||||
|
Georgia
|
||||||||||||||||||||||||
|
Towne West
|
Bartow | Atlanta | 100% | — | 2,674 | — | 121 | |||||||||||||||||
|
Other projects (14)
|
Various | Atlanta | 100% | — | 2,934 | — | 705 | |||||||||||||||||
|
Missouri and Utah
|
||||||||||||||||||||||||
|
Other projects (2)
|
Various | Various | 100% | 443 | 321 | — | — | |||||||||||||||||
| 6,462 | 14,085 | 591 | 1,576 | |||||||||||||||||||||
|
Projects in entities we consolidate
|
||||||||||||||||||||||||
|
Texas
|
||||||||||||||||||||||||
|
City Park
|
Harris | Houston | 75% | 1,099 | 212 | 50 | 105 | |||||||||||||||||
|
Lantana
|
Denton | Dallas/Fort Worth | 55% | (e) | 498 | 1,802 | — | — | ||||||||||||||||
|
Light Farms
|
Collin | Dallas/Fort Worth | 65% | — | 2,517 | — | — | |||||||||||||||||
|
Stoney Creek
|
Dallas | Dallas/Fort Worth | 90% | 69 | 685 | — | — | |||||||||||||||||
|
Timber Creek
|
Collin | Dallas/Fort Worth | 88% | — | 614 | — | — | |||||||||||||||||
|
Other projects (5)
|
Various | Various | Various | 936 | 271 | 26 | 21 | |||||||||||||||||
| 2,602 | 6,101 | 76 | 126 | |||||||||||||||||||||
|
Total owned and consolidated
|
9,064 | 20,186 | 667 | 1,702 | ||||||||||||||||||||
|
Projects in ventures that we account for using the equity
method
|
||||||||||||||||||||||||
|
Georgia
|
||||||||||||||||||||||||
|
Seven Hills
|
Paulding | Atlanta | 50% | 634 | 446 | 26 | — | |||||||||||||||||
|
The Georgian
|
Paulding | Atlanta | 38% | 288 | 1,097 | — | — | |||||||||||||||||
|
Other projects (5)
|
Various | Atlanta | Various | 1,845 | 77 | 3 | — | |||||||||||||||||
|
Texas
|
||||||||||||||||||||||||
|
Bar C Ranch
|
Tarrant | Dallas/Fort Worth | 50% | 192 | 1,007 | — | — | |||||||||||||||||
|
Fannin Farms West
|
Tarrant | Dallas/Fort Worth | 50% | 279 | 101 | — | 15 | |||||||||||||||||
|
Lantana
|
Denton | Dallas/Fort Worth | Various | (e) | 1,436 | 34 | 14 | 75 | ||||||||||||||||
|
Long Meadow Farms
|
Fort Bend | Houston | 19% | 607 | 1,499 | 72 | 138 | |||||||||||||||||
|
Southern Trails
|
Brazoria | Houston | 40% | 372 | 655 | — | — | |||||||||||||||||
|
Stonewall Estates
|
Bexar | San Antonio | 25% | 220 | 161 | — | — | |||||||||||||||||
|
Summer Creek Ranch
|
Tarrant | Dallas/Fort Worth | 50% | 796 | 1,772 | — | 363 | |||||||||||||||||
|
Summer Lakes
|
Fort Bend | Houston | 50% | 325 | 798 | 56 | — | |||||||||||||||||
|
Village Park
|
Collin | Dallas/Fort Worth | 50% | 339 | 221 | 3 | 2 | |||||||||||||||||
|
Waterford Park
|
Fort Bend | Houston | 50% | — | 493 | — | 37 | |||||||||||||||||
|
Other projects (2)
|
Various | Various | Various | 296 | 228 | — | 15 | |||||||||||||||||
|
Florida
|
||||||||||||||||||||||||
|
Other projects (3)
|
Various | Tampa | Various | 473 | 372 | — | — | |||||||||||||||||
|
Total in ventures
|
8,102 | 8,961 | 174 | 645 | ||||||||||||||||||||
|
Combined total
|
17,166 | 29,147 | 841 | 2,347 | ||||||||||||||||||||
7
Table of Contents
| (a) | A project is deemed entitled when all major discretionary governmental land-use approvals have been received. Some projects may require additional permits and/or non-governmental authorizations for development. | |
| (b) | Interest owned reflects our net equity interest in the project, whether owned directly or indirectly. There are some projects that have multiple ownership structures within them. Accordingly, portions of these projects may appear as owned, consolidated or accounted for using the equity method. | |
| (c) | Lots are for the total project, regardless of our ownership interest. Lots remaining represent vacant developed lots, lots under development and future planned lots. | |
| (d) | Commercial acres are for the total project, regardless of our ownership interest, and are net developable acres, which may be fewer than the gross acres available in the project. | |
| (e) | The Lantana project consists of a series of 15 partnerships in which our voting interests range from 25 percent to 55 percent. We account for three of these partnerships using the equity method and we consolidate the remaining partnerships. |
A summary of our significant commercial and income producing
properties at year-end 2009 follows:
|
Interest
|
||||||||||||
|
Project
|
County | Market | Owned (a) | Type | Description | |||||||
|
Radisson Hotel
|
Travis | Austin | 100 | % | Hotel | 413 guest rooms and suites | ||||||
|
Palisades West
|
Travis | Austin | 25 | % | Office | 375,000 square feet | ||||||
|
Las Brisas
|
Williamson | Austin | 49 | % | Multi-Family | 414 unit luxury apartment | ||||||
| (a) | Interest owned reflects our net equity interest in the project, whether owned directly or indirectly. |
Markets
We target investments primarily in markets within our strategic
growth corridors, which we define as areas possessing favorable
growth characteristics for population, employment and household
formation. These markets are generally located across the
southern half of the U.S., and we believe they represent
attractive long-term real estate investment opportunities.
Demand for residential lots, single-family housing, and
commercial land is substantially influenced by the
aforementioned growth characteristics, as well as by immigration
and in-migration. Currently, most of our development projects
are located within the major metropolitan areas of Texas.
Our ten strategic growth corridors encompass 165,000 square
miles, or approximately 5 percent of the total land area in
the U.S. According to 2005 census data, 85 million
people, 29 percent of the U.S. total, reside in these
corridors. The population density in these growth corridors is
almost seven times the national average and is projected to grow
at nine times the national average between 2000 and 2030. During
that time, the corridors are projected to garner approximately
43 percent of the nation’s population growth and
38 percent of total employment growth. Estimated housing
demand from these ten growth corridors from 2000 to 2030 exceeds
23 million new homes.
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Forestar
Strategic Growth Corridors
Our strategy includes not only entitlement and development on
our own lands but also growth through strategic and disciplined
investment in acquisitions that meet our investment criteria. We
did not acquire any new projects in 2009. We continually monitor
the markets in our strategic growth corridors for opportunities
to purchase developed lots and land at prices that meet our
return criteria.
Competition
We face competition for the acquisition, entitlement,
development and sale of real estate in our markets. Our major
competitors include other landowners who market and sell
undeveloped land and numerous national, regional and local
developers. In addition, our projects compete with other
development projects offering similar amenities, products
and/or
locations. Competition also exists for investment opportunities,
financing, available land, raw materials and labor, with
entities that may possess greater financial, marketing and other
resources than us. The presence of competition may increase the
bargaining power of property owners seeking to sell. These
competitive market pressures sometimes make it difficult to
acquire, entitle, develop or sell land at prices that meet our
return criteria. Some of our real estate competitors are well
established and financially strong, may have greater financial
resources than we do, or may be larger than us
and/or
have
lower cost of capital and operating costs than we have and
expect to have.
The land acquisition and development business is highly
fragmented, and we are unaware of any meaningful concentration
of market share by any one competitor. Enterprises of varying
sizes, from individuals or small companies to large
corporations, actively engage in the real estate development
business. Many competitors are local, privately-owned companies.
We have a few regional competitors and virtually no national
competitors other than national homebuilders that, depending on
business cycles and market conditions, may enter or exit the
real estate development business in some locations to develop
lots on which they construct and sell homes. There are very few
national homebuilders currently developing lots. During
9
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periods when access to capital is restricted, participants with
weaker financial conditions tend to be less active. We believe
the current environment is one where participants with stronger
financial conditions will have a competitive advantage, and
where fewer participants will be active.
Mineral
Resources
We lease our oil and gas mineral interests to third parties for
the exploration and production of oil and gas, principally in
Texas and Louisiana. When we lease our mineral interests, we may
negotiate a lease bonus payment and retain a royalty interest
and may take an additional participation in production,
including a non-operating working interest. Non-operating
working interests refer to well interests in which we pay a
share of the costs to drill, complete and operate a well and
receive a proportionate share of the production revenues. We are
not an operator with respect to any of the oil and gas
activities on our properties.
Our royalty revenues are contractually defined and based on a
percentage of production and are received in cash. Our royalty
revenues fluctuate based on changes in the market prices for oil
and gas, the inevitable decline in production in existing wells,
and other factors affecting the third-party oil and gas
exploration and production companies including the cost of
development and production.
Products
We own oil and gas mineral interests on approximately
620,000 net acres in Texas, Louisiana, Georgia, Alabama,
California and Colorado. Our minerals revenue is primarily from
lease bonus payments, delay rentals, oil and gas royalty
interests, non-operating working interests and other related
activities. We engage in leasing certain portions of these oil
and gas mineral interests to third parties for the exploration
and production of oil and gas, and we are increasingly
leveraging our mineral interests to participate in wells drilled
on or near our mineral acreage.
Our strategy for maximizing value from our oil and gas mineral
interests is to move acres up the minerals value chain by
increasing the net acreage leased, the lease bonus amount per
acre and the size of retained royalty interests. Additionally,
we may participate in non-operating working interests in the
drilling, completion and production of oil and gas on or nearby
our mineral interests. The chart below depicts our minerals
value chain.
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Of our 620,000 net acres of oil and gas mineral interests,
about 480,000 net acres are available for lease. We have
about 140,000 net acres leased for exploration activities,
of which about 27,000 net acres are held by production from
over 470 oil and gas wells that are owned and operated by others.
Our principal areas of ownership follow:
East
Texas and Gulf Coast Basins
We have about 252,000 net mineral acres in East Texas and
about 144,000 net mineral acres in Louisiana located within
the East Texas and Gulf Coast Basins. These basins contain
numerous oil and gas producing formations consisting of
conventional, unconventional, and tight sand reservoirs. Of
these reservoirs, we have mineral interests in and around
production trends in the Wilcox, Frio, Cockfield, James Lime,
Pettet, Travis Peak, Cotton Valley, Austin Chalk, Haynesville
Shale, and Bossier formations.
Fort Worth
Basin
We have about 1,000 net mineral acres in the
Fort Worth Basin. This basin contains numerous oil and gas
producing formations consisting of conventional, unconventional,
and tight sand reservoirs. Of these reservoirs, we have mineral
interests in and around the Barnett Shale.
Alabama &
Georgia
We have about 42,000 net mineral acres in Alabama and
180,000 net mineral acres in Georgia. These areas have
historically had very little oil and gas exploration activity.
However, there has been activity in the Floyd and Conesuega
Shales in and around our mineral interests, and we currently
have about 2,000 acres under lease in Northeastern Alabama.
A summary of our oil and gas mineral
acres
(a)
at year-end 2009 follows:
|
Held By
|
||||||||||||||||
|
State
|
Unleased | Leased (b) | Production (c) | Total (d) | ||||||||||||
| (Net acres) | ||||||||||||||||
|
Texas
|
130,000 | 103,000 | 20,000 | 253,000 | ||||||||||||
|
Louisiana
|
129,000 | 8,000 | 7,000 | 144,000 | ||||||||||||
|
Georgia
|
180,000 | — | — | 180,000 | ||||||||||||
|
Alabama
|
40,000 | 2,000 | — | 42,000 | ||||||||||||
|
California
|
1,000 | — | — | 1,000 | ||||||||||||
| 480,000 | 113,000 | 27,000 | 620,000 | |||||||||||||
| (a) | Includes ventures. | |
| (b) | Includes leases in primary lease term only. | |
| (c) | Acres being held by production are producing oil or gas in paying quantities. | |
| (d) | Texas, Louisiana and California net acres are calculated as the gross number of surface acres multiplied by our percentage ownership of the mineral interest. Alabama and Georgia net acres are calculated as the gross number of surface acres multiplied by our estimated percentage ownership of the mineral interest based on county sampling. Excludes 481 net mineral acres located in Colorado. |
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A summary of our Texas and Louisiana mineral
acres
(a)
by county at year-end 2009 follows:
| Texas | Louisiana | |||||||||
|
County
|
Net Acres |
Parish
|
Net Acres | |||||||
|
Trinity
|
47,000 | Beauregard | 79,000 | |||||||
|
Angelina
|
42,000 | Vernon | 39,000 | |||||||
|
Houston
|
29,000 | Calcasieu | 17,000 | |||||||
|
Anderson
|
25,000 | Allen | 7,000 | |||||||
|
Cherokee
|
23,000 | Rapides | 1,000 | |||||||
|
Sabine
|
22,000 | Other | 1,000 | |||||||
|
Red River
|
14,000 | 144,000 | ||||||||
|
Newton
|
14,000 | |||||||||
|
San Augustine
|
13,000 | |||||||||
|
Jasper
|
11,000 | |||||||||
|
Other
|
13,000 | |||||||||
| 253,000 | ||||||||||
| (a) | Includes ventures. |
Leasing mineral acres for exploration and production creates
significant value because we may negotiate a lease bonus payment
and retain a royalty interest in all revenues generated by the
lessee from oil and gas production. The significant terms of
these arrangements include granting the exploration company the
rights to any oil or gas it may find and requiring that drilling
be commenced within a specified period. In return, we may
receive an initial payment (bonus), subsequent payments if
drilling has not started within the specified period (delay
rentals), and a percentage interest in the value of any oil or
gas produced (royalties). If no oil or gas is produced during
the required period, all rights are returned to us. Capital
requirements are minimal and primarily consist of acquisition
costs allocated to mineral interests and administrative costs.
Most leases are for a three-year term although a portion or all
of a lease may be extended by the lessee if actual production is
occurring. Financial terms vary based on a number of market
factors including the location of the mineral interest, the
number of acres subject to the agreement, our mineral interest,
and proximity to transportation facilities such as pipelines,
depth of formations to be drilled and risk. From our retained
royalty interests in production sold by third-party exploration
and production companies, we received an average net price per
barrel of oil of $56.86 in 2009, $106.66 in 2008 and $65.24 in
2007 and per thousand cubic feet of gas of $4.09 in 2009, $8.76
in 2008 and $6.69 in 2007.
We have water interests in about 1.6 million acres
including a 45 percent nonparticipating royalty interest in
groundwater produced or withdrawn for commercial purposes or
sold from approximately 1.4 million acres in Texas,
Louisiana, Georgia and Alabama. We have not received any income
from this interest.
Proved
Developed Reserves
In December 2009, we adopted revised oil and gas reserve
estimation and disclosure requirements to conform to the U.S.
Securities and Exchange Commission (SEC) “Modernization of
Oil and Gas Reporting” rules, which were issued in December
2008. The new rules require disclosure of proved reserves using
the twelve-month average
beginning-of-month
price for the year, rather than year-end prices. These same
twelve month average prices are also used in calculating the
amount of (and changes in) future net cash inflows related to
the standardized measure of discounted future net cash flows.
Our net proved developed oil and natural gas reserves as of
year-end 2009 and 2008, all of which are located in the United
States, have been estimated by Netherland, Sewell &
Associates, Inc. (NSAI) in accordance with the definitions and
guidelines of the SEC. This reserve information does not include
estimates of reserves and future cash flows associated with
proved undeveloped reserves or any potential value related to
12
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our 593,000 undeveloped net mineral acres because we are solely
royalty and non-operating working interest owners so we do not
determine whether or when proved undeveloped reserves will be
converted to developed reserves. The third-party operators to
which we lease our mineral interests do not provide us with
their adopted development plans related to our royalty interests.
Net quantities of proved developed oil and natural gas reserves,
principally located in the East Texas, Gulf Coast and Fort Worth
Basins, are summarized as follows:
Summary
of Oil and Gas Reserves as of Year-End
| Net Reserves | ||||||||
|
Oil
|
Natural Gas
|
|||||||
| (Barrels) | (Mcf) | |||||||
| (In thousands) | ||||||||
|
Consolidated entities:
|
||||||||
|
Year-end 2009
|
580 | 6,660 | ||||||
|
Year-end 2008
|
457 | 7,538 | ||||||
|
Our share of ventures accounted for using the equity method:
|
||||||||
|
Year-end 2009
|
— | 2,508 | ||||||
|
Year-end 2008
|
— | 125 | ||||||
|
Total consolidated and our share of equity method ventures:
|
||||||||
|
Year-end 2009
|
580 | 9,168 | ||||||
|
Year-end 2008
|
457 | 7,663 | ||||||
The effect of applying twelve month average beginning-of-month
prices, versus 2009 year-end prices, decreased net
remaining reserve volumes by 8 percent of total proved
reserves. We do not have any estimated reserves of synthetic
oil, synthetic natural gas or products of other non-renewable
natural resources that are intended to be upgraded into
synthetic oil and gas.
Estimates of oil and natural gas reserve information related to
our oil and gas interests in 2007, the period prior to our
spin-off, are unknown to us. The reserve estimates were based on
the economic and operating conditions existing at year-end 2009
and 2008. For 2009, oil prices are based on a twelve month
average price of $57.65 per barrel of West Texas Intermediate
Crude and natural gas prices are based on a twelve month average
price of $3.87 per MMBTU per the Henry Hub spot market. For
2008, oil prices are based on a year-end 2008, West Texas
Intermediate posted price of $41.00 per barrel and natural gas
prices are based on a year-end 2008, Henry Hub spot market price
of $5.71 per MMBTU. All prices were adjusted for quality,
transportation fees and regional price differentials. Since the
determination and valuation of proved developed reserves is a
function of the interpretation of engineering and geologic data
and prices for oil and natural gas and the cost to produce these
reserves, the reserves presented should be expected to change as
future information becomes available. For an estimate of the
standardized measure of discounted future net cash flows from
proved developed oil and natural gas reserves, see
Note 22 — Supplemental Oil and Gas Disclosures
(Unaudited) in our consolidated financial statements included in
this Annual Report on
Form 10-K.
The process of estimating oil and natural gas reserves is
complex involving decisions and assumptions in evaluating the
available geological, geophysical, engineering and economic
data. Accordingly, these estimates are imprecise. Actual future
production, oil and natural gas prices, revenues, taxes and
quantities of recoverable oil and natural gas reserves might
vary from those estimated. Any variance could materially affect
the estimated quantities and present value of proved developed
reserves. In addition, we may adjust estimates of proved
developed reserves to reflect production history, development,
prevailing oil and natural gas prices and other factors, many of
which are beyond our control.
The primary internal technical person in charge of overseeing
our reserves estimates has a Bachelor of Science in Petroleum
Engineering and a Masters of Business Administration in Finance
and Accounting. He has over 30 years of experience in the
exploration and production business as well as experience in gas
processing, refining and marketing, coal, geothermal,
manufactured utilities and electricity generation.
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As part of our internal control over financial reporting, we
have a process for reviewing well production data and division
of interest percentages prior to submitting well level data to
NSAI to prepare reserve estimates on our behalf. Prior to
inclusion in the Annual Report on
Form 10-K,
our primary internal technical person and other members of
management review the reserve estimates prepared by NSAI,
including the underlying assumptions and estimates upon which
they are based, for accuracy and reasonableness.
Production
Oil and natural gas produced and average unit prices related to
our royalty interests
follows
(a)
:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Oil production (barrels)
|
107,200 | 87,900 | 94,900 | |||||||||
|
Average price per barrel
|
$ | 56.86 | $ | 106.66 | $ | 65.24 | ||||||
|
Natural gas production (millions of cubic feet)
|
1,575.8 | 1,363.4 | 967.3 | |||||||||
|
Average price per thousand cubic feet
|
$ | 4.09 | $ | 8.76 | $ | 6.69 | ||||||
| (a) | Includes 100 percent of venture activity. In 2009, our share of activity in ventures accounted for using the equity method was 82 Mcf of natural gas from one venture in which we have a 50 percent interest. We had no production from ventures accounted for using the equity method in 2008 and 2007. |
At year-end 2009, production lifting costs, which exclude ad
valorem and severance taxes, were $1.14 per Mcfe related to six
wells in which we have a non-operating working interest. In 2008
and 2007, this information was not available to us.
Drilling
and Other Exploratory and Development Activities; Present
Activities
We did not drill any wells or conduct any other exploratory or
development activities in 2009, 2008 or 2007, and we are not
presently conducting any such activities. In 2009, third-party
oil and gas operators to whom we have leased our minerals
drilled seven exploratory wells and twenty-four productive
development wells within units where we own mineral interests.
At year-end 2009, there were no wells being drilled by
third-party oil and gas operators on units where we own an
interest; however, there were seven wells that were in some
stage of the completion process requiring additional activities
prior to generating sales.
Delivery
Commitments
We have no oil or natural gas delivery commitments.
14
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Wells
and Acreage
The number of wells owned and operated by third parties to whom
we have leased our minerals, as of year-end 2009 and 2008,
follows:
| Wells (a) | ||||||||||||
| Oil | Natural Gas | Total | ||||||||||
|
Consolidated entities:
|
||||||||||||
|
Year-end 2009
|
262 | 194 | 456 | |||||||||
|
Year-end 2008
|
257 | 181 | 438 | |||||||||
|
Ventures accounted for using the equity method:
|
||||||||||||
|
Year-end 2009
|
— | 16 | 16 | |||||||||
|
Year-end 2008
|
— | 1 | 1 | |||||||||
|
Total consolidated and equity method ventures:
|
||||||||||||
|
Year-end 2009
|
262 | 210 | 472 | |||||||||
|
Year-end 2008
|
257 | 182 | 439 | |||||||||
| (a) | We have royalty interests in all wells at year-end 2009 and 2008. We also have working interests in six of these wells at year-end 2009 and in three of these wells at year-end 2008. |
We did not have any wells with production of synthetic oil,
synthetic natural gas or products of other non-renewable natural
resources that are intended to be upgraded into synthetic oil
and gas as of year-end 2009 or 2008. We do not have any plugging
liabilities as a royalty interest owner.
At year-end 2009, our proved developed acreage includes
27,000 net mineral acres in which we have royalty
interests. In addition, we have 593,000 net undeveloped
mineral acres of which 113,000 net acres are leased to
third parties for exploration and development.
Markets
Oil and gas revenues are influenced by the prices of these
commodities as determined by both regional and global markets.
Mineral leasing activity is influenced by the location of our
mineral interests relative to existing or projected oil and gas
reserves and by the proximity of successful extractive efforts
to our mineral interests.
Competition
In locations where our mineral interests are close to producing
wells and proven reserves, other parties will compete to lease
our mineral interests. Conversely, where our mineral interests
are close to areas where reserves have not been discovered we
may receive nominal interest in leasing our minerals. When oil
and gas prices are higher, we are likely to receive greater
interest in leasing our minerals close to producing areas
because the economics will support more exploration and
extraction activities. Portions of our Texas and Louisiana
minerals are proximate to producing wells and proven reserves.
We have little competition from others related to our leasing
activities and resulting non-operating working interests. These
wells historically have been drilled on or near our owned
mineral interests, which allow us to achieve favorable terms
from the oil and gas operators. Risk and the increasing need of
capital to support drilling, completion and production
activities may impact our ability to participate in
non-operating working interests.
Fiber
Resources
We sell wood fiber from portions of our land, primarily in
Georgia, and lease land for hunting and other recreational uses.
15
Table of Contents
Products
We have about 227,000 acres of timber on our lands and
about 18,000 acres of timber under lease. In 2009, we sold
at market prices, primarily to Temple-Inland, about 1,141,000
tons of timber from our lands. We manage our timberland in
accordance with the Sustainable Forestry
Initiative
®
program of Sustainable Forestry Initiative, Inc. Over
213,000 acres of our land, primarily in Georgia, are leased
for recreational purposes. Most recreational leases are for a
one-year term but may be terminated by us on 30 days’
notice to the lessee.
Information about our principle timber products follows:
| For the Year | ||||||||
| 2009 | 2008 | |||||||
|
Pulpwood tons sold
|
810,100 | 917,000 | ||||||
|
Sawtimber tons sold
|
331,300 | 162,900 | ||||||
|
Total tons sold
|
1,141,400 | 1,079,900 | ||||||
Markets
We have an agreement to sell wood fiber to Temple-Inland at
market prices, primarily for use at Temple-Inland’s Rome,
Georgia mill complex. The agreement expires in 2013 although the
purchase and sale commitments are established annually based on
our annual harvest plan. Base prices are determined by
independent sources and are indexed to third-party sources.
Payment for timber is advanced to us by Temple-Inland on a
quarterly basis. It is likely that Temple-Inland will continue
to be our largest wood fiber customer. We also sell wood fiber
to other parties at market prices.
Competition
We face significant competition from other landowners for the
sale of our wood fiber. Some of these competitors own similar
timber assets that are located in the same or nearby markets.
However, due to its weight, the cost for transporting wood fiber
long distances is significant, resulting in a competitive
advantage for timber that is located reasonably close to paper
and building products manufacturing facilities. A significant
portion of our wood fiber is reasonably close to such
facilities, so we expect continued demand for our wood fiber.
Employees
We have 93 employees. None of our employees participate in
collective bargaining arrangements. We believe we have a good
relationship with our employees.
Environmental
Regulations
Our operations are subject to federal, state and local laws,
regulations and ordinances relating to protection of public
health and the environment. These laws may impose liability on
property owners or operators for the costs of removal or
remediation of hazardous or toxic substances on real property,
without regard to whether the owner or operator knew, or was
responsible for, the presence of the hazardous or toxic
substances. The presence of, or the failure to properly
remediate, such substances may adversely affect the value of a
property, as well as our ability to sell the property or to
borrow funds using that property as collateral or the ability to
produce oil and gas from that property. Environmental claims
generally would not be covered by our insurance programs.
The particular environmental laws that apply to any given
development site vary according to the site’s location, its
environmental condition, and the present and former uses of the
site and adjoining properties. Environmental laws and conditions
may result in delays, may cause us to incur substantial
compliance or other costs and can prohibit or severely restrict
development activity or mineral production in environmentally
sensitive regions or areas, which could negatively affect our
results of operations.
16
Table of Contents
We own approximately 288 acres in several parcels in or
near Antioch, California, portions of which were sites of a
Temple-Inland paper manufacturing operation that are in
remediation. The remediation is being conducted voluntarily with
oversight by the California Department of Toxic Substances
Control, or DTSC. The DTSC issued Certificates of Completion for
approximately 180 acres in 2006. We estimate the remaining
cost to complete remediation activities will be about
$4.4 million.
Oil and gas operations are subject to numerous federal, state
and local laws and regulations controlling the generation, use,
storage and discharge of materials into the environment or
otherwise relating to the protection of the environment. We
participate in wells as a royalty interest owner, and also as a
non-operating working interest owner in six wells. We are not an
operator with respect to any of the oil and gas activities on
our properties. Well operators are responsible for compliance
with oil and gas laws and regulations, which include requiring
the operator of oil and gas properties to possess permits for
the drilling and development of wells, post bonds in connection
with various types of activities, and file reports concerning
operations.
Legal
Structure
Forestar Group Inc. is a Delaware corporation. The following
chart presents the ownership structure for our significant
subsidiaries and ventures. It does not contain all our
subsidiaries and ventures, some of which are immaterial
entities. Except as indicated, all subsidiaries shown are
100 percent owned by their immediate parent.
Our principal executive offices are located at 6300 Bee Cave
Road, Building Two, Suite 500, Austin, Texas
78746-5149.
Our telephone number is
(512) 433-5200.
Available
Information
From our Internet website,
http://www.forestargroup.com
,
you may obtain additional information about us including:
| • | our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including amendments to these reports, and other documents as soon as reasonably practicable after we file them with the Securities and Exchange Commission; | |
| • | beneficial ownership reports filed by officers, directors, and principal security holders under Section 16(a) of the Securities Exchange Act of 1934, as amended (or the “Exchange Act”); and |
17
Table of Contents
| • | corporate governance information that includes our |
| • | corporate governance guidelines, | |
| • | audit committee charter, | |
| • | management development and executive compensation committee charter, | |
| • | nominating and governance committee charter, | |
| • | standards of business conduct and ethics, | |
| • | code of ethics for senior financial officers, and | |
| • | information on how to communicate directly with our board of directors. |
We will also provide printed copies of any of these documents to
any shareholder free of charge upon request. In addition, the
materials we file with the SEC may be read and copied at the
SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. Information about the operation of the
Public Reference Room is available by calling the SEC at
1-800-SEC-0330.
The SEC also maintains an Internet site
(
http://www.sec.gov
)
that contains reports, proxy and information statements, and
other information that is filed electronically with the SEC.
Financial
Information
Our results of operations, including information regarding our
principal business segments, are shown in the Consolidated
Financial Statements and the notes thereto attached as pages F-1
through F-37 to this Annual Report on
Form 10-K.
Executive
Officers
The names, ages and titles of our executive officers are:
|
Name
|
Age | Position | ||||
|
James M. DeCosmo
|
51 | President and Chief Executive Officer | ||||
|
Christopher L. Nines
|
38 | Chief Financial Officer | ||||
|
Craig A. Knight
|
62 | Chief Real Estate Officer | ||||
|
Flavious J. Smith, Jr.
|
51 | Executive Vice President | ||||
|
Phillip J. Weber
|
49 | Executive Vice President | ||||
|
Charles T. Etheredge, Jr.
|
46 | Executive Vice President | ||||
|
David M. Grimm
|
49 | Chief Administrative Officer, General Counsel and Secretary | ||||
|
Charles D. Jehl
|
41 | Chief Accounting Officer | ||||
James M. DeCosmo has served as our President and Chief Executive
Officer since 2006. He served as Group Vice President of
Temple-Inland from 2005 to 2007, as Vice President, Forest from
2000 to 2005 and as Director of Forest Management from 1999 to
2000. Prior to joining Temple-Inland, he held various land
management positions throughout the southeastern United States.
Christopher L. Nines has served as our Chief Financial Officer
since 2007. He served as Temple-Inland’s Director of
Investor Relations from 2003 to 2007 and as Corporate Finance
Director from 2001 to 2003. He was Senior Vice President of
Finance for ConnectSouth Communications, Inc. from 2000 to 2001.
Craig A. Knight has served as our Chief Real Estate Officer
since 2006. From 1994 to 2006, he served as President of
Lumbermen’s Investment Corporation, which changed its name
in 2006 to Forestar (USA) Real Estate Group Inc. Mr. Knight
was a principal in the real estate development firm of Heath and
Knight Properties from 1991 to 1994 and was a partner with
Centre Development from 1978 to 1994.
18
Table of Contents
Flavious J. Smith, Jr. has served as our Executive Vice
President since August 2008. He served as Division Land
Manager for EOG Resources, Inc. from 2005 to August 2008. He
owned and operated Flavious Smith Petroleum Properties, an
independent oil and gas operator, from 1989 to 2005, and
previously held various leadership positions with several oil
and gas and energy-related companies.
Phillip J. Weber has served Forestar as Executive Vice President
since October 2009. He served the Federal National Mortgage
Association (Fannie Mae) as Senior Vice President
— Multifamily from 2006 to October 2009, as Chief of
Staff to the CEO from 2004 to 2006, and in other management
roles prior to 2004.
Charles T. Etheredge, Jr. has served as our Executive Vice
President since 2006. He was a member of Guaranty Bank’s
commercial real estate lending segment from 1992 to 2006, where
he served as Senior Vice President and Managing Director for the
Eastern Region from 1999 to 2006 and as Vice President and
Division Manager from 1997 to 1999.
David M. Grimm has served as our Chief Administrative Officer
since 2007, in addition to holding the offices of General
Counsel and Secretary since 2006. Mr. Grimm served
Temple-Inland as Group General Counsel from 2005 to 2006,
Associate General Counsel from 2003 to 2005, and held various
other legal positions from 1992 to 2003. Prior to joining
Temple-Inland, Mr. Grimm was an attorney in private
practice in Dallas, Texas.
Charles D. Jehl has served as our Chief Accounting Officer since
2006. He served as Chief Operations Officer and Chief Financial
Officer of Guaranty Insurance Services, Inc. from 2005 to 2006
and as Senior Vice President and Controller from 2000 to 2005.
From 1989 to 1999, Mr. Jehl held various financial
management positions within Temple-Inland’s financial
services segment.
| Item 1A. | Risk Factors. |
Risks
Related to our Real Estate Operations
A
decrease in demand for new housing in the markets where we
operate could decrease our profitability.
The residential development industry is cyclical and is
significantly affected by changes in general and local economic
conditions, such as employment levels, availability of financing
for home buyers, interest rates, consumer confidence and housing
demand. Adverse changes in these conditions generally, or in the
markets where we operate, could decrease demand for lots for new
homes in these areas. The current market conditions include a
general over-supply of housing, decreased sales volumes for both
new and existing homes, and flat home prices. There also has
been significant tightening of mortgage credit standards,
decreasing the availability of mortgage loans to acquire new and
existing homes. A further decline in housing demand could
negatively affect our real estate development activities, which
could result in a decrease in our revenues and earnings.
Furthermore, the market value of undeveloped land and lots held
by us can fluctuate significantly as a result of changing
economic and real estate market conditions. If there are
significant adverse changes in economic or real estate market
conditions, we may have to hold land in inventory longer than
planned. Inventory carrying costs can be significant and can
result in losses or lower returns.
Development
of real estate entails a lengthy, uncertain, and costly
entitlement process.
Approval to develop real property entails an extensive
entitlement process involving multiple and overlapping
regulatory jurisdictions and often requiring discretionary
action by local governments. This process is often political,
uncertain and may require significant exactions in order to
secure approvals. Real estate projects must generally comply
with local land development regulations and may need to comply
with state and federal regulations. The process to comply with
these regulations is usually lengthy and costly, may not result
in the approvals we seek, and can be expected to materially
affect our real estate development activities.
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Table of Contents
Our
real estate development operations are currently concentrated in
the major markets of Texas, and a significant portion of our
undeveloped land holdings are concentrated in Georgia. As a
result, our financial results are dependent on the economic
growth and strength of those areas.
The economic growth and strength of Texas, where the majority of
our real estate development activity is located, are important
factors in sustaining demand for our real estate development
activities. As a result, any adverse change to the economic
growth and health of those areas could materially adversely
affect our financial results. The future economic growth in
certain portions of Georgia in particular may be adversely
affected if its infrastructure, such as roads, utilities, and
schools, are not improved to meet increased demand. There can be
no assurance that these improvements will occur.
Our
real estate development operations are highly dependent upon
national, regional, and local homebuilders, as well as other
strategic partners, who may have interests that differ from ours
and may take actions that adversely affect us.
We are highly dependent upon our relationships with national,
regional, and local homebuilders to purchase lots in our
residential developments. If homebuilders do not view our
developments as desirable locations for homebuilding operations,
our business will be adversely affected. Also, a national
homebuilder could decide to delay purchases of lots in one of
our developments due to adverse real estate conditions wholly
unrelated to our areas of operations.
We are also involved in strategic alliances or venture
relationships as part of our overall strategy for particular
developments or regions. These venture partners may bring
development experience, industry expertise, financing
capabilities, and local credibility or other competitive
attributes. Strategic partners, however, may have economic or
business interests or goals that are inconsistent with ours or
that are influenced by factors unrelated to our business. We may
also be subject to adverse business consequences if the market
reputation of a strategic partner deteriorates.
A formal agreement with a venture partner may also involve
special risks, such as: we may not have voting control over the
venture; the venture partner may take actions contrary to our
instructions or requests, or contrary to our policies or
objectives with respect to the real estate investments; the
venture partner could experience financial difficulties; and
actions by a venture partner may subject property owned by the
venture to liabilities greater than those contemplated by the
venture agreement or have other adverse consequences.
Our
customers may be unwilling or unable to meet lot takedown
commitments due to liquidity limitations or slowing market
conditions.
We enter into contracts to sell lots to builders. Home mortgage
credit standards have tightened substantially and many markets
have excess housing inventory so fewer new houses are being
constructed and sold. Some builders are experiencing liquidity
shortfalls and may be unwilling or unable to close on previously
committed lot purchases. As a result, we may sell fewer lots and
may have lower sales revenues, which could have an adverse
effect on our financial position and results of operations.
Delays
or failures by third parties to take expected actions could
reduce our returns or cause us to incur losses on certain real
estate development projects.
We rely on governmental utility and special improvement
districts to issue bonds as a revenue source for the districts
to reimburse us for qualified expenses, such as road and utility
infrastructure costs. Bonds must be supported by districts tax
revenues, usually from ad valorem taxes. Slowing new home sales,
decreasing real estate prices or difficult credit markets for
bond sales can reduce or delay district bond sale revenues,
causing such districts to delay reimbursement of our qualified
expenses. Failure to receive timely reimbursement for qualified
expenses could reduce our returns or cause us to incur losses on
certain real estate development projects.
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Table of Contents
We are
unable to control the approval or timing of reimbursements or
other payments from the special public improvement district
(SPID) in which our Cibolo Canyons project is located. Delays or
failure by the SPID to approve infrastructure costs for
reimbursement or to issue bonds could negatively impact the
timing of our future cash flows.
The SPID in which our Cibolo Canyons project is located is an
independent governmental entity not affiliated with us. The SPID
has an elected governing board comprised of members living
within the district, none of whom are affiliated with us.
Reimbursement of our infrastructure costs, and timing of
payment, is subject to approval and determination by the SPID.
The SPID is also obligated to pay to us certain amounts
generated from hotel occupancy revenues and other resort sales
revenues collected as taxes by the SPID within the district. The
amount of revenues collected by the SPID will be impacted by
hotel occupancy and resort sales, each of which could be lower
than projected. The timing of these payments will be impacted by
decisions made by the SPID in regard to whether and when to
issue bonds that would generate funds to support payments to us.
Decisions by the SPID to delay approval of reimbursements or
issuance of bonds could negatively impact the timing of our
future cash flows.
Risks
Related to our Mineral Resources Operations
We
cannot control activities on oil or gas properties we do not
operate.
We do not operate any of the properties in which we have oil or
gas mineral interests and have very limited ability to exercise
influence over operations for these properties or their
associated costs. The success and timing of drilling,
development and exploitation activities on properties operated
by others depend on a number of factors that are beyond our
control, including the operator’s expertise and financial
resources, approval of other participants for drilling wells and
utilization of technology.
Volatile
oil and gas prices could adversely affect our cash flows and
results of operations.
Our cash flows and results of operations are dependent in part
on oil and gas prices, which are volatile. Any substantial or
extended decline in the price of oil and gas could have a
negative impact on our business operations and future revenues.
Moreover, oil and gas prices depend on factors we cannot
control, such as: changes in foreign and domestic supply and
demand for oil and gas; actions by the Organization of Petroleum
Exporting Countries; weather; political conditions in other
oil-producing countries, including the possibility of insurgency
or war in such areas; prices of foreign exports; availability of
alternate fuel sources; the value of the U.S. dollar
relative to other major currencies; and governmental regulations.
Our
estimated proved reserves are based on many assumptions that may
prove to be inaccurate. Any material inaccuracies in these
reserve estimates or underlying assumptions will materially
affect the quantities and present value of our
reserves.
The process of estimating oil and gas reserves is complex
involving decisions and assumptions in evaluating the available
geological, geophysical, engineering and economic data.
Accordingly, these estimates are imprecise. Actual future
production, oil and natural gas prices, revenues, taxes and
quantities of recoverable oil and natural gas reserves might
vary from those estimated. Any variance could materially affect
the estimated quantities and present value of proved developed
reserves. In addition, we may adjust estimates of proved
reserves to reflect production history, development, prevailing
oil and gas prices and other factors, many of which are beyond
our control.
Changes
in environmental or other regulations for extraction of oil or
gas could reduce our mineral resource revenues.
An increasing amount of our mineral resources revenue is
dependent on newer technologies for extraction of oil or natural
gas, specifically hydraulic fracturing. Changes in environmental
or other regulations governing hydraulic fracturing could
substantially increase the cost or risk associated with
extracting oil or gas from our mineral interests, resulting in
lower production from our minerals or reduced demand for leasing
our minerals. Such changes could result in reduced mineral
resources revenues.
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Additionally, the U.S. Congress is currently considering
legislation to amend the Safe Drinking Water Act to require the
disclosure of chemicals used by the oil and gas industry in the
hydraulic fracturing process. The sponsors of the bills have
asserted that chemicals used in the fracturing process could
adversely affect drinking water supplies. The proposed
legislation would require the reporting and public disclosure of
chemicals used in the fracturing process as well as additional
levels of regulation that could lead to operational restrictions
and delays and increased operating costs.
The
standardized measure of future net cash flows from our proved
reserves is not necessarily the same as the current market value
of our estimated reserves. Any material inaccuracies in reserve
estimates or underlying assumptions will materially affect the
quantities and present value of our reserves.
As required by SEC regulations, we base the estimated discounted
future net cash flows from our proved reserves on prices and
costs in effect at the time of the estimate. However, actual
future net cash flows from our properties will be affected by
numerous factors not subject to our control.
The timing of production will affect the timing of actual future
net cash flows from proved reserves, and thus their actual
present value. In addition, the 10% discount factor we use when
calculating discounted future net cash flow, which is required
by the SEC, may not be the most appropriate discount factor
based on interest rates in effect from time to time and risks
associated with us or the oil and gas industry in general. Any
material inaccuracies in our reserve estimates or underlying
assumptions will materially affect the quantities and present
value of our reserves.
General
Risks Related to our Operations
Both
our real estate and mineral resources businesses are cyclical in
nature.
The operating results of our business segments reflect the
general cyclical pattern of each segment. While the cycles of
each industry do not necessarily coincide, demand and prices in
each may drop substantially in an economic downturn. Real estate
development of residential lots is further influenced by new
home construction activity. Mineral resources may be further
influenced by national and international commodity prices,
principally for oil and gas. Cyclical downturns may materially
and adversely affect our results of operations.
The
real estate and mineral resource industries are highly
competitive and a number of entities with which we compete are
larger and have greater resources, and competitive conditions
may adversely affect our results of operations.
The real estate and mineral resource industries in which we
operate are highly competitive and are affected to varying
degrees by supply and demand factors and economic conditions,
including changes in interest rates, new housing starts, home
repair and remodeling activities, credit availability, housing
affordability and federal energy policies. No single company is
dominant in any of our industries.
We compete with numerous regional and local developers for the
acquisition, entitlement, and development of land suitable for
development. We also compete with some of our national and
regional home builder customers who develop real estate for
their own use in homebuilding operations, many of which are
larger and have greater resources, including greater marketing
and technology budgets. Any improvement in the cost structure or
service of our competitors will increase the competition we face.
The competitive conditions in the real estate industry may
result in difficulties acquiring suitable land at acceptable
prices, lower sales volumes and prices, increased development
costs, and delays in construction.
Our business and results of operations are negatively affected
by the existence of these conditions.
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Table of Contents
Our
activities are subject to environmental regulations and
liabilities that could have a negative effect on our operating
results.
Our operations are subject to federal, state, and local laws and
regulations related to the protection of the environment.
Compliance with these provisions may result in delays, may cause
us to invest substantial funds to ensure compliance with
applicable environmental regulations and can prohibit or
severely restrict real estate development or mineral production
activity in environmentally sensitive regions or areas.
Significant
reductions in cash flow from slowing real estate, mineral
resources or fiber resources market conditions could lead to
higher levels of indebtedness, limiting our financial and
operating flexibility.
Under our senior credit facility, we have a $125 million
term loan and a revolving line of credit. Our senior credit
facility matures December 1, 2010, although we have the
option to extend the maturity through June 12, 2012. At
year-end 2009, we had drawn $125 million of the term loan
and no borrowings under the revolving line of credit resulting
in a net unused borrowing capacity of $203 million. Amounts
due under our senior credit facility are secured by certain of
our assets. For a further description of our senior credit
facility, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Capital Resources and Liquidity — Liquidity and
Contractual Obligations.”
We must comply with various covenants contained in our senior
credit facility, and any other future debt arrangements.
Significant reductions in cash flow from slowing real estate,
mineral resources or fiber resources market conditions could
lead to higher levels of indebtedness, limiting our financial
and operating flexibility, and ultimately limiting our ability
to comply with our debt covenants. If we fail to comply with the
terms of any of our debt covenants, our lenders will have the
right to accelerate the maturity of that debt and foreclose upon
the collateral securing that debt. Realization of any of these
factors could adversely affect our financial condition and
results of operations.
Debt
within some of our ventures may not be renewed or may be
difficult or more expensive to replace.
Some of our ventures have debt, a substantial portion of which
is non-recourse to us. Many lenders have substantially curtailed
or ceased making real estate acquisition and development loans.
When debt within our ventures matures, some of our ventures may
be unable to renew existing loans or secure replacement
financing, or replacement financing may be more expensive. If
our ventures are unable to renew existing loans or secure
replacement financing, we may be required to contribute
additional equity to our ventures which could increase our risk
or increase our borrowings under our senior credit facility, or
both. If our ventures secure replacement financing that is more
expensive, our profits may be reduced.
Our
lenders may be unable or unwilling to fund their commitments
under our senior credit facility.
Our senior credit facility includes a revolving line of credit
under which we regularly draw funds as required for routine
operating liquidity. Some U.S. financial institutions are
having difficulty maintaining regulatory capital at levels
required for additional lending, and some institutions are
experiencing liquidity shortfalls. If some of the lenders
participating in our senior credit facility fail to meet their
funding commitments, we could be required to borrow from other
sources at a higher cost or we may be required to monetize some
of our assets to meet our liquidity requirements, which could
have an adverse effect on our business, financial position and
results of operations.
The
current turmoil in the credit markets could limit demand for our
products, and affect the overall availability and cost of
credit.
At this time, it is unclear whether and to what extent actions
taken by the U.S. government will mitigate the effects of
the current turmoil in the credit markets and in the economy
generally. Demand for our products could be limited by the
reduction in availability or increased cost of credit. While we
have no immediate need to access the credit markets, the impact
of the current turmoil on our ability to obtain financing in the
future, and the cost and terms of financing, is unclear. No
assurances can be given that the effects of the current
23
Table of Contents
credit markets turmoil will not have a material adverse effect
on our business, financial position and results of operations.
We
have only a limited operating history as an independent,
publicly-traded company upon which you can evaluate our
performance, and accordingly, our prospects must be considered
in light of the risks that any newly independent company
encounters.
We have only a limited experience operating as an independent,
publicly-traded company. Our prospects must be considered in
light of the risks, expenses and difficulties encountered by
companies in the early stages of independent business
operations, particularly companies such as ours in highly
competitive markets.
Our
historical financial information prior to 2008 is not
necessarily indicative of our results as a separate company and,
therefore, may not be reliable as an indicator of our future
financial results.
Our historical financial information prior to 2008 has been
created using our historical results of operations and
historical bases of assets and liabilities as part of
Temple-Inland. This historical financial information is not
necessarily indicative of what our results of operations,
financial position and cash flows would have been if we had been
a separate, stand-alone entity during the periods presented.
It also is not necessarily indicative of what our results of
operations, financial position and cash flows will be in the
future and does not reflect many significant changes that have
occurred in our capital structure, funding, and operations as a
result of the spin-off. While our historical results of
operations prior to 2008 include all costs of
Temple-Inland’s real estate development and minerals
operations, our historical costs and expenses prior to 2008 do
not include all of the costs that would have been or will be
incurred by us as an independent, publicly-traded company.
If the
spin-off is determined to be taxable for U.S. federal income tax
purposes, we could incur significant U.S. federal income tax
liabilities.
Temple-Inland has received a private letter ruling from the
Internal Revenue Service, or IRS, that the spin-off qualifies
for tax-free treatment under applicable sections of the Code. In
addition, Temple-Inland has received an opinion from tax counsel
that the spin-off so qualifies. The IRS ruling and the opinion
rely on certain representations, assumptions, and undertakings,
including those relating to the past and future conduct of our
business, and neither the IRS ruling nor the opinion would be
valid if such representations, assumptions, and undertakings
were incorrect. Notwithstanding the IRS private letter ruling
and opinion, the IRS could determine that the spin-off should be
treated as a taxable transaction if it determines that any of
the representations, assumptions, or undertakings that were
included in the request for the private letter ruling are false
or have been violated or if it disagrees with the conclusions in
the opinion that are not covered by the IRS ruling. If the
spin-off fails to qualify for tax-free treatment, under a tax
matters agreement between Temple-Inland and us, we may be
required to indemnify Temple-Inland against any tax resulting
from the distribution to the extent that such tax resulted from
any of our representations or undertakings being incorrect or
violated. If we are required to indemnify Temple-Inland or such
other persons under the circumstances set forth in the tax
matters agreement, we may be subject to substantial liabilities.
| Item 1B. | Unresolved Staff Comments. |
None.
| Item 2. | Properties. |
Our principal executive offices are located in Austin, Texas,
where we lease approximately 32,000 square feet of office
space from Palisades West, LLC, a venture in which we own a
25 percent interest. We also lease office space in Dallas,
Texas; Fort Worth, Texas; Lufkin, Texas; and Atlanta,
Georgia. We believe these offices are suitable for conducting
our business.
24
Table of Contents
For a description of our properties in our real estate, mineral
resources and fiber resources segments, see
“Business — Real Estate”,
“Business — Mineral Resources” and
“Business — Fiber Resources”, respectively,
in Part I, Item 1 of this Annual Report on
Form 10-K.
| Item 3. | Legal Proceedings. |
We are involved directly or through ventures in various legal
proceedings that arise from time to time in the ordinary course
of doing business. We believe we have established adequate
reserves for any probable losses and that the outcome of any of
the proceedings should not have a material adverse effect on our
financial position or long-term results of operations or cash
flows. It is possible, however, that charges related to these
matters could be significant to results of operations or cash
flow in any single accounting period.
| Item 4. | Reserved. |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market
Information
Our common stock is traded on the New York Stock Exchange. The
high and low sales prices in each quarter in 2009 and 2008 were:
| 2009 | 2008 | |||||||||||||||
| Price Range | Price Range | |||||||||||||||
| High | Low | High | Low | |||||||||||||
|
First Quarter
|
$ | 13.50 | $ | 5.74 | $ | 29.49 | $ | 16.50 | ||||||||
|
Second Quarter
|
14.17 | 7.36 | 27.30 | 18.39 | ||||||||||||
|
Third Quarter
|
18.39 | 10.32 | 21.03 | 12.01 | ||||||||||||
|
Fourth Quarter
|
22.98 | 14.31 | 15.50 | 2.93 | ||||||||||||
|
For the Year
|
22.98 | 5.74 | 29.49 | 2.93 | ||||||||||||
Shareholders
Our stock transfer records indicated that as of
February 25, 2010, there were approximately 4,170 holders
of record of our common stock.
Dividend
Policy
We currently intend to retain any future earnings to support our
business and do not anticipate paying cash dividends in the
foreseeable future. The declaration and payment of any future
dividends will be at the discretion of our Board of Directors
after taking into account various factors, including without
limitation, our financial condition, earnings, capital
requirements of our business, the terms of any credit agreements
to which we may be a party at the time, legal requirements
(including compliance with the IRS private letter ruling issued
in connection with our spin-off), industry practice, and other
factors that our Board of Directors deems relevant.
25
Table of Contents
Equity
Compensation Plan Information
We have only one equity compensation plan, the Forestar 2007
Stock Incentive Plan, which was approved by our sole shareholder
prior to the spin-off. Information at year-end 2009 about our
equity compensation plan under which our common stock may be
issued follows:
|
Number of Securities
|
||||||||||||
|
Remaining Available for
|
||||||||||||
|
Number of Securities to be
|
Weighted-Average
|
Future Issuance Under
|
||||||||||
|
Issued Upon Exercise of
|
Exercise Price of
|
Equity Compensation Plans
|
||||||||||
|
Outstanding Options,
|
Outstanding Options,
|
(Excluding Securities
|
||||||||||
|
Plan Category
|
Warrants and Rights (1)(2) | Warrants and Rights | Reflected in Column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
|
Equity compensation plans approved by security holders
|
2,310,797 | $ | 21.85 | 3,096,858 | ||||||||
|
Equity compensation plans not approved by security holders
|
None | None | None | |||||||||
|
Total
|
2,310,797 | $ | 21.85 | 3,096,858 | ||||||||
| (1) | Includes approximately 1,363,000 issuable to employees and directors of Temple-Inland and Guaranty resulting from the equitable adjustment of Temple-Inland equity awards in connection with our spin-off. | |
| (2) | Includes 108,278 equity-settled restricted stock units, which are excluded from the calculation of weighted-average exercise price. |
Issuer
Purchases of Equity
Securities
(1)
|
Maximum
|
||||||||||||||||
|
Total Number
|
Number of
|
|||||||||||||||
|
of Shares
|
Shares That
|
|||||||||||||||
|
Purchased as
|
May Yet be
|
|||||||||||||||
|
Total
|
Average
|
Part of Publicly
|
Purchased
|
|||||||||||||
|
Number of
|
Price
|
Announced
|
Under the
|
|||||||||||||
|
Shares
|
Paid per
|
Plans or
|
Plans
|
|||||||||||||
|
Period
|
Purchased (2) | Share | Programs | or Programs | ||||||||||||
|
Month 1 (10/1/2009 — 10/31/2009)
|
— | $ | — | — | 7,000,000 | |||||||||||
|
Month 2 (11/1/2009 — 11/30/2009)
|
57,512 | $ | 18.67 | — | 7,000,000 | |||||||||||
|
Month 3 (12/1/2009 — 12/31/2009)
|
56,134 | $ | 21.88 | — | 7,000,000 | |||||||||||
|
Total
|
113,646 | $ | 20.26 | — | ||||||||||||
| (1) | On February 11, 2009, we announced that our Board of Directors authorized the repurchase of up to 7,000,000 shares of our common stock. We have not purchased any shares under this authorization, which has no expiration date. We have no repurchase plans or programs that expired during the period covered by the table above and no repurchase plans or programs that we intend to terminate prior to expiration or under which we no longer intend to make further purchases. | |
| (2) | Represents shares withheld to pay taxes in connection with vesting of restricted stock awards and exercises of stock options. |
26
Table of Contents
Performance
Graph
We composed an index of our peers consisting of Avatar Holdings
Inc., Consolidated-Tomoka Land Co., Tejon Ranch Co. and The St.
Joe Company (Peer Index). Our cumulative total shareholder
return following our spin-off compared to the Russell 2000 Index
and to the Peer Index was as shown in the following graph
(assuming $100 invested on January 1, 2008):
Pursuant to SEC rules, returns of each of the companies in the
Peer Index are weighted according to the respective
company’s stock market capitalization at the beginning of
each period for which a return is indicated.
27
Table of Contents
| Item 6. | Selected Financial Data. |
| For the Year | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Real estate
|
$ | 94,436 | $ | 98,859 | $ | 142,729 | $ | 180,151 | $ | 118,121 | ||||||||||
|
Mineral resources
|
36,256 | 47,671 | 20,818 | 27,980 | 21,049 | |||||||||||||||
|
Fiber resources
|
15,559 | 13,192 | 14,439 | 17,429 | 16,317 | |||||||||||||||
|
Total revenues
|
$ | 146,251 | $ | 159,722 | $ | 177,986 | $ | 225,560 | $ | 155,487 | ||||||||||
|
Segment earnings:
|
||||||||||||||||||||
|
Real
estate
(a)
|
$ | 3,182 | $ | 9,075 | $ | 39,507 | $ | 70,271 | $ | 46,418 | ||||||||||
|
Mineral resources
|
32,370 | 44,076 | 18,581 | 26,305 | 19,629 | |||||||||||||||
|
Fiber resources
|
9,622 | 8,896 | 7,950 | 6,711 | 5,221 | |||||||||||||||
|
Total segment earnings
|
45,174 | 62,047 | 66,038 | 103,287 | 71,268 | |||||||||||||||
|
Items not allocated to segments:
|
||||||||||||||||||||
|
General and administrative
|
(22,399 | ) | (19,318 | ) | (17,413 | ) | (14,048 | ) | (9,113 | ) | ||||||||||
|
Share-based compensation
|
(11,998 | ) | (4,516 | ) | (1,397 | ) | (1,275 | ) | (443 | ) | ||||||||||
|
Gain on sale of
assets
(b)
|
104,047 | — | — | — | — | |||||||||||||||
|
Interest expense
|
(20,459 | ) | (21,283 | ) | (9,229 | ) | (6,229 | ) | (6,439 | ) | ||||||||||
|
Other non-operating
income
(c)
|
375 | 279 | 705 | 79 | 483 | |||||||||||||||
|
Income before taxes
|
94,740 | 17,209 | 38,704 | 81,814 | 55,756 | |||||||||||||||
|
Income tax expense
|
(35,633 | ) | (5,235 | ) | (13,909 | ) | (29,970 | ) | (20,859 | ) | ||||||||||
|
Net income
|
$ | 59,107 | $ | 11,974 | $ | 24,795 | $ | 51,844 | $ | 34,897 | ||||||||||
|
Diluted net income per
share
(d)
|
$ | 1.64 | $ | 0.33 | $ | 0.70 | $ | 1.47 | $ | 0.99 | ||||||||||
|
Average diluted shares
outstanding
(d)
|
36,102 | 35,892 | 35,380 | 35,380 | 35,380 | |||||||||||||||
|
At year-end:
|
||||||||||||||||||||
|
Assets
|
$ | 784,734 | $ | 834,576 | $ | 748,726 | $ | 620,174 | $ | 543,944 | ||||||||||
|
Debt
|
$ | 216,626 | $ | 337,402 | $ | 266,015 | $ | 161,117 | $ | 121,948 | ||||||||||
|
Noncontrolling interest
|
$ | 5,879 | $ | 6,660 | $ | 8,629 | $ | 7,746 | $ | 7,292 | ||||||||||
|
Forestar Group Inc. shareholders’/Parent’s equity
|
$ | 512,456 | $ | 447,292 | $ | 433,201 | $ | 418,052 | $ | 381,290 | ||||||||||
|
Ratio of total debt to total capitalization
|
29 | % | 43 | % | 38 | % | 27 | % | 24 | % | ||||||||||
| (a) | Beginning in 2006, we eliminated our historical one-month lag in accounting for our investment in our two largest real estate ventures as financial information became more readily available. The one-time effect of eliminating this one-month lag was to increase our 2006 equity in earnings by about $1,104,000. | |
| (b) | In 2009, gain on sale of assets represents Georgia and Alabama timberland sales in accordance with our near-term strategic initiatives. | |
| (c) | In 2006, other non-operating income included $459,000 expense associated with early repayment of debt. | |
| (d) | For 2007 and prior years, we computed diluted net income per share based upon the number of shares of our common stock distributed by Temple-Inland on December 28, 2007. |
28
Table of Contents
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Forward-Looking
Statements
This Annual Report on
Form 10-K
and other materials we have filed or may file with the
Securities and Exchange Commission contain “forward-looking
statements” within the meaning of the federal securities
laws. These forward-looking statements are identified by their
use of terms and phrases such as “believe,”
“anticipate,” “could,” “estimate,”
“likely,” “intend,” “may,”
“plan,” “expect,” and similar expressions,
including references to assumptions. These statements reflect
our current views with respect to future events and are subject
to risk and uncertainties. We note that a variety of factors and
uncertainties could cause our actual results to differ
significantly from the results discussed in the forward-looking
statements. Factors and uncertainties that might cause such
differences include, but are not limited to:
| • | general economic, market or business conditions in Texas or Georgia, where our real estate activities are concentrated; | |
| • | the opportunities (or lack thereof) that may be presented to us and that we may pursue; | |
| • | significant customer concentration | |
| • | future residential or commercial entitlements, development approvals and the ability to obtain such approvals; | |
| • | accuracy of estimates and other assumptions related to investment in real estate, the expected timing and pricing of land and lot sales and related cost of real estate sales, impairment of long-lived assets, income taxes, share-based compensation and oil and gas reserves; | |
| • | the levels of resale housing inventory and potential impact of foreclosures in our development projects and the regions in which they are located; | |
| • | the development of relationships with strategic partners; | |
| • | fluctuations in costs and expenses; | |
| • | demand for new housing, which can be affected by a number of factors including the availability of mortgage credit; | |
| • | supply of and demand for oil and gas and fluctuations in oil and gas prices; | |
| • | competitive actions by other companies; | |
| • | changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies; | |
| • | government regulation of exploration and production technology, including hydraulic fracturing; | |
| • | the results of financing efforts, including our ability to obtain financing with favorable terms; | |
| • | our partners’ ability to fund their capital commitments and otherwise fulfill their operating and financial obligations; and | |
| • | the final resolutions or outcomes with respect to our contingent and other liabilities related to our business. |
Other factors, including the risk factors described in
Item 1A of this Annual Report on
Form 10-K,
may also cause actual results to differ materially from those
projected by our forward-looking statements. New factors emerge
from time to time and it is not possible for us to predict all
such factors, nor can we assess the impact of any such factor on
our business or the extent to which any factor, or combination
of factors, may cause results to differ materially from those
contained in any forward-looking statement.
Any forward-looking statement speaks only as of the date on
which such statement is made, and, except as required by law, we
expressly disclaim any obligation or undertaking to disseminate
any updates or revisions to any forward-looking statement to
reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated
events.
29
Table of Contents
Background
Prior to December 28, 2007, we were a wholly-owned
subsidiary of Temple-Inland Inc. On December 28, 2007,
Temple-Inland distributed all of the issued and outstanding
shares of our common stock to its shareholders in a transaction
commonly referred to as a spin-off.
Strategy
Our strategy is to maximize and grow long-term shareholder value
through:
| • | Entitlement and development of real estate; | |
| • | Realization of value from minerals, water and fiber resources; and | |
| • | Strategic and disciplined investment in our business. |
In first quarter 2009, we announced our near-term strategic
initiatives to enhance shareholder value by generating
significant cash flow, principally from the sale of about
175,000 acres of higher and better use (HBU) timberland. In
2009, we sold about 95,000 acres of timber and timberland
in Georgia and Alabama for $158,603,000 in two transactions to
Hancock Timber Resource Group and St. Regis Paper Company, LLC
generating combined net cash proceeds of $153,851,000, which
were principally used to reduce debt and pay taxes, resulting in
a combined gain on sale of assets of $104,047,000.
Results
of Operations for the Years Ended 2009, 2008 and 2007
Net income was $59,107,000 or $1.64 per diluted share in 2009,
compared with $11,974,000 or $0.33 per diluted share in 2008 and
$24,795,000 or $0.70 per diluted share in 2007.
A summary of our consolidated results follows:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Revenues:
|
||||||||||||
|
Real estate
|
$ | 94,436 | $ | 98,859 | $ | 142,729 | ||||||
|
Mineral resources
|
36,256 | 47,671 | 20,818 | |||||||||
|
Fiber resources
|
15,559 | 13,192 | 14,439 | |||||||||
|
Total revenues
|
$ | 146,251 | $ | 159,722 | $ | 177,986 | ||||||
|
Segment earnings:
|
||||||||||||
|
Real estate
|
$ | 3,182 | $ | 9,075 | $ | 39,507 | ||||||
|
Mineral resources
|
32,370 | 44,076 | 18,581 | |||||||||
|
Fiber resources
|
9,622 | 8,896 | 7,950 | |||||||||
|
Total segment earnings
|
45,174 | 62,047 | 66,038 | |||||||||
|
Items not allocated to segments:
|
||||||||||||
|
General & administrative
|
(22,399 | ) | (19,318 | ) | (17,413 | ) | ||||||
|
Share-based compensation
|
(11,998 | ) | (4,516 | ) | (1,397 | ) | ||||||
|
Gain on sale of assets
|
104,047 | — | — | |||||||||
|
Interest expense
|
(20,459 | ) | (21,283 | ) | (9,229 | ) | ||||||
|
Other non-operating income
|
375 | 279 | 705 | |||||||||
|
Income before taxes
|
94,740 | 17,209 | 38,704 | |||||||||
|
Income tax expense
|
(35,633 | ) | (5,235 | ) | (13,909 | ) | ||||||
|
Net income
|
$ | 59,107 | $ | 11,974 | $ | 24,795 | ||||||
30
Table of Contents
Significant aspects of our results of operations follow:
2009
| • | Real estate segment earnings were negatively impacted by impairment charges principally associated with a residential condominium project located in Austin, Texas, two joint venture projects located in Tampa, Florida and an equity investment in an unconsolidated venture. Segment earnings were also negatively impacted by environmental remediation charges. | |
| • | Mineral resources segment earnings declined principally due to lower royalty revenues as result of lower natural gas and oil prices, and to a lesser extent, lower lease bonus revenues from decreased leasing activity and increased infrastructure costs associated with developing our mineral resources organization. | |
| • | Fiber resources segment earnings increased principally due to increased volumes and higher prices related to a higher mix of larger pine sawtimber sold from our Texas forest. | |
| • | General and administrative expense includes about $3,200,000 paid to outside advisors regarding an evaluation by our Board of Directors of an unsolicited shareholder proposal and $2,213,000 in non-cash impairment charges related to our undivided 15 percent interest in corporate aircraft contributed to us by Temple-Inland at spin-off. Other general and administrative expenses have declined as result of execution of our near-term strategic initiatives to lower costs. | |
| • | Share-based compensation increased principally due to our higher stock price and increased number of cash-settled equity awards. | |
| • | Gain on sale of assets results from the sale of 95,000 acres of timber and timberland in Georgia and Alabama for $158,603,000 generating net cash proceeds of $153,851,000, which were principally used to reduce debt and pay taxes, resulting in a gain on sale of assets of $104,047,000. | |
| • | Interest expense decreased as result of lower debt levels. |
2008
| • | Real estate segment earnings declined principally due to a continued decrease in the sales of residential real estate, decreased commercial sales activity, increased costs associated with environmental remediation, and asset impairments. | |
| • | Mineral resources segment earnings increased as a result of bonus payments received for leasing over 61,500 net mineral acres. Mineral resources segment earnings also benefited from increased production volumes from new well activity and higher average oil and natural gas prices. | |
| • | General and administrative expenses increased as a result of costs associated with the continued development of corporate functions as well as start-up costs necessary as a stand-alone public company. | |
| • | Share-based compensation expense increased primarily due to accelerated expense recognition in conjunction with awards granted to retirement-eligible employees, and an increase in the number of participants in our plan. | |
| • | Interest expense increased as a result of higher debt levels and higher borrowing costs. |
2007
| • | Net income decreased as a result of the overall decline in the housing industry and a reduction in activity within our mineral resources segment. | |
| • | General and administrative expenses increased as a result of costs associated with the development of corporate functions as a stand-alone company. | |
| • | Interest expense increased principally as a result of higher debt levels. |
31
Table of Contents
Current
Market Conditions
Current market conditions in the single-family residential
industry continue to be difficult, characterized by product
oversupply, depressed sales volumes and prices, high
unemployment rates and low consumer confidence. In 2009, most
homebuilders continued to focus on balance sheet health and
liquidity, making them reluctant to purchase new lots. While all
markets are being negatively affected by overall poor economic
conditions, not all geographic areas and products have been
affected to the same extent or with equal severity. These
difficult market conditions may continue throughout 2010.
In 2009, oil prices decreased compared with 2008 principally due
to slower economic activity and reduced demand. Natural gas
prices have remained depressed as production remains strong and
the economic downturn has reduced demand resulting in increased
inventory levels. Exploration and production companies remained
conservative reducing capital expenditures for drilling and
lease acquisition due to lower prices. These conditions may
impact the demand for new mineral leases, new exploration
activity and the amount of royalty revenues we receive.
Pulpwood demand is relatively stable in our markets. The average
price at which we sold fiber products is up principally due to
our harvesting and selling a higher mix of larger pine sawtimber.
Business
Segments
In 2008, we changed our reportable segments to reflect our
post-spin management of the operations transferred to us from
Temple-Inland. All prior period segment information has been
reclassified to conform to the current presentation. We manage
our operations through three business segments:
| • | Real estate, | |
| • | Mineral resources, and | |
| • | Fiber resources. |
We evaluate performance based on earnings before unallocated
items and income taxes. Segment earnings consist of operating
income, equity in earnings (loss) of unconsolidated ventures and
net income attributable to noncontrolling interests. Unallocated
items consist of general and administrative expense, share-based
compensation, gain on sale of assets, interest expense and other
non-operating income and expense. The accounting policies of the
segments are the same as those described in the accounting
policy note to the consolidated financial statements.
We operate in cyclical industries. Our operations are affected
to varying degrees by supply and demand factors and economic
conditions including changes in interest rates, availability of
mortgage credit, consumer sentiment, new housing starts, real
estate values, employment levels, changes in the market prices
for oil, natural gas, and timber, and the overall strength or
weakness of the U.S. economy.
Real
Estate
We own directly or through ventures over 251,000 acres of
real estate located in nine states and 12 markets. Our real
estate segment secures entitlements and develops infrastructure
on our lands, primarily for single-family residential and
mixed-use communities. We own about 188,000 acres in a
broad area around Atlanta, Georgia, with the balance located
primarily in Texas. We target investments principally in our
strategic growth corridors, regions across the southern half of
the United States that possess key demographic and growth
characteristics that we believe make them attractive for
long-term real estate investment. We own and manage our projects
either directly or through ventures. Our real estate segment
revenues are principally derived from the sales of residential
single-family lots, undeveloped land and commercial real estate
and to a lesser degree from the operation of commercial
properties, primarily a hotel.
32
Table of Contents
A summary of our real estate results follows:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Revenues
|
$ | 94,436 | $ | 98,859 | $ | 142,729 | ||||||
|
Cost of sales
|
(46,307 | ) | (55,131 | ) | (75,982 | ) | ||||||
|
Operating expenses
|
(34,319 | ) | (35,898 | ) | (25,201 | ) | ||||||
| 13,810 | 7,830 | 41,546 | ||||||||||
|
Equity in (loss) earnings of unconsolidated ventures
|
(8,161 | ) | 3,480 | 3,732 | ||||||||
|
Less: Net income attributable to noncontrolling interests
|
(2,467 | ) | (2,235 | ) | (5,771 | ) | ||||||
|
Segment earnings
|
$ | 3,182 | $ | 9,075 | $ | 39,507 | ||||||
In 2009, cost of sales includes $5,718,000 in impairment charges
related principally to a residential condominium project located
in Austin, Texas. Operating expenses principally consist of
$9,115,000 in property taxes, $6,112,000 in employee
compensation and benefits, $3,702,000 related to environmental
remediation charges, $2,727,000 in professional services,
$2,167,000 in depreciation, $2,054,000 in community maintenance
and $1,195,000 in marketing and advertising.
In 2009, CL Realty, a venture in which we own a 50 percent
interest, recognized impairment charges of $8,538,000 related to
two residential real estate projects located in Tampa, Florida
and an equity investment in an unconsolidated venture. Our share
of these charges is $4,269,000 and is included in equity in
(loss) earnings of unconsolidated ventures.
In 2008, cost of sales includes $3,000,000 in asset impairment
charges related to wholly-owned residential real estate
projects, principally in Texas. Operating expenses principally
consist of $10,030,000 in property taxes, $8,109,000 in employee
compensation and benefits, $3,007,000 related to environmental
remediation activities, $2,585,000 in professional services,
$2,094,000 in marketing and advertising, $2,076,000 in
depreciation and $1,342,000 in community maintenance. Segment
earnings benefited from $943,000 in recovered project
infrastructure costs from an improvement district related to a
project in Texas in which we no longer have an investment.
In 2007, cost of sales includes $6,518,000 in asset impairment
charges related to residential real estate projects and a
commercial golf club operation in Texas. Operating expenses
principally consist of $7,405,000 in property taxes, $3,907,000
related to employee compensation and benefits, $2,333,000 in
depreciation, $1,156,000 in professional services and $993,000
in facilities expense.
Revenues in our owned and consolidated ventures consist of:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Residential real estate
|
$ | 27,677 | $ | 38,110 | $ | 56,731 | ||||||
|
Commercial real estate
|
793 | 9,440 | 43,220 | |||||||||
|
Undeveloped land
|
46,580 | 26,005 | 17,939 | |||||||||
|
Commercial operating properties
|
18,214 | 21,488 | 20,383 | |||||||||
|
Other
|
1,172 | 3,816 | 4,456 | |||||||||
|
Total revenues
|
$ | 94,436 | $ | 98,859 | $ | 142,729 | ||||||
33
Table of Contents
Units sold in our owned and consolidated ventures consist of:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Residential real estate:
|
||||||||||||
|
Lots sold
|
483 | 812 | 1,076 | |||||||||
|
Average price per lot sold
|
$ | 53,469 | $ | 45,712 | $ | 51,079 | ||||||
|
Commercial real estate:
|
||||||||||||
|
Acres sold
|
2 | 55 | 166 | |||||||||
|
Average price per acre sold
|
$ | 433,406 | $ | 172,346 | $ | 260,229 | ||||||
|
Undeveloped land:
|
||||||||||||
|
Acres sold
|
18,204 | 5,577 | 2,486 | |||||||||
|
Average price per acre sold
|
$ | 2,550 | $ | 4,663 | $ | 6,748 | ||||||
Residential real estate revenues principally consist of the sale
of single-family lots to national, regional and local
homebuilders. In 2009, residential real estate revenues
continued to decline as a result of decreased demand for
single-family lots due to the overall decline in the housing
industry. These difficult housing markets and credit conditions
may continue throughout 2010. In 2008, average prices for
residential lots sold were negatively impacted by the sale of
192 high density lots for approximately $24,300 per lot.
The continued decrease in commercial real estate revenue in 2009
is attributable to limited availability of commercial real
estate acquisition and development mortgages to potential
third-party purchasers. Commercial real estate revenues in 2007
included $31,000,000 from three sales aggregating 91 acres
on which we recognized income of $17,000,000.
As market conditions for residential and commercial real estate
sales continued to deteriorate in 2008 and 2009, we allocated
additional internal resources and focused our strategic
marketing efforts toward sale of undeveloped land through our
retail land sales program. As a result, in 2009, we sold
18,204 acres from our owned and consolidated ventures at an
average price of $2,550 per acre, generating about $46,420,000
in revenues. In 2008, we sold 5,577 acres from our owned
and consolidated ventures at an average price of $4,663 per
acre, generating $26,005,000 in revenues.
34
Table of Contents
Information about our real estate projects and our real estate
ventures follows:
| Year-End | ||||||||
| 2009 | 2008 | |||||||
|
Owned and consolidated ventures:
|
||||||||
|
Entitled, developed and under development projects
|
||||||||
|
Number of projects
|
54 | 57 | ||||||
|
Residential lots remaining
|
20,186 | 20,561 | ||||||
|
Commercial acres remaining
|
1,702 | 1,624 | ||||||
|
Undeveloped land and land in the entitlement process
|
||||||||
|
Number of projects
|
19 | 23 | ||||||
|
Acres in entitlement process
|
30,370 | 32,640 | ||||||
|
Acres
undeveloped
(a)
|
198,063 | 309,232 | ||||||
|
Ventures accounted for using the equity method:
|
||||||||
|
Ventures’ lot sales (for the year)
|
||||||||
|
Lots sold
|
159 | 248 | ||||||
|
Average price per lot sold
|
$ | 60,589 | $ | 57,750 | ||||
|
Ventures’ entitled, developed and under development projects
|
||||||||
|
Number of projects
|
21 | 21 | ||||||
|
Residential lots remaining
|
8,961 | 9,348 | ||||||
|
Commercial acres sold (for the year)
|
4 | 65 | ||||||
|
Average price per acre sold
|
$ | 188,144 | $ | 280,609 | ||||
|
Commercial acres remaining
|
645 | 648 | ||||||
|
Ventures’ undeveloped land and land in the entitlement
process
|
||||||||
|
Number of projects
|
2 | 2 | ||||||
|
Acres in entitlement process
|
1,080 | 1,080 | ||||||
|
Acres sold (for the year)
|
1 | 486 | ||||||
|
Average price per acre sold
|
$ | 10,000 | $ | 6,306 | ||||
|
Acres undeveloped
|
5,517 | 5,641 | ||||||
| (a) | Includes 74,000 acres classified as assets held for sale. |
Mineral
Resources
We own directly or through ventures about 620,000 net acres
of oil and natural gas mineral interests. Our mineral resources
segment is focused on maximizing the value from royalties and
other lease revenues from our oil and natural gas mineral
interests located principally in Texas, Louisiana, Alabama and
Georgia. At year-end 2009, we have about 113,000 net acres
under lease and about 27,000 net acres held by production.
A summary of our mineral resources results follows:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Revenues
|
$ | 36,256 | $ | 47,671 | $ | 20,818 | ||||||
|
Cost of sales
|
(922 | ) | (1,714 | ) | — | |||||||
|
Operating expenses
|
(3,354 | ) | (3,043 | ) | (2,237 | ) | ||||||
| 31,980 | 42,914 | 18,581 | ||||||||||
|
Equity in earnings of unconsolidated ventures
|
390 | 1,162 | — | |||||||||
|
Segment earnings
|
$ | 32,370 | $ | 44,076 | $ | 18,581 | ||||||
35
Table of Contents
Cost of sales represent our share of oil and natural gas
production severance taxes, which are calculated based on a
percentage of oil and natural gas produced and costs related to
our non-operating working interests. In 2009, these expenses
were partially offset by a refund of $255,000 related to well
status changes approved by the Texas Railroad Commission. In
2007, oil and natural gas production severance taxes were
reflected as a reduction of revenues.
In 2009, operating expenses principally consist of $1,299,000 in
employee compensation and benefits, $792,000 in contract labor
and contract services, $301,000 in property taxes, $260,000 in
information technology and $184,000 in depreciation. Equity in
earnings of unconsolidated ventures includes our share of
royalties from a venture located within the Barnett Shale
natural gas formation.
In 2008, operating expenses principally consist of $1,236,000 in
contract labor and contract services as we resourced our
operations with a contract workforce while recruiting our
minerals team, $911,000 related to employee compensation and
benefits and $250,000 in property taxes. Equity in earnings of
unconsolidated ventures includes our share of a lease bonus
payment as result of leasing 241 net mineral acres for
$1,568,000. This leasing activity was located within the Barnett
Shale natural gas formation.
Revenues consist of:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Royalties
|
$ | 11,910 | $ | 21,639 | $ | 13,114 | ||||||
|
Other lease revenues
|
24,346 | 26,032 | 7,704 | |||||||||
|
Total revenues
|
$ | 36,256 | $ | 47,671 | $ | 20,818 | ||||||
Additional information about our
royalties
(a)
follows:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Oil production (barrels)
|
107,200 | 87,900 | 94,900 | |||||||||
|
Average price per barrel
|
$ | 56.86 | $ | 106.66 | $ | 65.24 | ||||||
|
Natural gas production (millions of cubic feet)
|
1,575.8 | 1,363.4 | 967.3 | |||||||||
|
Average price per thousand cubic feet
|
$ | 4.09 | $ | 8.76 | $ | 6.69 | ||||||
| (a) | Includes 100 percent of venture activity. In 2009, our share of activity in ventures accounted for using the equity method was 82 Mcf of natural gas from one venture in which we have a 50 percent interest. We had no production from ventures accounted for using the equity method in 2008 and 2007. |
In 2009, royalty revenues declined principally due to lower
natural gas and oil prices, which were partially offset by
higher production volume principally due to the increased number
of new wells commencing production. At year-end 2009, there were
472 active wells owned and operated by others on our leased
mineral acres compared to 439 wells at year-end 2008.
In 2009, other lease revenues include $21,333,000 in lease bonus
payments as a result of leasing over 25,800 net mineral
acres for an average of $827 per acre and $2,530,000 from delay
rental payments. This leasing activity was located principally
in Trinity County, Texas.
In 2008, royalty revenues increased principally due to higher
natural gas prices.
In 2008, other lease revenues include $23,356,000 in lease bonus
payments as a result of leasing over 61,300 net mineral
acres for an average of $381 per acre and $1,986,000 from delay
rental payments. The leasing activity was located principally in
East Texas and was driven by our proximity to the Cotton Valley,
James Lime and Haynesville natural gas formations.
In 2007, other lease revenues include $6,719,000 in lease bonus
payments as a result of leasing over 30,100 net mineral
acres for an average of $222 per acre and $985,000 from delay
rental payments.
36
Table of Contents
A summary of our oil and natural gas mineral
acres
(a)
at year-end 2009 follows:
|
Held By
|
||||||||||||||||
|
State
|
Unleased | Leased (b) | Production (c) | Total (d) | ||||||||||||
| (Net acres) | ||||||||||||||||
|
Texas
|
130,000 | 103,000 | 20,000 | 253,000 | ||||||||||||
|
Louisiana
|
129,000 | 8,000 | 7,000 | 144,000 | ||||||||||||
|
Georgia
|
180,000 | — | — | 180,000 | ||||||||||||
|
Alabama
|
40,000 | 2,000 | — | 42,000 | ||||||||||||
|
California
|
1,000 | — | — | 1,000 | ||||||||||||
| 480,000 | 113,000 | 27,000 | 620,000 | |||||||||||||
| (a) | Includes ventures. | |
| (b) | Includes leases in primary lease term only. | |
| (c) | Acres being held by production are producing oil or natural gas in paying quantities. | |
| (d) | Texas, Louisiana and California net acres are calculated as the gross number of surface acres multiplied by our percentage ownership of the mineral interest. Alabama and Georgia net acres are calculated as the gross number of surface acres multiplied by our estimated percentage ownership of the mineral interest based on county sampling. Excludes 481 net mineral acres located in Colorado. |
We have water interest in about 1.6 million acres,
including a 45 percent nonparticipating royalty interest in
groundwater produced or withdrawn for commercial purposes or
sold from approximately 1.4 million acres in Texas,
Louisiana, Georgia and Alabama. We have not received any income
from this interest.
Fiber
Resources
Our fiber resources segment focuses principally on the
management of our timber holdings. We have about
227,000 acres of timber, primarily in Georgia, and about
18,000 acres of timber under lease. We sell wood fiber from
our land and lease land for hunting and other recreational uses.
In accordance with our near-term strategic initiatives, we sold
95,000 acres and intend to sell an additional
74,000 acres classified as held for sale. As a result of
executing these initiatives, future segment revenues and
earnings are anticipated to be lower.
A summary of our fiber resources results follows:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Revenues
|
$ | 15,559 | $ | 13,192 | $ | 14,439 | ||||||
|
Cost of sales
|
(3,396 | ) | (3,357 | ) | (3,672 | ) | ||||||
|
Operating expenses
|
(2,728 | ) | (2,611 | ) | (5,060 | ) | ||||||
| 9,435 | 7,224 | 5,707 | ||||||||||
|
Other operating income
|
187 | 1,672 | 2,243 | |||||||||
|
Segment earnings
|
$ | 9,622 | $ | 8,896 | $ | 7,950 | ||||||
In 2009, operating expenses principally consisted of $1,241,000
in employee compensation and benefits, $533,000 in facility
costs and $224,000 in timber severance taxes.
In 2008, operating expenses decreased as a result of
establishing our post-spin operating structure and principally
consist of $1,036,000 related to employee compensation and
benefits and $600,000 related to contract services. In 2007,
operating expenses were allocated to us from Temple-Inland.
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Table of Contents
In 2008 and 2007, other operating income principally reflects a
gain from partial termination of a timber lease related to land
sold from Ironstob LLC, a venture created in 2007. We have a
58 percent ownership interest in this venture which
controls about 16,000 acres of undeveloped land near
Atlanta, Georgia.
Revenues consist of:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Fiber
|
$ | 13,478 | $ | 10,987 | $ | 13,722 | ||||||
|
Recreational leases and other
|
2,081 | 2,205 | 717 | |||||||||
|
Total revenues
|
$ | 15,559 | $ | 13,192 | $ | 14,439 | ||||||
Fiber sold consists of:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Tons sold
|
1,141,400 | 1,079,900 | 1,215,500 | |||||||||
|
Average price per ton
|
$ | 11.81 | $ | 10.17 | $ | 11.29 | ||||||
In 2009, total price per ton increased due to sales including a
higher proportional mix of sawtimber versus pulpwood. In 2008,
average price per ton decreased because we harvested and sold
higher levels of pulpwood. The majority of our sales were to
Temple-Inland at market prices.
In 2007, Temple-Inland retained a greater portion of
recreational lease revenues.
Additional information about our fiber sold follows:
| For the Year | ||||||||
| 2009 | 2008 | |||||||
|
Pulpwood tons sold
|
810,100 | 917,000 | ||||||
|
Average pulpwood price per ton
|
$ | 8.53 | $ | 8.52 | ||||
|
Sawtimber tons sold
|
331,300 | 162,900 | ||||||
|
Average sawtimber price per ton
|
$ | 19.82 | $ | 19.51 | ||||
|
Total tons sold
|
1,141,400 | 1,079,900 | ||||||
|
Average price per ton
|
$ | 11.81 | $ | 10.17 | ||||
In 2007, fiber revenues were allocated to us from Temple-Inland
and the detail by product is not available to us.
Items Not
Allocated to Segments
Unallocated items represent income and expenses managed on a
company-wide basis and include general and administrative
expenses, share-based compensation, gain on sale of assets,
interest expense and other non-operating income and expense.
General and administrative expense principally consists of
accounting and finance, tax, legal, human resources, internal
audit, information technology and our board of directors. These
functions support all of our business segments and are not
allocated.
In 2009, general and administrative expense principally consists
of $5,687,000 in employee compensation and benefits, $4,686,000
in professional services, of which about $3,200,000 was paid to
outside advisors regarding an evaluation by our Board of
Directors of an unsolicited shareholder proposal, $2,213,000 in
non-cash impairment charges related to our undivided
15 percent interest in corporate aircraft contributed to us
by Temple-Inland at spin-off, $1,728,000 in depreciation
expense, $1,308,000 in insurance, $1,134,000 in facilities
expense and $1,111,000 in director fees. In 2008, the increase
in general and administrative expenses was due
38
Table of Contents
to increased costs associated with implementing corporate
functions as a stand-alone public company. In 2007, general and
administrative expenses were allocated from Temple-Inland.
In 2009, the increase in share-based compensation was due to our
higher stock price and increased number of cash-settled equity
awards. In 2008, the increase in share-based compensation
expense was a result of recognizing accelerated expense for
retirement eligible employees and fully vested awards to members
of our board of directors, and from an increase in the number of
participants in our plan. In 2007, share-based compensation was
allocated from Temple-Inland and represents the expense of
Temple-Inland share-based awards granted to our employees.
In 2009, gain on sale of assets of $104,047,000 results from the
sale of 95,000 acres of timber and timberland in Georgia
and Alabama for $158,603,000 generating net cash proceeds of
$153,851,000, which were principally used to reduce debt and pay
taxes.
In 2009, interest expense decreased as result of lower debt
levels. In 2008 and 2007, the increase in interest expense was
due to higher average debt balances and higher borrowing costs.
Income
Taxes
Our effective tax rate and the benefit attributable to
noncontrolling interests was 37 percent and 1 percent
in 2009, 27 percent and 4 percent in 2008 and
31 percent and 5 percent in 2007. Our 2009 and 2008
rates also include benefits from percentage depletion and a
federal income tax rate change for qualified timber gains due to
the Food, Conservation and Energy Act of 2008. Income before
income taxes includes income from pass-through entities
allocable to noncontrolling interests for which there is no
income tax provided.
We anticipate that our effective tax rate in 2010 will be about
37 percent of which about 2 percent will be
attributable to noncontrolling interests.
Capital
Resources and Liquidity
Sources
and Uses of Cash
We operate in cyclical industries and our cash flows fluctuate
accordingly. Our principal operating cash requirements are for
the acquisition and development of real estate, either directly
or indirectly through ventures, taxes, interest and
compensation. Our principal sources of cash are proceeds from
the sale of real estate and timber, the cash flow from minerals
and commercial operating properties, borrowings, and
reimbursements from utility and improvement districts. Operating
cash flows are affected by the timing of the payment of real
estate development expenditures and the collection of proceeds
from the eventual sale of the real estate, the timing of which
can vary substantially depending on many factors including the
size of the project, state and local permitting requirements and
availability of utilities, and by the timing of oil and natural
gas leasing and production activities. Working capital is
subject to operating needs, the timing of sales of real estate
and timber, the timing of collection of mineral royalties or
mineral lease payments, collection of receivables, reimbursement
from utility and improvement districts and the payment of
payables and expenses.
Cash
Flows from Operating Activities
Cash flows from our real estate development activities,
undeveloped land sales, timber sales, mineral and recreational
leases and reimbursements from utility and improvement districts
are classified as operating cash flows.
Net cash provided by (used for) operations was $142,120,000 in
2009, ($51,889,000) in 2008 and ($63,981,000) in 2007. In 2009,
proceeds from the sale of about 95,000 acres of timber and
timberland in Georgia and Alabama generated pre-tax net cash
proceeds of $153,851,000 and generated gain on sale of assets of
$104,047,000. Expenditures for real estate development slightly
exceeded non-cash cost of sales due to our commitment to the
resort at Cibolo Canyons and our development of existing real
estate projects, principally in the major markets of Texas. We
invested $18,857,000 in Cibolo Canyons near San Antonio,
Texas, of which $16,235,000 was invested in the resort
development. We received $24,945,000 in
39
Table of Contents
reimbursements from utility and improvement districts, of which
$20,270,000 was related to our Cibolo Canyons mixed-use
development and was accounted for as a reduction of our
investment. We paid estimated income taxes of $48,299,000 for
2009.
In 2008, expenditures for real estate development and
acquisition exceeded non-cash real estate cost of sales
principally due to contractual commitments to our Cibolo Canyons
project. We invested $34,863,000 in this project in 2008 of
which $18,301,000 was invested in the resort development.
In 2007, expenditures for real estate development and
acquisition significantly exceeded non-cash real estate cost of
sales principally due to the investment of $47,000,000 in new
real estate projects, an increase in the deferred tax asset of
$19,544,000 due primarily to a tax gain resulting from our
contractual right to receive certain hotel occupancy and sales
revenues through 2034 at our Cibolo Canyons project and
distributions to noncontrolling interests of $11,042,000.
Cash
Flows from Investing Activities
Capital contributions to and capital distributions from
unconsolidated ventures are classified as investing activities.
In addition, proceeds from the sale of property and equipment,
software costs and expenditures related to reforestation
activities are also classified as investing activities.
In 2009, net cash (used for) investing activities was
($6,373,000) and is principally related to our investment in
property, equipment, software and reforestation. Net cash
returned from our unconsolidated ventures provided $922,000.
In 2008, net cash (used for) investing activities was
($16,667,000) as capital contributed to unconsolidated ventures
exceeded distributions received principally due to our
contractual commitment to Palisades West LLC. In 2008, we
contributed $9,118,000 to this venture which consists of two
office buildings totaling approximately 375,000 square feet
located in Austin, Texas.
In 2007, net cash (used for) investing activities was
($10,828,000) as capital contributed to unconsolidated ventures
exceeded distributions received.
Cash
Flows from Financing Activities
Net cash (used for) provided by financing activities was
($122,823,000) in 2009, $69,163,000 in 2008 and $71,979,000 in
2007. In 2009, we reduced our outstanding debt by $120,776,000
principally from the net proceeds generated from the sale of
about 95,000 acres of timber and timberland in Georgia and
Alabama.
In 2008, our debt increased by $71,387,000 to fund our real
estate development expenditures, net investment in our
unconsolidated ventures and net working capital to operate our
business.
In 2007, the increase in debt funded expenditures for real
estate development and acquisitions.
Liquidity
and Contractual Obligations
Liquidity
At year-end 2009, net unused borrowing capacity under our senior
credit facility is calculated as follows:
|
Senior
|
||||
| Credit Facility | ||||
| (In thousands) | ||||
|
Borrowing base availability
|
$ | 359,335 | ||
|
Less: borrowings
|
(125,000 | ) | ||
|
Less: letters of credit
|
(3,071 | ) | ||
|
Less: minimum liquidity covenant
|
(28,703 | ) | ||
|
Unused borrowing capacity
|
$ | 202,561 | ||
40
Table of Contents
The net proceeds from the sale of approximately
95,000 acres of timber and timberland in accordance with
our near-term strategic initiatives were principally used to
reduce our term loan by $50,000,000 and repay our revolving line
of credit in the amount of $70,000,000.
Our senior credit facility provides for a $125,000,000 term loan
and a $257,700,000 revolving line of credit. The term loan and
revolving line of credit may be prepaid at any time without
penalty. The aggregate commitment under this agreement will be
reduced by $850 per acre of HBU timberland sold pursuant to our
near-term strategic initiatives, with such reduction being split
60 percent to reduce the term loan commitment and
40 percent to reduce the revolving line of credit. Assuming
the sale of 74,000 acres classified as held for sale in
accordance with our near-term strategic initiatives, the total
aggregate commitment under our senior credit facility will be
$316,250,000, consisting of $85,750,000 under the term loan and
$230,500,000 under the revolving line of credit. The revolving
line of credit includes a sublimit for letters of credit equal
to the lesser of $100,000,000 or 22 percent of the
aggregate facility commitments, of which $3,071,000 was
outstanding at year-end 2009. Total borrowings under our senior
credit facility (including the face amount of letters of credit)
may not exceed a borrowing base formula, and includes a minimum
liquidity requirement equal to the lesser of $35,000,000 or
7.5 percent of the aggregate facility commitments at each
quarter-end.
Our senior credit facility matures December 1, 2010,
although we have the option to extend the maturity through
June 30, 2012 and it is likely we will exercise the
extension option. At our option, we can borrow at LIBOR plus
4.5 percent (subject to a 2 percent LIBOR floor) or
Prime plus 2.5 percent. All borrowings under the senior
credit facility are secured by (a) all timberland and
high-value timberland, (b) assignments of current and
future leases, rents and contracts, including our mineral
leases, (c) a security interest in our primary operating
account, (d) pledge of the equity interests in current and
future material operating subsidiaries or joint venture
interests, or if such pledge is not permitted, a pledge of the
right to distributions from such entities, and (e) negative
pledge (without a mortgage) on all other wholly-owned assets.
The senior credit facility provides for releases of real estate
to be conveyed provided that borrowing base compliance is
maintained.
As a result of current financial market conditions, we closely
monitor the banks in our senior credit facility. We have not
experienced any difficulty borrowing under our credit facility
to date, and we currently have no reason to believe that the
participants will not be able to honor their commitments under
these facilities.
In 2008, we entered into an interest rate swap agreement. This
instrument expires March 1, 2010 and is for a total
notional amount of $100,000,000. It is non-exchange traded and
is valued using third-party resources and models. Under the
agreement, we mitigate interest rate fluctuations by fixing the
interest rate on the first $100,000,000 of our variable rate
borrowings at 6.57 percent compared with a floating
interest rate of one month LIBOR plus 4 percent
(4.24 percent at year-end 2009). At year-end 2009, the fair
value of our interest rate instrument was a $393,000 liability
that is included in other liabilities.
Our senior credit facility and other debt agreements contain
terms, conditions and financial covenants customary for such
agreements including minimum levels of interest coverage and
limitations on leverage. At year-end 2009, we were in compliance
with the terms, conditions and financial covenants of these
agreements. Based on our current operating projections, we
believe that we will remain in compliance with our senior credit
facility covenants in the future.
In 2009, we amended our senior credit facility, and the
following table details our compliance with the amended
financial covenants calculated as provided in the senior credit
facility:
|
Financial Covenant
|
Requirement
|
Year-End 2009 | ||
|
Interest Coverage
Ratio
(a)
|
³ 1.50:1.0 | 7.08:1.0 | ||
|
Revenues/Capital Expenditures
Ratio
(b)
|
³ 1.00:1.0 | 4.20:1.0 | ||
|
Total Leverage
Ratio
(c)
|
£ 40% | 19.1% | ||
|
Minimum
Liquidity
(d)
|
> $29 million | $252 million | ||
|
Net
Worth
(e)
|
> $403 million | $518 million | ||
|
Collateral Value to Loan Commitment
Ratio
(f)
|
³ 1.75:1.0 | 2.23:1.0 |
41
Table of Contents
| (a) | Calculated as EBITDA (earnings before interest, taxes, depreciation and amortization), plus non-cash compensation expense, plus other non-cash expenses, divided by interest expense. This covenant is applied at the end of each quarter on a rolling four quarter basis. | |
| (b) | Calculated as total gross revenues, plus our pro rata share of the operating revenues from unconsolidated ventures, divided by capital expenditures. Capital expenditures are defined as consolidated development and acquisition expenditures plus our pro rata share of unconsolidated ventures’ development and acquisition expenditures. This covenant is applied at the end of each quarter on a rolling four quarter basis. | |
| (c) | Calculated as total funded debt divided by adjusted asset value. Total funded debt includes indebtedness for borrowed funds, secured liabilities and reimbursement obligations with respect to letters of credit or similar instruments. Adjusted asset value is defined as the sum of unrestricted cash and cash equivalents, timberlands, high value timberlands, raw entitled lands, entitled land under development, minerals business, other real estate owned at book value without regard to any indebtedness and our pro rata share of joint ventures’ book value without regard to any indebtedness. This covenant is applied at the end of each quarter. | |
| (d) | Calculated as the amount available for drawing under the revolving commitment, plus unrestricted cash, plus cash equivalents which are not pledged or encumbered and the use of which is not restricted by the terms of any agreement. At year-end 2009, the minimum liquidity is required to be at least equal to the lesser of $35,000,000 or 7.5 percent of the aggregate commitment under the senior credit facility. At year-end 2009, the requirement was $29,000,000. This covenant is applied at the end of each quarter. | |
| (e) | Calculated as the amount by which consolidated total assets exceeds consolidated total liabilities. At year-end 2009, the requirement is $403,000,000, computed as: $350,000,000, plus 85 percent of the aggregate net proceeds received by us from any equity offering, plus 75 percent of all positive net income, on a cumulative basis. This covenant is applied at the end of each quarter. | |
| (f) | Calculated as the total collateral value of timberland, high value timberland and our minerals business, divided by total aggregate loan commitment. This covenant is applied at the end of each quarter. |
Contractual
Obligations
At year-end 2009, contractual obligations consist of:
| Payments Due or Expiring by Year | ||||||||||||||||||||
| Total | 2010 | 2011-12 | 2013-14 | Thereafter | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Debt
(a)
|
$ | 216,626 | $ | 175,873 | $ | 40,753 | $ | — | $ | — | ||||||||||
|
Interest payments on debt
|
7,849 | 7,489 | 360 | — | — | |||||||||||||||
|
Purchase obligations
|
4,673 | 4,673 | — | — | — | |||||||||||||||
|
Operating leases
|
20,806 | 2,186 | 4,058 | 3,396 | 11,166 | |||||||||||||||
|
Venture contributions
|
2,566 | 2,566 | — | — | — | |||||||||||||||
|
Loan commitments
|
10,000 | 10,000 | — | — | — | |||||||||||||||
|
Total
|
$ | 262,520 | $ | 202,787 | $ | 45,171 | $ | 3,396 | $ | 11,166 | ||||||||||
| (a) | Items included in our balance sheet. In 2010, payments due or expiring include $125,000,000 borrowed under our term loan facility in which we have an option to extend the maturity date through June 2012. |
Our sources of funding are our operating cash flows and
borrowings under our senior credit facility. Our contractual
obligations due in 2010 will likely be paid from operating cash
flows and from borrowings under our senior credit facility. It
is likely we will exercise our option to extend the maturity of
our senior credit facility through June 2012.
Interest payments on debt include interest payments related to
our fixed rate debt and estimated interest payments related to
our variable rate debt. Estimated interest payments on variable
rate debt were calculated
42
Table of Contents
assuming that the outstanding balances and interest rates that
existed at year-end 2009 remain constant through maturity.
Purchase obligations are defined as legally binding and
enforceable agreements to purchase goods and services. Our
purchase obligations include commitments for land acquisition
and land development, engineering and construction contracts for
land development and service contracts.
Our operating leases are for timberland, facilities and
equipment. In second quarter 2008, we entered into a
10-year
agreement with Palisades West LLC, in which we have a
25 percent ownership interest, to lease approximately
32,000 square feet in Austin, Texas as our corporate
headquarters. At year-end 2009, the remaining contractual
obligation is $11,397,000. Also included in operating leases is
a long-term timber lease of over 16,000 acres that has a
remaining lease term of 16 years and a remaining
contractual obligation of $7,574,000.
Venture contributions and other represent commitments to
contribute a stated amount to a venture as and when needed by
the venture and other commitments. We have excluded from the
table contributions that may be made in the ordinary course of
business for which there is no commitment to contribute an
amount that is quantifiable or identifiable to specific dates.
Loan commitments represent our commitment to loan $10,000,000 to
a third-party equity investor in the JW
Marriott
®
San Antonio Hill Country Resort & Spa resort
development. We funded this commitment in January 2010.
Estimated payments related to our interest rate swap agreement
are excluded from the table because we cannot reasonably
estimate the amount or timing of payment obligations.
Additionally, we have other long-term liabilities that are not
included in the table because they do not have scheduled
maturities.
Off-Balance
Sheet Arrangements
From time to time, we enter into off-balance sheet arrangements
to facilitate our operating activities. At year-end 2009, our
off-balance sheet unfunded arrangements, excluding contractual
interest payments, purchase obligations and operating lease
obligations included in the table of contractual obligations,
consist of:
| Expiring by Year | ||||||||||||||||||||
| Total | 2010 | 2011-12 | 2013-14 | Thereafter | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Performance bonds
|
$ | 6,050 | $ | 5,394 | $ | 626 | $ | 30 | $ | — | ||||||||||
|
Standby letters of credit
|
3,071 | 3,071 | — | — | — | |||||||||||||||
|
Recourse obligations
|
3,595 | 380 | 462 | 1,079 | 1,674 | |||||||||||||||
|
Total
|
$ | 12,716 | $ | 8,845 | $ | 1,088 | $ | 1,109 | $ | 1,674 | ||||||||||
Performance bonds, letters of credit and recourse obligations
are primarily for our real estate development activities and
include $1,798,000 of performance bonds and letters of credit we
provided on behalf of certain ventures. Our venture partners
also provide performance bonds and letters of credit. Generally
these performance bonds or letters of credit would be drawn on
due to lack of specific performance by us or the ventures, such
as failure to deliver streets and utilities in accordance with
local codes and ordinances.
In addition, at year-end 2009, we participate in four ventures
that have about $77,113,000 of principally non-recourse
borrowings maturing in 2010. These ventures have total assets of
about $77,500,000 and other liabilities of $11,100,000. Based on
current operating results and projections, we believe it is
likely that these ventures will be able to extend or refinance
the borrowings maturing in 2010; however there is no assurance
that this can be done. We have no obligation to make further
capital contributions to these ventures. We do not believe that
the ultimate resolution of these matters will have a significant
effect on our earnings or financial position. At year-end 2009,
our investment in these four ventures, which are accounted for
using the equity method, was approximately $5,600,000. Please
read Note 7 — Investment in Unconsolidated
Ventures for additional information.
43
Table of Contents
Cibolo
Canyons — San Antonio, Texas
Cibolo Canyons consists of the JW
Marriott
®
San Antonio Hill Country Resort & Spa development
owned by third parties and a mixed-use development we own. We
have about $87,804,000 invested in Cibolo Canyons at year-end
2009.
Resort
Hotel, Spa and Golf Development
In 2007, we entered into agreements to facilitate third-party
construction and ownership of the JW
Marriott
®
San Antonio Hill Country Resort & Spa, which
includes a 1,002 room destination resort and two PGA
Tour
®
Tournament Players
Club
®
(TPC) golf courses. Under these agreements, we agreed to
transfer to third-party owners about 700 acres of
undeveloped land, to provide about $30,000,000 cash and to
provide approximately $12,700,000 of other consideration
principally consisting of golf course construction materials,
substantially all of which have been provided at year-end 2009.
In exchange for our commitment to the resort, the third-party
owners assigned to us certain rights under an agreement between
the third-party owners and a legislatively created Special
Purpose Improvement District (SPID). This agreement includes the
right to receive from the SPID 9 percent of hotel occupancy
revenues and 1.5 percent of other resort sales revenues
collected as taxes by the SPID through 2034. The amount we
receive will be net of annual ad valorem tax reimbursements by
the SPID to the third-party owners of the resort through 2020.
In addition, these payments will be net of debt service, if any,
on bonds issued by the SPID collateralized by hotel occupancy
tax and other resort sales tax through 2034.
The amounts we collect under this agreement are dependent on
several factors including the amount of revenues generated by
and ad valorem taxes imposed on the resort and the amount of any
applicable debt service incurred by the SPID. As a result, there
is significant uncertainty as to the amount and timing of
collections under this agreement. Until these uncertainties are
clarified, amounts collected under the agreement will be
accounted for as a reduction of our investment in the resort
development. The resort began operations on January 22,
2010.
At year-end 2009, we have $42,724,000 invested in the resort
development.
In addition, in January 2010, pursuant to a 2009 commitment, we
loaned $10,000,000 to a third-party equity investor in the
resort development. The loan bears interest at 9 percent,
increasing to 12 percent after July 2012, and is repayable
at the earliest of refinancing or sale of the resort hotel or
July 31, 2013. Borrowings are collateralized by pledges of
funding commitments from the borrower, including our right to
direct capital calls and to enforce rights under the fund
operating agreement in the event of nonpayment.
Mixed-Use
Development
The mixed-use development we own consists of 2,100 acres
planned to include about 1,700 residential lots and about 145
commercial acres designated for multifamily and retail uses, of
which 590 lots and 64 commercial acres have been sold through
year-end 2009.
In 2007, we entered into an agreement with the SPID providing
for reimbursement of certain infrastructure costs related to the
mixed-use development. Reimbursements are subject to review and
approval by the SPID and unreimbursed amounts accrue interest at
9.75 percent. The SPID’s funding for reimbursements is
principally derived from its ad valorem tax collections and bond
proceeds collateralized by ad valorem taxes, less debt service
on these bonds and annual administrative and public service
expenses. Through year-end 2009, we have submitted for
reimbursement about $57,332,000 of infrastructure costs. In
2009, we received reimbursements totaling $20,270,000. At
year-end 2009, we have about $37,062,000 in pending
reimbursements, excluding interest.
Since the amount we will be reimbursed is dependent on several
factors, including timing of SPID approval and the SPID having
an adequate tax base to generate funds that can be used to
reimburse us, there is significant uncertainty as to the amount
and timing of reimbursements under this agreement. As a result,
in 2009 amounts collected under this agreement were accounted
for as a reduction of our investment in the
44
Table of Contents
mixed-use development. We have not recognized income from
interest due, but not collected. As these uncertainties are
clarified, we will modify our accounting accordingly.
At year-end 2009, we have $45,080,000 invested in the mixed-use
development.
Accounting
Policies
Critical
Accounting Estimates
In preparing our financial statements, we follow generally
accepted accounting principles, which in many cases require us
to make assumptions, estimates, and judgments that affect the
amounts reported. Our significant accounting policies are
included in Note 2 to the Consolidated Financial
Statements. Many of these principles are relatively
straightforward. There are, however, a few accounting policies
that are critical because they are important in determining our
financial condition and results of operations and involve
significant assumptions, estimates and judgments that are
difficult to determine. We must make these assumptions,
estimates and judgments currently about matters that are
inherently uncertain, such as future economic conditions,
operating results and valuations, as well as our intentions. As
the difficulty increases, the level of precision decreases,
meaning actual results can, and probably will, differ from those
currently estimated. We base our assumptions, estimates and
judgments on a combination of historical experiences and other
factors that we believe are reasonable. We have reviewed the
selection and disclosure of these critical accounting estimates
with our Audit Committee.
| • | Investment in Real Estate and Cost of Real Estate Sales — In allocating costs to real estate owned and real estate sold, we must estimate current and future real estate values. Our estimates of future real estate values sometimes must extend over periods 15 to 20 years from today and are dependent on numerous assumptions including our intentions and future market and economic conditions. In addition, when we sell real estate from projects that are not finished, we must estimate future development costs through completion. Differences between our estimates and actual results will affect future carrying values and operating results. | |
| • | Impairment of Long-Lived Assets — Measuring assets for impairment requires estimating future fair values based on our intentions as to holding periods, future operating cash flows and the residual value of assets under review, primarily undeveloped land. Depending on the asset under review, we use varying methods to determine fair value, such as discounting expected future cash flows, determining resale values by market, or applying a capitalization rate to net operating income using prevailing rates in a given market. Changes in economic conditions, demand for real estate, and the projected net operating income for a specific property will inevitably change our estimates. | |
| • | Share-Based Compensation — We currently use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the stock price as well as assumptions regarding a number of other variables. These variables include expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors (term of option), risk-free interest rate and expected dividends. We have limited historical experience as a stand-alone company so we utilized alternative methods in determining our valuation assumptions. The expected life was based on the simplified method utilizing the midpoint between the vesting period and the contractual life of the awards. The expected stock price volatility was based on historical prices of our peers’ common stock for a period corresponding to the expected life of the options. Pre-vesting forfeitures are estimated based upon the pool of participants and their expected activity. | |
| • | Income Taxes — In preparing our consolidated financial statements, significant judgment is required to estimate our income taxes. Our estimates are based on our interpretation of federal and state tax laws. We estimate our actual current tax due and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. The temporary differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. If needed, we record a valuation allowance against our deferred tax assets based upon our analysis of the timing and reversal |
45
Table of Contents
| of future taxable amounts and our history and future expectations of taxable income. Adjustments may be required by a change in assessment of our deferred tax assets and liabilities, changes due to audit adjustments by federal and state tax authorities, and changes in tax laws. To the extent adjustments are required in any given period; we will include the adjustments in the tax provision in our financial statements. These adjustments could materially impact our financial position, cash flow and results of operations. |
| • | Oil and Natural Gas Reserves — The estimation of the oil and natural gas reserve is a significant estimate. On an annual basis, our consulting petroleum engineering firm, with our assistance, prepares estimates of crude oil and natural gas reserves based on available geologic and seismic data, reservoir pressure data, core analysis reports, well logs, analogous reservoir performance history, production data and other available sources of engineering, geological and geophysical information. Oil and natural gas prices are volatile and largely affected by worldwide or domestic production and consumption and are outside our control. |
Adopted
and Pending Accounting Pronouncements
We adopted 10 new accounting pronouncements in 2009, the
adoption of which did not have a significant effect on our
earnings or financial position. There are two new accounting
pronouncements that we will be required to adopt in 2010, and we
are currently evaluating the effect if any, on our earnings or
financial position. Please read Note 3 — New
Accounting Pronouncements to the Consolidated Financial
Statements.
Effects
of Inflation
Inflation has had minimal effects on operating results the past
three years. Our real estate, timber, and property and equipment
are carried at historical costs. If carried at current
replacement costs, the cost of real estate sold, timber cut, and
depreciation expense would have been significantly higher than
what we reported.
Legal
Proceedings
We are involved in various legal proceedings that arise from
time to time in the ordinary course of doing business. We
believe we have established adequate reserves for any probable
losses, and we do not believe that the outcome of any of these
proceedings should have a material adverse effect on our
financial position, long-term results of operations, or cash
flow. It is possible, however, that charges related to these
matters could be significant to results of operations or cash
flows in any one accounting period.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
Interest
Rate Risk
Our interest rate risk is principally related to our
variable-rate debt. Interest rate changes impact earnings due to
the resulting increase or decrease in the cost of our
variable-rate debt, which was $213,195,000 at year-end 2009 and
$329,030,000 at year-end 2008. In 2009 and 2008, our outstanding
variable rate debt includes $100,000,000 notional amount
interest rate swap which expires in March 2010. Please read
Note 11 — Derivative Instruments for additional
information regarding our interest rate swap agreement.
The following table illustrates the estimated effect on our
pre-tax income of immediate, parallel, and sustained shifts in
interest rates for the next 12 months on our variable-rate
debt at year-end 2009, with comparative year-end 2008
information.
46
Table of Contents
This estimate assumes that debt reductions from contractual
payments will be replaced with short-term, variable-rate debt;
however, that may not be the financing alternative we choose.
| At Year-End | ||||||||
|
Change in Interest Rates
|
2009 | 2008 | ||||||
| (In thousands) | ||||||||
|
+2%
|
$ | (4,100 | ) | $ | (4,581 | ) | ||
|
+1%
|
(2,132 | ) | (2,290 | ) | ||||
|
−1%
|
2,132 | 2,290 | ||||||
|
−2%
|
4,264 | 4,581 | ||||||
Changes in interest rates affect the value of our interest rate
swap agreement ($100,000,000 notional amount at year-end 2009).
We believe any change in the value of this agreement would not
be significant.
Foreign
Currency Risk
We have no exposure to foreign currency fluctuations.
Commodity
Price Risk
We have no significant exposure to commodity price fluctuations.
| Item 8. | Financial Statements and Supplementary Data. |
The Consolidated Financial Statements and related notes and
schedules are indexed on
page F-1,
and are attached as pages F-1 through F-37, to this Annual
Report on
Form 10-K.
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
None.
| Item 9A. | Controls and Procedures. |
(a) Disclosure controls and procedures
Our management, with the participation of the Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such
term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (or the
Exchange Act)) as of the end of the period covered by this
report. Based on such evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that, as of the end
of such period, our disclosure controls and procedures are
effective in recording, processing, summarizing and reporting,
on a timely basis, information required to be disclosed by us in
the reports that we file or submit under the Exchange Act and
are effective in ensuring that information required to be
disclosed by us in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding
required disclosure.
(b) Internal control over financial reporting
Management’s report on internal control over financial
reporting is included in this Annual Report on
Form 10-K
on
page F-2.
(c) Changes in Internal Control over Financial Reporting
During fourth quarter 2009, we completed implementation of a new
mineral business information system to record financial
transactions related to our mineral resources segment.
Management conducted pre-implementation testing and
post-implementation reviews to ensure that internal controls
were properly designed to prevent material financial statement
errors. We have tested and evaluated the effectiveness of the
key controls over financial reporting related to this system and
determined that the controls are operating
47
Table of Contents
effectively. There were no other changes in fourth quarter 2009
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
| Item 9B. | Other Information. |
None.
| Item 10. | Directors, Executive Officers and Corporate Governance. |
Set forth below is certain information about the members of our
Board of Directors:
|
Year First
|
||||||||||
|
Elected to
|
||||||||||
|
Name
|
Age
|
the Board
|
Principal Occupation | |||||||
|
Kenneth M. Jastrow, II
|
62 | 2007 | Former Chairman and Chief Executive Officer of Temple-Inland Inc. | |||||||
|
Louis R. Brill
|
68 | 2007 | Former Chief Accounting Officer of Temple-Inland Inc. | |||||||
|
Kathleen Brown
|
64 | 2007 | Senior Advisor, Goldman, Sachs & Co. | |||||||
|
William G. Currie
|
62 | 2007 | Executive Chairman of Universal Forest Products, Inc. | |||||||
|
James M. DeCosmo
|
51 | 2007 | President and Chief Executive Officer of Forestar Group Inc. | |||||||
|
Michael E. Dougherty
|
69 | 2008 | Chairman of Dougherty Financial Group LLC | |||||||
|
James A. Johnson
|
66 | 2007 | Vice Chairman of Perseus LLC | |||||||
|
Thomas H. McAuley
|
64 | 2007 | Former President of Inland Capital Markets Groups, Inc. | |||||||
|
William C. Powers, Jr.
|
63 | 2007 | President of The University of Texas at Austin | |||||||
|
James A. Rubright
|
63 | 2007 | Chairman and Chief Executive Officer of Rock-Tenn Company | |||||||
|
Richard M. Smith
|
64 | 2007 | Chairman of Newsweek | |||||||
The remaining information required by this item is incorporated
herein by reference from our definitive proxy statement,
involving the election of directors, to be filed pursuant to
Regulation 14A with the SEC not later than 120 days
after the end of the fiscal year covered by this
Form 10-K
(or Definitive Proxy Statement). Certain information required by
this item concerning executive officers is included in
Part I of this report.
| Item 11. | Executive Compensation. |
The information required by this item will be contained in our
Definitive Proxy Statement to be filed in connection with our
2010 annual meeting of stockholders and is incorporated herein
by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by this item will be contained in our
Definitive Proxy Statement to be filed in connection with our
2010 annual meeting of stockholders and is incorporated herein
by reference.
48
Table of Contents
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
The information required by this item will be contained in our
Definitive Proxy Statement to be filed in connection with our
2010 annual meeting of stockholders and is incorporated herein
by reference.
| Item 14. | Principal Accountant Fees and Services. |
The information required by this item will be contained in our
Definitive Proxy Statement to be filed in connection with our
2010 annual meeting of stockholders and is incorporated herein
by reference.
| Item 15. | Exhibits and Financial Statement Schedules. |
(a) Documents filed as part of this report.
(1)
Financial Statements
Our Consolidated Financial Statements are attached as pages F-1
through F-37 to this Annual Report on
Form 10-K.
(2)
Financial Statement Schedules
Schedule III — Consolidated Real Estate and
Accumulated Depreciation is attached as pages
S-1
through
S-6
to this
Annual Report on
Form 10-K.
Schedules other than those listed above are omitted as the
required information is either inapplicable or the information
is presented in our Consolidated Financial Statements and notes
thereto.
(3)
Exhibits
The exhibits listed in the Exhibit Index in (b) below
are filed or incorporated by reference as part of this Annual
Report on
Form 10-K.
(b) Exhibits
|
Exhibit
|
||||
|
Number
|
Exhibit
|
|||
| 2 | .1 | Separation and Distribution Agreement, dated December 11, 2007, among Forestar Real Estate Group Inc. (the “Company”), Guaranty Financial Group Inc., and Temple — Inland Inc. (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 11, 2007). | ||
| 3 | .1 | Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 11, 2007). | ||
| 3 | .2 | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed with the Commission on December 11, 2007). | ||
| 3 | .3 | First Amendment to Amended and Restated Bylaws of Forestar Real Estate Group Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Commission on February 19, 2008). | ||
| 3 | .4 | Certificate of Designation of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.3 of the Company’s Current Report on Form 8-K filed with the Commission on December 11, 2007). | ||
| 3 | .5 | Second Amendment to Amended and Restated Bylaws of Forestar Real Estate Group Inc. (incorporated by reference to Exhibit 3.5 of the Company’s Annual Report on Form 10-K filed with the Commission on March 5, 2009) | ||
| 3 | .6 | Certificate of Ownership and Merger, dated November 21, 2008 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Commission on November 24, 2008). | ||
| 3 | .7 | Third Amendment to Amended and Restated Bylaws of Forestar Group Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed with the Commission on November 24, 2008). | ||
49
Table of Contents
|
Exhibit
|
||||
|
Number
|
Exhibit
|
|||
| 4 | .1 | Specimen Certificate for shares of common stock, par value $1.00 per share, of Forestar Real Estate Group Inc. (incorporated by reference to Exhibit 4.1 of Amendment No. 5 to the Company’s Form 10 filed with the Commission on December 10, 2007). | ||
| 4 | .2 | Rights Agreement, dated December 11, 2007, between Forestar Real Estate Group Inc. and Computershare Trust Company, N.A., as Rights Agent (including Form of Rights Certificate) (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 11, 2007). | ||
| 10 | .1 | Tax Matters Agreement, dated December 11, 2007, among Forestar Real Estate Group Inc., Guaranty Financial Group Inc., and Temple — Inland Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 11, 2007). | ||
| 10 | .2 | Transition Services Agreement, dated December 11, 2007, among Forestar Real Estate Group Inc., Guaranty Financial Group Inc., and Temple — Inland Inc. (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on December 11, 2007). | ||
| 10 | .3 | Employee Matters Agreement, dated December 11, 2007, among Forestar Real Estate Group Inc., Guaranty Financial Group Inc., and Temple — Inland Inc. (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Commission on December 11, 2007). | ||
| 10 | .4 | Form of Forestar Real Estate Group Retirement Savings Plan (incorporated by reference to Exhibit 10.4 of Amendment No. 5 to the Company’s Form 10 filed with the Commission on December 10, 2007). | ||
| 10 | .5† | Form of Forestar Real Estate Group Supplemental Employee Retirement Plan (incorporated by reference to Exhibit 10.5 of Amendment No. 5 to the Company’s Form 10 filed with the Commission on December 10, 2007). | ||
| 10 | .6† | Form of Forestar Real Estate Group 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 of Amendment No. 5 to the Company’s Form 10 filed with the Commission on December 10, 2007). | ||
| 10 | .7† | Form of Forestar Real Estate Group Director’s Fee Deferral Plan (incorporated by reference to Exhibit 10.7 of Amendment No. 5 to the Company’s Form 10 filed with the Commission on December 10, 2007). | ||
| 10 | .8 | Revolving and Term Credit Agreement, dated as of December 14, 2007, among Forestar (USA) Real Estate Group Inc., as borrower, and Forestar Real Estate Group Inc. and certain wholly-owned subsidiaries of the Company, as guarantors, and KeyBank National Association, as lender, swing line lender and agent; General Electric Credit Corporation and AgFirst Farm Credit Bank, as co-syndication agents; KeyBanc Capital Markets, as sole arranger and sole book managers; and the lenders party thereto (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 17, 2007). | ||
| 10 | .9† | Form of Indemnification Agreement to be entered into between the Company and each of its directors (incorporated by reference to Exhibit 10.9 of Amendment No. 5 to the Company’s Form 10 filed with the Commission on December 10, 2007). | ||
| 10 | .10† | Form of Change in Control Agreement between the Company and its named executive officers (incorporated by reference to Exhibit 10.10 of Amendment No. 5 to the Company’s Form 10 filed with the Commission on December 10, 2007). | ||
| 10 | .11† | Employment Agreement between the Company and James M. DeCosmo dated August 9, 2007 (incorporated by reference to Exhibit 10.11 of Amendment No. 5 to the Company’s Form 10 filed with the Commission on December 10, 2007). | ||
| 10 | .12† | Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.12 of the Company’s Annual Report on Form 10-K filed with the Commission on March 5, 2009). | ||
| 10 | .13† | Form of Restricted Stock Agreement (Tier 1) (incorporated by reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K filed with the Commission on March 5, 2009). | ||
| 10 | .14† | Form of Restricted Stock Units Agreement for senior executives (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on February 12, 2009). | ||
| 10 | .15† | Form of Stock Appreciation Rights Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on February 12, 2009). | ||
50
Table of Contents
|
Exhibit
|
||||
|
Number
|
Exhibit
|
|||
| 10 | .16† | First Amendment to Forestar Group Inc. Director’s Fee Deferral Plan (incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K filed with the Commission on March 5, 2009). | ||
| 10 | .17† | First Amendment to the Forestar Real Estate Group Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on May 13, 2009). | ||
| 10 | .18 | First Amendment to the Revolving and Term Credit Agreement and Other Loan Documents, dated as of March 12, 2008, by and among the Company, Forestar (USA) Real Estate Group Inc. and its wholly-owned subsidiaries signatory thereto, Key Bank National Association, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 6, 2009). | ||
| 10 | .19 | Second Amendment to the Revolving and Term Credit Agreement, dated as of July 16, 2009, by and among the Company, Forestar (USA) Real Estate Group Inc. and its wholly-owned subsidiaries signatory thereto, KeyBank National Association, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on July 17, 2009). | ||
| 10 | .20 | Purchase and Sale Agreement, dated as of May 2, 2009, by and between Forestar (USA) Real Estate Group Inc. and Hancock Natural Resource Group, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 6, 2009). | ||
| 10 | .21 | Purchase and Sale Agreement, dated as of June 26, 2009, by and between Forestar (USA) Real Estate Group Inc. and Holland M. Ware (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 6, 2009). | ||
| 10 | .22†* | Second Amendment to the Forestar Group Inc. 2007 Stock Incentive Plan. | ||
| 21 | .1* | List of Subsidiaries of the Company. | ||
| 23 | .1* | Consent of Ernst & Young LLP. | ||
| 23 | .2* | Consent of Netherland, Sewell & Associates, Inc. | ||
| 31 | .1* | Certification of Chief Executive Officer pursuant to Exchange Act rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31 | .2* | Certification of Chief Financial Officer pursuant to Exchange Act rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .1* | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .2* | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 99 | .1* | Reserve audit report of Netherland, Sewell & Associates, Inc., dated February 25, 2010. | ||
| * | Filed herewith. | |
| † | Management contract or compensatory plan or arrangement. |
51
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Forestar Group Inc.
| By: |
/s/ James
M. DeCosmo
|
James M. DeCosmo
President and Chief Executive Officer
Date: March 3, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
Signature
|
Capacity
|
Date
|
||||
|
/s/ James
M. DeCosmo
|
Director, President and Chief Executive Officer (Principal Executive Officer) | March 3, 2010 | ||||
|
/s/ Christopher
L. Nines
|
Chief Financial Officer
(Principal Financial Officer) |
March 3, 2010 | ||||
|
/s/ Charles
D. Jehl
|
Chief Accounting Officer
(Principal Accounting Officer) |
March 3, 2010 | ||||
|
/s/ Kenneth
M. Jastrow, II
|
Chairman of the Board | March 3, 2010 | ||||
|
/s/ Louis
R. Brill
|
Director | March 3, 2010 | ||||
|
/s/ Kathleen
Brown
|
Director | March 3, 2010 | ||||
|
/s/ William
G. Currie
|
Director | March 3, 2010 | ||||
|
/s/ Michael
E. Dougherty
|
Director | March 3, 2010 | ||||
|
/s/ James
A. Johnson
|
Director | March 3, 2010 | ||||
|
/s/ Thomas
H. McAuley
|
Director | March 3, 2010 | ||||
|
/s/ William
C. Powers, Jr.
|
Director | March 3, 2010 | ||||
|
/s/ James
A. Rubright
|
Director | March 3, 2010 | ||||
|
/s/ Richard
M. Smith
|
Director | March 3, 2010 | ||||
52
Index to
Financial Statements
| Page | ||||
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
|
Audited Financial Statements
|
||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
| F-8 | ||||
| F-9 | ||||
|
Financial Statement Schedule
|
||||
| S-1 | ||||
F-1
Table of Contents
MANAGEMENT’S
ANNUAL REPORT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Forestar is responsible for establishing and
maintaining adequate internal control over financial reporting.
Management has designed our internal control over financial
reporting to provide reasonable assurance that our published
financial statements are fairly presented, in all material
respects, in conformity with generally accepted accounting
principles.
Management is required by paragraph (c) of
Rule 13a-15
of the Securities Exchange Act of 1934, as amended, to assess
the effectiveness of our internal control over financial
reporting as of each year end. In making this assessment,
management used the
Internal Control — Integrated
Framework
issued in July 1994 by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Management conducted the required assessment of the
effectiveness of our internal control over financial reporting
as of year end. Based upon this assessment, management believes
that our internal control over financial reporting is effective
as of year-end 2009.
Ernst & Young LLP, the independent registered public
accounting firm that audited our financial statements included
in this
Form 10-K,
has also audited our internal control over financial reporting.
Their attestation report follows this report of management.
F-2
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders of Forestar Group Inc.:
We have audited Forestar Group Inc. and subsidiaries (Forestar
Group) internal control over financial reporting as of
December 31, 2009 based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Forestar Group’s management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting included in the
accompanying Management’s Annual Report on Internal Control
Over Financial Reporting. Our responsibility is to express an
opinion on the effectiveness of the company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Forestar Group maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Forestar Group as of
December 31, 2009 and December 31, 2008 and the
related consolidated statements of income, shareholders’
equity, and cash flows for each of the three years ended
December 31, 2009 and our report dated March 3, 2010
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Austin, Texas
March 3, 2010
F-3
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders of Forestar Group Inc.:
We have audited the accompanying consolidated balance sheets of
Forestar Group Inc. and subsidiaries (Forestar Group) as of
December 31, 2009 and December 31, 2008, and the
related consolidated statements of income, shareholders’
equity, and cash flows for each of the three years ended
December 31, 2009. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Forestar Group at December 31, 2009
and December 31, 2008, and the consolidated results of
their operations and their cash flows for each of the three
years ended December 31, 2009, in conformity with
U.S. generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 3 to the consolidated financial
statements, during 2009 the Company changed its method of
disclosing noncontrolling interests as a result of adopting new
guidance applicable to the disclosure of such interests as a
component of shareholders’ equity. Additionally, during
2009, the Company changed its reserve estimates and related
disclosures as a result of adopting new oil and gas reserve
estimation and disclosure requirements.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Forestar Group’s internal control over
financial reporting as of December 31, 2009, based on
criteria established in
Internal Control —
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
March 3, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Austin, Texas
March 3, 2010
F-4
Table of Contents
| At Year-End | ||||||||
| 2009 | 2008 | |||||||
| (In thousands, except share data) | ||||||||
|
ASSETS
|
||||||||
|
Cash and cash equivalents
|
$ | 21,051 | $ | 8,127 | ||||
|
Real estate
|
542,812 | 610,586 | ||||||
|
Assets held for sale
|
31,226 | — | ||||||
|
Investment in unconsolidated ventures
|
109,597 | 117,554 | ||||||
|
Timber
|
19,845 | 50,989 | ||||||
|
Receivables, net of allowance for bad debts of $144 in 2009 and
$226 in 2008
|
1,841 | 4,262 | ||||||
|
Prepaid expense
|
2,587 | 1,295 | ||||||
|
Income taxes receivable
|
— | 1,130 | ||||||
|
Property and equipment, net of accumulated depreciation of
$3,629 in 2009 and $2,994 in 2008
|
5,234 | 6,211 | ||||||
|
Deferred tax asset
|
40,751 | 17,184 | ||||||
|
Other assets
|
9,790 | 17,238 | ||||||
|
TOTAL ASSETS
|
$ | 784,734 | $ | 834,576 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
|
Accounts payable
|
$ | 4,573 | $ | 7,438 | ||||
|
Accrued employee compensation and benefits
|
4,025 | 3,389 | ||||||
|
Accrued property taxes
|
4,302 | 6,808 | ||||||
|
Accrued interest
|
546 | 1,199 | ||||||
|
Income taxes payable
|
2,809 | — | ||||||
|
Other accrued expenses
|
8,269 | 11,448 | ||||||
|
Other liabilities
|
25,249 | 12,940 | ||||||
|
Debt
|
216,626 | 337,402 | ||||||
|
TOTAL LIABILITIES
|
266,399 | 380,624 | ||||||
|
COMMITMENTS AND CONTINGENCIES
|
||||||||
|
EQUITY
|
||||||||
|
Forestar Group Inc. shareholders’ equity:
|
||||||||
|
Preferred stock, par value $0.01 per share, 25,000,000
authorized shares, none issued
|
— | — | ||||||
|
Common stock, par value $1.00 per share, 200,000,000 authorized
shares, 36,255,336 issued at December 31, 2009 and
35,839,390 issued at December 31, 2008
|
36,255 | 35,839 | ||||||
|
Additional paid-in capital
|
384,795 | 377,810 | ||||||
|
Retained earnings
|
95,876 | 36,769 | ||||||
|
Accumulated other comprehensive loss
|
(256 | ) | (1,260 | ) | ||||
|
Treasury stock, at cost, 209,544 shares at
December 31, 2009 and 90,819 at December 31, 2008
|
(4,214 | ) | (1,866 | ) | ||||
|
Total Forestar Group Inc. shareholders’ equity
|
512,456 | 447,292 | ||||||
|
Noncontrolling interests
|
5,879 | 6,660 | ||||||
|
TOTAL EQUITY
|
518,335 | 453,952 | ||||||
|
TOTAL LIABILITIES AND EQUITY
|
$ | 784,734 | $ | 834,576 | ||||
Please read the notes to the consolidated financial statements.
F-5
Table of Contents
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
REVENUES
|
||||||||||||
|
Real estate sales
|
$ | 75,050 | $ | 73,555 | $ | 117,890 | ||||||
|
Commercial operating properties and other
|
19,386 | 25,304 | 24,839 | |||||||||
|
Real estate
|
94,436 | 98,859 | 142,729 | |||||||||
|
Mineral resources
|
36,256 | 47,671 | 20,818 | |||||||||
|
Fiber resources and other
|
15,559 | 13,192 | 14,439 | |||||||||
| 146,251 | 159,722 | 177,986 | ||||||||||
|
EXPENSES
|
||||||||||||
|
Cost of real estate sales
|
(30,463 | ) | (38,395 | ) | (58,046 | ) | ||||||
|
Cost of commercial operating properties and other
|
(15,844 | ) | (16,736 | ) | (17,936 | ) | ||||||
|
Cost of mineral resources
|
(922 | ) | (1,714 | ) | — | |||||||
|
Cost of fiber resources
|
(3,396 | ) | (3,357 | ) | (3,672 | ) | ||||||
|
Other operating
|
(44,685 | ) | (41,486 | ) | (30,441 | ) | ||||||
|
General and administrative
|
(29,926 | ) | (22,228 | ) | (18,624 | ) | ||||||
|
Gain on sale of assets
|
104,047 | — | — | |||||||||
| (21,189 | ) | (123,916 | ) | (128,719 | ) | |||||||
|
OPERATING INCOME
|
125,062 | 35,806 | 49,267 | |||||||||
|
Equity in (loss) earnings of unconsolidated ventures
|
(7,771 | ) | 4,642 | 3,732 | ||||||||
|
Interest expense
|
(20,459 | ) | (21,283 | ) | (9,229 | ) | ||||||
|
Other non-operating income
|
375 | 279 | 705 | |||||||||
|
INCOME BEFORE TAXES
|
97,207 | 19,444 | 44,475 | |||||||||
|
Income tax expense
|
(35,633 | ) | (5,235 | ) | (13,909 | ) | ||||||
|
CONSOLIDATED NET INCOME
|
61,574 | 14,209 | 30,566 | |||||||||
|
Less: Net income attributable to noncontrolling interests
|
(2,467 | ) | (2,235 | ) | (5,771 | ) | ||||||
|
NET INCOME ATTRIBUTABLE TO FORESTAR GROUP INC.
|
$ | 59,107 | $ | 11,974 | $ | 24,795 | ||||||
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
|
||||||||||||
|
Basic
|
35,805 | 35,455 | 35,380 | |||||||||
|
Diluted
|
36,102 | 35,892 | 35,380 | |||||||||
|
NET INCOME PER COMMON SHARE
|
||||||||||||
|
Basic
|
$ | 1.65 | $ | 0.34 | $ | 0.70 | ||||||
|
Diluted
|
$ | 1.64 | $ | 0.33 | $ | 0.70 | ||||||
Please read the notes to the consolidated financial statements.
F-6
Table of Contents
| Forestar Group Inc. Shareholders | ||||||||||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||||
|
Additional
|
Other
|
|||||||||||||||||||||||||||||||||||||||
| Common Stock |
Paid-in
|
Treasury Stock |
Comprehensive
|
Retained
|
Parent’s
|
Noncontrolling
|
||||||||||||||||||||||||||||||||||
| Total | Shares | Amount | Capital | Shares | Amount | Income | Earnings | Equity | Interest | |||||||||||||||||||||||||||||||
| (In thousands, except share data) | ||||||||||||||||||||||||||||||||||||||||
|
Balances at December 30, 2006
|
$ | 425,798 | — | $ | — | $ | — | — | $ | — | $ | — | $ | — | $ | 418,052 | $ | 7,746 | ||||||||||||||||||||||
|
Net income
|
30,566 | — | — | — | — | — | — | 24,795 | — | 5,771 | ||||||||||||||||||||||||||||||
|
Distributions to noncontrolling interest
|
(11,948 | ) | — | — | — | — | — | — | — | — | (11,948 | ) | ||||||||||||||||||||||||||||
|
Contributions from noncontrolling interest
|
7,060 | — | — | — | — | — | — | — | — | 7,060 | ||||||||||||||||||||||||||||||
|
Net transactions with parent company
|
(9,646 | ) | — | — | — | — | — | — | — | (9,646 | ) | — | ||||||||||||||||||||||||||||
|
Spin-off from Temple-Inland
|
— | 35,380,385 | 35,380 | 373,026 | (53 | ) | — | — | — | (408,406 | ) | — | ||||||||||||||||||||||||||||
|
Balances at December 29, 2007
|
$ | 441,830 | 35,380,385 | $ | 35,380 | $ | 373,026 | (53 | ) | $ | — | $ | — | $ | 24,795 | $ | — | $ | 8,629 | |||||||||||||||||||||
|
Net income
|
14,209 | — | — | — | — | — | — | 11,974 | — | 2,235 | ||||||||||||||||||||||||||||||
|
Unrealized loss on interest rate swap, net of taxes of $679
|
(1,260 | ) | — | — | — | — | — | (1,260 | ) | — | — | — | ||||||||||||||||||||||||||||
|
Comprehensive income
|
$ | 12,949 | ||||||||||||||||||||||||||||||||||||||
|
Distributions to noncontrolling interest
|
(4,441 | ) | — | — | — | — | — | — | — | — | (4,441 | ) | ||||||||||||||||||||||||||||
|
Contributions from noncontrolling interest
|
237 | — | — | — | — | — | — | — | — | 237 | ||||||||||||||||||||||||||||||
|
Issuances of common stock
|
— | 182,976 | 183 | (183 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||
|
Issuances of restricted stock
|
— | 214,426 | 214 | (214 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||
|
Issuances from exercises of stock options
|
897 | 61,603 | 62 | 835 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Shares withheld for payroll taxes
|
(1,194 | ) | — | — | — | (52,482 | ) | (1,194 | ) | — | — | — | — | |||||||||||||||||||||||||||
|
Shares exchanged for options exercised
|
(646 | ) | — | — | — | (27,394 | ) | (646 | ) | — | — | — | — | |||||||||||||||||||||||||||
|
Forfeitures of restricted stock
|
(19 | ) | — | — | 7 | (10,890 | ) | (26 | ) | — | — | — | — | |||||||||||||||||||||||||||
|
Share-based compensation
|
4,254 | — | — | 4,254 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Tax benefit from exercise of restricted stock units and stock
options and vested restricted stock
|
85 | — | — | 85 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Balances at December 31, 2008
|
$ | 453,952 | 35,839,390 | $ | 35,839 | $ | 377,810 | (90,819 | ) | $ | (1,866 | ) | $ | (1,260 | ) | $ | 36,769 | $ | — | $ | 6,660 | |||||||||||||||||||
|
Net income
|
61,574 | — | — | — | — | — | — | 59,107 | — | 2,467 | ||||||||||||||||||||||||||||||
|
Unrealized gain on interest rate swap, net of taxes of ($542)
|
1,004 | — | — | — | — | — | 1,004 | — | — | — | ||||||||||||||||||||||||||||||
|
Comprehensive income
|
$ | 62,578 | ||||||||||||||||||||||||||||||||||||||
|
Distributions to noncontrolling interest
|
(3,501 | ) | — | — | — | — | — | — | — | — | (3,501 | ) | ||||||||||||||||||||||||||||
|
Contributions from noncontrolling interest
|
253 | — | — | — | — | — | — | — | — | 253 | ||||||||||||||||||||||||||||||
|
Issuances of common stock
|
— | 4,870 | 5 | (5 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||
|
Issuances of restricted stock
|
— | 125,275 | 125 | (125 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||
|
Issuances from exercises of stock options
|
3,547 | 285,801 | 286 | 3,261 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Shares withheld for payroll taxes
|
(467 | ) | — | — | — | (24,170 | ) | (467 | ) | — | — | — | — | |||||||||||||||||||||||||||
|
Shares exchanged for options exercised
|
(1,880 | ) | — | — | — | (93,255 | ) | (1,880 | ) | — | — | — | — | |||||||||||||||||||||||||||
|
Forfeitures of restricted stock
|
— | — | — | 1 | (1,300 | ) | (1 | ) | — | — | — | — | ||||||||||||||||||||||||||||
|
Share-based compensation
|
3,824 | — | — | 3,824 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Tax benefit from exercise of restricted stock units and stock
options and vested restricted stock
|
29 | — | — | 29 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Balances at December 31, 2009
|
$ | 518,335 | 36,255,336 | $ | 36,255 | $ | 384,795 | (209,544 | ) | $ | (4,214 | ) | $ | (256 | ) | $ | 95,876 | $ | — | $ | 5,879 | |||||||||||||||||||
Please read the notes to the consolidated financial statements.
F-7
Table of Contents
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Consolidated net income
|
$ | 61,574 | $ | 14,209 | $ | 30,566 | ||||||
|
Adjustments:
|
||||||||||||
|
Depreciation and amortization
|
9,786 | 7,673 | 2,915 | |||||||||
|
Deferred income taxes
|
(22,734 | ) | (11,399 | ) | (19,544 | ) | ||||||
|
Tax benefits not recognized for book purposes
|
6,162 | — | — | |||||||||
|
Equity in loss (earnings) of unconsolidated ventures
|
7,771 | (4,642 | ) | (3,732 | ) | |||||||
|
Distributions of earnings of unconsolidated ventures
|
259 | 1,053 | 2,863 | |||||||||
|
Distributions of earnings to noncontrolling interests
|
(3,325 | ) | (4,427 | ) | (11,042 | ) | ||||||
|
Share-based compensation
|
11,998 | 4,516 | 1,397 | |||||||||
|
Non-cash real estate cost of sales
|
25,858 | 34,766 | 46,975 | |||||||||
|
Non-cash cost of assets sold
|
49,804 | — | — | |||||||||
|
Real estate development and acquisition expenditures
|
(33,787 | ) | (99,189 | ) | (140,013 | ) | ||||||
|
Reimbursements from utility and improvement districts
|
24,945 | 674 | 10,628 | |||||||||
|
Other changes in real estate
|
384 | (522 | ) | (1,364 | ) | |||||||
|
Gain on termination of timber lease
|
(195 | ) | (1,627 | ) | (2,243 | ) | ||||||
|
Cost of timber cut
|
3,104 | 2,968 | 4,060 | |||||||||
|
Deferred income
|
(2,673 | ) | 681 | — | ||||||||
|
Asset impairments
|
7,931 | 3,000 | 6,518 | |||||||||
|
Other
|
528 | (538 | ) | (65 | ) | |||||||
|
Changes in:
|
||||||||||||
|
Receivables
|
(747 | ) | 22 | 659 | ||||||||
|
Prepaid expenses and other
|
1,259 | 2,188 | (66 | ) | ||||||||
|
Accounts payable and other accrued liabilities
|
(8,490 | ) | (165 | ) | 7,507 | |||||||
|
Income taxes payable (receivable)
|
2,708 | (1,130 | ) | — | ||||||||
|
Net cash provided by (used for) operating activities
|
142,120 | (51,889 | ) | (63,981 | ) | |||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Property, equipment, software and reforestation
|
(7,295 | ) | (5,197 | ) | (3,198 | ) | ||||||
|
Investment in unconsolidated ventures
|
(2,875 | ) | (17,845 | ) | (14,492 | ) | ||||||
|
Return of investment in unconsolidated ventures
|
3,797 | 6,168 | 3,239 | |||||||||
|
Notes receivable sold or collected
|
— | — | 491 | |||||||||
|
Proceeds from sale of property and equipment
|
— | 52 | 166 | |||||||||
|
Proceeds from termination of timber lease
|
— | 155 | 2,966 | |||||||||
|
Net cash (used for) investing activities
|
(6,373 | ) | (16,667 | ) | (10,828 | ) | ||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Payments of debt
|
(164,612 | ) | (80,165 | ) | (22,534 | ) | ||||||
|
Additions to debt
|
43,836 | 151,552 | 226,446 | |||||||||
|
Note payable to Temple-Inland, net
|
— | — | (93,063 | ) | ||||||||
|
Dividends and other transfers to Temple-Inland
|
— | — | (29,101 | ) | ||||||||
|
Deferred financing fees
|
(3,209 | ) | (1,619 | ) | (10,010 | ) | ||||||
|
Return of investment to noncontrolling interest
|
(176 | ) | (14 | ) | (906 | ) | ||||||
|
Exercise of stock options
|
3,547 | 897 | — | |||||||||
|
Payroll taxes on restricted stock and stock options
|
(2,347 | ) | (1,858 | ) | — | |||||||
|
Tax benefit from share-based compensation
|
29 | 85 | — | |||||||||
|
Other
|
109 | 285 | 1,147 | |||||||||
|
Net cash (used for) provided by financing activities
|
(122,823 | ) | 69,163 | 71,979 | ||||||||
|
Net increase (decrease) in cash and cash equivalents
|
12,924 | 607 | (2,830 | ) | ||||||||
|
Cash and cash equivalents at beginning of year
|
8,127 | 7,520 | 10,350 | |||||||||
|
Cash and cash equivalents at year-end
|
$ | 21,051 | $ | 8,127 | $ | 7,520 | ||||||
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||||||
|
Cash paid during the year for:
|
||||||||||||
|
Interest
|
$ | 16,951 | $ | 21,006 | $ | 12,030 | ||||||
|
Income taxes
|
$ | 48,299 | $ | 18,414 | $ | 33,428 | ||||||
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:
|
||||||||||||
|
Capitalized interest
|
$ | 1,021 | $ | 3,628 | $ | 3,351 | ||||||
|
Lessor construction allowances
|
$ | — | $ | 1,296 | $ | — | ||||||
Please read the notes to the consolidated financial statements.
F-8
Table of Contents
FORESTAR
GROUP INC.
| Note 1 — | Background |
Prior to December 28, 2007, we were a wholly-owned
subsidiary of Temple-Inland Inc. On December 28, 2007,
Temple-Inland distributed all of the issued and outstanding
shares of our common stock to its shareholders in a transaction
commonly referred to as a spin-off.
| Note 2 — | Summary of Significant Accounting Policies |
Basis
of Presentation
Our consolidated financial statements include the accounts of
Forestar Group Inc., all subsidiaries, ventures, and other
entities in which we have a controlling interest and variable
interest entities of which we are the primary beneficiary. We
eliminate all material intercompany accounts and transactions.
Noncontrolling interests in consolidated pass-through entities
are recognized before income taxes. We account for our
investment in other entities in which we have significant
influence over operations and financial policies using the
equity method (we recognize our share of the entities’
income or loss and any preferential returns and treat
distributions as a reduction of our investment). We account for
our investment in other entities in which we do not have
significant influence over operations and financial policies
using the cost method (we recognize as income only distribution
of accumulated earnings).
We prepare our financial statements in accordance with generally
accepted accounting principles, which require us to make
estimates and assumptions about future events. Actual results
can, and probably will, differ from those we currently estimate.
Examples of significant estimates include those related to
allocating costs to real estate and measuring assets for
impairment.
In 2008, we changed our fiscal year from a 52/53 week year
ending the Saturday closest to December 31 to a calendar year.
In 2007, our fiscal year ended on the Saturday closest to
December 31. All of the periods presented had
52 weeks. Fiscal year 2007 ended on December 29, 2007.
In 2007, our consolidated financial statements reflect the
historical accounts of the real estate development, minerals and
fiber operations contributed to us and have been derived from
the historical financial statements and accounts of
Temple-Inland. These operations were conducted within separate
legal entities and their subsidiaries or within segments or
components of segments of Temple-Inland.
In 2007, we used Temple-Inland as a source of capital and for
services such as environmental, finance, financial reporting,
human resources, internal audit, insurance, legal, tax and
technology. The estimated costs of these services were allocated
to us and are included in general and administrative expense. In
addition, we have also included other expenses incurred by
Temple-Inland but not directly attributable to us such as costs
associated with investor relations and executive officers. The
allocations were based on actual usage or in some cases
estimated usage based on Temple-Inland’s net investment in
us relative to its other segments, revenues, operating profits,
employee count, or similar measures. These allocated costs,
which include salaries and benefits, totaled $7,909,000 in 2007.
For 2007, we believe the assumptions and methodologies used to
derive the allocations in our financial statements are
reasonable; however, they may not necessarily be indicative of
what expenses would have been had we been a separate stand-alone
company. We have no practical way of determining what expenses
we would have incurred if we would have been a stand-alone
company in 2007.
Cash
and Cash Equivalents
Cash and cash equivalents include cash and other short-term
instruments with original maturities of three months or less. At
year-end 2009, restricted cash included in cash and cash
equivalents was $574,000.
F-9
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Cash
Flows
Expenditures for the acquisition and development of real estate
are classified as operating activities. Expenditures for the
acquisition of commercial operating properties are classified as
investing activities.
Capitalized
Software
We capitalize purchased software costs as well as the direct
internal and external costs associated with software we develop
for our own use. We amortize these capitalized costs using the
straight-line method over estimated useful lives ranging from
three to seven years. The carrying value of capitalized software
was $2,859,000 at year-end 2009 and $2,604,000 at year-end 2008
and is included in other assets. The amortization of these
capitalized costs was $1,012,000 in 2009, $784,000 in 2008 and
$370,000 in 2007 and is included in general and administrative
expense.
Derivative
Instruments
We periodically enter into interest rate agreements in the
normal course of business to mitigate the risk inherent in
interest rate fluctuations. We do not enter into derivative
instruments for trading purposes. We defer and include in other
comprehensive income changes in the fair value of derivative
instruments designated as cash flow hedges. We recognize the
ineffective portion of these hedges in income or loss. The
effectiveness of the hedge relationship is periodically assessed
by comparing the present value of the cumulative change in the
expected future cash flows on the variable leg of the swap with
the present value of the cumulative change in the expected
future hedged cash flows.
Environmental
and Asset Retirement Obligations
We recognize environmental remediation liabilities on an
undiscounted basis when environmental assessments or remediation
are probable and we can reasonably estimate the cost. We adjust
these liabilities as further information is obtained or
circumstances change. We currently do not have any asset
retirement obligations.
Fair
Value Measurements
Financial instruments for which we did not elect the fair value
option include cash and cash equivalents, accounts receivables,
other current assets, long-term debt, accounts payable and other
current liabilities. With the exception of long-term debt, the
carrying amounts of these financial instruments approximate
their fair values due to their short-term nature or variable
interest rates.
Impairment
of Long-Lived Assets
We review long-lived assets held for use, principally real
estate, for impairment when events or circumstances indicate
that their carrying value may not be recoverable. Impairment
exists if the carrying amount of the long-lived asset is not
recoverable from the undiscounted cash flows expected from its
use and eventual disposition. We determine the amount of the
impairment loss by comparing the carrying value of the
long-lived asset to its estimated fair value. In the absence of
quoted market prices, we determine estimated fair value
generally based on the present value of future probability
weighted cash flows expected from the sale of the long-lived
asset. We recognized real estate asset impairments of $5,718,000
in 2009, $3,000,000 in 2008 and $6,518,000 in 2007. Impairment
charges related to our owned and consolidated real estate assets
are included in cost of real estate sales.
F-10
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Income
Taxes
We provide deferred income taxes using current tax rates for
temporary differences between the financial accounting carrying
value of assets and liabilities and their tax accounting
carrying values. We recognize and value income tax exposures for
the various taxing jurisdictions where we operate based on laws,
elections, commonly accepted tax positions, and management
estimates. We include tax penalties and interest in income tax
expense. In 2007, we were included in Temple-Inland’s
consolidated federal income tax return prior to our spin-off,
and our income tax expense was computed as if we filed a
separate tax return. We provide a valuation allowance for any
deferred tax asset that is not likely to be recoverable in
future periods.
Mineral
Interests
We acquire real estate that may include the subsurface rights
associated with the property, including minerals. We capitalize
the costs of acquiring these mineral interests. We amortize the
cost assigned to unproved interests, principally acquisition
costs, using the straight-line method over appropriate periods
based on our experience, generally no longer than 10 years.
Costs assigned to individual unproven interests are minimal and
amortized on an aggregate basis. When we lease these interests
to third-party oil and natural gas exploration and production
entities, any related unamortized costs are accounted for using
the cost recovery method from the cash proceeds received from
lease bonus payments. We have fully amortized all
previously-capitalized acquisition costs and did not capitalize
any costs in 2009, 2008 or 2007.
When we lease our mineral interests to third-party exploration
and production entities, we retain a royalty interest and may
take an additional participation in production, including a
non-operating working interest. Non-operating working interests
refer to well interests in which we pay a share of the costs to
drill, complete and operate a well and receive a proportionate
share of the production revenues. We use the successful efforts
method to account for our mineral interest participations.
Mineral interests and non-operating working interests, net of
amortization, are included in property and equipment on our
balance sheet.
Operating
Leases
We occupy office space in various locations under operating
leases. The lease agreements may contain rent escalation
clauses, construction allowances
and/or
contingent rent provisions. We expense operating leases ratably
over the shorter of the useful life or the lease term. For
scheduled rent escalation clauses, we recognize the minimum rent
expense on a straight-line basis and record the difference
between the recognized rent expense and the amounts payable
under the lease as deferred lease credits included in other
liabilities in the consolidated balance sheets. Deferred lease
credits are amortized over the lease term. For construction
allowances, we record leasehold improvement assets included in
property and equipment in the consolidated balance sheets
amortized over the shorter of their economic lives or the lease
term. The related deferred lease credits are amortized as a
reduction of rent expense over the lease term.
F-11
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Property
and Equipment
We carry property and equipment at cost less accumulated
depreciation. We capitalize the cost of significant additions
and improvements, and we expense the cost of repairs and
maintenance. We capitalize interest costs incurred on major
construction projects. We depreciate these assets using the
straight-line method over their estimated useful lives as
follows:
|
Carrying
|
||||||||
|
Value
|
||||||||
|
Estimated
|
Year-End
|
|||||||
| Useful Lives | 2009 | |||||||
| (In thousands) | ||||||||
|
Buildings and building improvements
|
10 to 40 years | $ | 4,402 | |||||
|
Property and equipment
|
2 to 10 years | 4,461 | ||||||
| 8,863 | ||||||||
|
Less: accumulated depreciation
|
(3,629 | ) | ||||||
| $ | 5,234 | |||||||
Depreciation expense of property and equipment was $1,022,000 in
2009, $650,000 in 2008 and $392,000 in 2007.
Real
Estate
We carry real estate at the lower of cost or fair value less
cost to sell. We capitalize interest costs and property taxes
once development begins, and we continue to capitalize
throughout the development period. We also capitalize
infrastructure, improvements, amenities, and other development
costs incurred during the development period. We determine the
cost of real estate sold using the relative sales value method.
When we sell real estate from projects that are not finished, we
include in the cost of real estate sold estimates of future
development costs though completion, allocated based on relative
sales values. These estimates of future development costs are
reevaluated at least annually, with any adjustments being
allocated prospectively to the remaining units available for
sale.
Commercial properties are carried at cost less accumulated
depreciation computed using the straight-line method over their
estimated useful lives (three to 39 years).
We have agreements with utility or improvement districts,
principally in Texas, whereby we agree to convey to the
districts water, sewer and other infrastructure-related assets
we have constructed in connection with projects within their
jurisdiction. The reimbursement for these assets ranges from 70
to 100 percent of allowable cost as defined by the
district. The transfer is consummated and we receive payment
when the districts have a sufficient tax base to support funding
of their bonds. The cost we incur in constructing these assets
is included in capitalized development costs, and upon
collection, we remove the assets from capitalized development
costs. We provide an allowance to reflect our past experiences
related to claimed allowable development costs.
Reclassifications
In 2009, we reclassified $1,714,000 of operating expenses to
cost of mineral resources for 2008 to conform to the current
year’s presentation. In 2008, we changed our reportable
segments to reflect our post-spin management of the operations
transferred to us by Temple-Inland.
F-12
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Revenue
Real
Estate
We recognize revenue from sales of real estate when a sale is
consummated, the buyer’s initial investment is adequate,
any receivables are probable of collection, the usual risks and
rewards of ownership have been transferred to the buyer, and we
do not have significant continuing involvement with the real
estate sold. If we determine that the earnings process is not
complete, we defer recognition of any gain until earned. We
recognize revenue from hotel room sales and other guest services
when rooms are occupied and other guest services have been
rendered.
We exclude from revenue amounts we collect from utility or
improvement districts related to the conveyance of water, sewer
and other infrastructure related assets. We also exclude from
revenue amounts we collect for timber sold on land being
developed. These proceeds reduce capitalized development costs.
We exclude from revenue amounts we collect from customers that
represent sales tax or other taxes that are based on the sale.
These amounts are included in other accrued expenses until paid.
Mineral
Resources
We recognize revenue from mineral bonus payments when we have
received an executed agreement with the exploration company
transferring the rights to any oil or natural gas it may find
and requiring drilling be done within a specified period, the
payment has been collected, and we have no obligation to refund
the payment. We recognize revenue from delay rentals if drilling
has not started within the specified period, when the payment
has been collected, and we have no further obligation. We
recognize revenue from mineral royalties and non-operating
working interests when the minerals have been delivered to the
buyer, the value is determinable, and we are reasonably sure of
collection.
Fiber
Resources
We recognize revenue from timber sales upon passage of title,
which occurs at delivery; when the price is fixed and
determinable; and we are reasonably sure of collection. We
recognize revenue from hunting and recreational leases on the
straight-line basis over the lease term if we are reasonably
sure of collection.
Share-Based
Compensation
We use the Black-Scholes option pricing model for stock options,
grant date fair value for equity-settled awards and period-end
fair value for cash-settled awards. We expense share-based
awards ratably over the vesting period or earlier based on
retirement eligibility.
Prior to the spin-off, we participated in Temple-Inland’s
share-based compensation plans, and as a result, certain of our
employees received share-based compensation awards under those
plans. The expense for those awards was allocated to us by
Temple-Inland.
Timber
We carry timber at cost less the cost of timber cut. We expense
the cost of timber cut based on the relationship of the timber
carrying value to the estimated volume of recoverable timber
multiplied by the amount of timber cut. We include the cost of
timber cut in cost of fiber resources in the income statement.
We determine the estimated volume of recoverable timber using
statistical information and other data related to growth rates
and yields gathered from physical observations, models and other
information gathering techniques. Changes in yields are
generally due to adjustments in growth rates and similar matters
and are accounted for prospectively as changes in estimates. We
capitalize reforestation costs incurred in developing viable
seedling plantations (up to two years from planting), such as
site preparation, seedlings, planting,
F-13
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
fertilization, insect and wildlife control, and herbicide
application. We expense all other costs, such as property taxes
and costs of forest management personnel, as incurred. Once the
seedling plantation is viable, we expense all costs to maintain
the viable plantations, such as fertilization, herbicide
application, insect and wildlife control, and thinning, as
incurred.
| Note 3 — | New Accounting Pronouncements |
Accounting
Standards Adopted in 2009
The FASB Accounting Standards
Codification
TM
(ASC) and the Hierarchy of Generally Accepted Accounting
Principles
(Codified within ASC 105,
Generally Accepted
Accounting Principles
) — Establishes
The FASB
Accounting Standards
Codification
TM
as the single source of authoritative accounting principles to
be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. Adoption did not
have an impact on our earnings or financial position; however,
references to accounting literature in these notes have been
changed to codification references.
ASC 810,
Consolidation
— Specifies that
noncontrolling interests be reported as a part of equity, not as
a liability or other item outside of equity. Upon adoption, we
reclassified $6,660,000 of noncontrolling interests to
shareholders’ equity at year-end 2008, $2,235,000 of
minority interest expense to net income attributable to
noncontrolling interests for 2008 and $5,771,000 of minority
interest expense to net income attributable to noncontrolling
interests for 2007.
ASC 932,
Extractive Activities — Oil and
Gas —
Expands the definition of oil and gas
producing activities, updates the definition of proved oil and
gas reserves, changes the prices used for determining and
disclosing oil and gas reserves, clarifies that equity-method
investments must be considered when determining whether oil and
gas producing activities are significant and adds required
disclosures. Adoption of this pronouncement did not have a
significant effect on our earnings and financial position but
has resulted in certain additional disclosures.
ASC 820,
Fair Value Measurements and Disclosures
—
Delayed the effective date of Statement of Financial Accounting
Standard (SFAS) No. 157,
Fair Value Measurements
,
for certain nonfinancial assets and nonfinancial liabilities.
Adoption of this FSP did not significantly affect how we
determine fair value but has resulted in certain additional
disclosures.
ASC 855,
Subsequent Events
— Establishes general
standards of accounting for and disclosure of events that occur
after the balance sheet date but before the financial statements
are issued, introduces the concept of financial statements being
available to be issued and requires disclosures regarding the
date through which subsequent events were evaluated. Adoption of
this standard did not have a significant effect on our earnings
or financial position but does affect our disclosures regarding
subsequent events.
In addition, we adopted ASC 260,
Earnings Per Share
; ASC
805,
Business Combinations
; ASC 815,
Derivatives and
Hedging
; ASC 825,
Financial Instruments
; and ASU
2009-05,
Measuring Liabilities at Fair Value
. Adoption of these
new standards did not have a significant effect on our earnings
or financial position.
Pending
Accounting Standards
ASU
2009-17,
Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities
— Amends certain
requirements of ASC 810,
Consolidation
to improve
financial reporting related to consolidation of and disclosures
about variable interest entities and is effective first quarter
2010. We are currently evaluating the effect, if any, on our
earnings or financial position.
ASU
2010-06,
Improving Disclosures about Fair Value Measurements
— Amends ASC 820,
Fair Value Measurements and
Disclosures
to provide more robust disclosures. Portions of
this ASU are effective first
F-14
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
quarter 2010 with the remaining effective first quarter 2011. We
do not anticipate that adoption will have a significant impact
on our earnings or financial position but may result in
additional disclosures.
| Note 4 — | Strategic Initiatives and Assets Held for Sale |
In first quarter 2009, we announced our near-term strategic
initiatives to enhance shareholder value by generating
significant cash flow, principally from the sale of about
175,000 acres of higher and better use (HBU) timberland. As
a result, we classified to assets held for sale about
171,000 acres of undeveloped land located in Alabama,
Georgia and Texas with a carrying value of $51,390,000 and
related timber with a carrying value of $24,749,000.
In 2009, we sold about 95,000 acres of timber and
timberland in Georgia and Alabama for $158,603,000 generating
net cash proceeds of $153,851,000, which were principally used
to reduce debt and pay taxes, resulting in gain on sale of
assets of $104,047,000.
At year-end 2009, assets held for sale includes about
74,000 acres of undeveloped land with a carrying value of
$18,138,000 and related timber with a carrying value of
$10,209,000. These assets are actively being marketed. Also
included is our undivided 15 percent interest in corporate
aircraft contributed to us by Temple-Inland at spin-off with a
carrying value of $2,879,000. Our interest is being disposed of
pursuant to the terms of an aircraft joint ownership agreement,
which expired December 28, 2009.
| Note 5 — | Real Estate |
Real estate consists of:
| At Year-End | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Entitled, developed and under development projects
|
$ | 427,047 | $ | 445,394 | ||||
|
Undeveloped land
|
91,011 | 143,749 | ||||||
|
Commercial operating properties
|
49,171 | 43,987 | ||||||
| 567,229 | 633,130 | |||||||
|
Accumulated depreciation
|
(24,417 | ) | (22,544 | ) | ||||
| $ | 542,812 | $ | 610,586 | |||||
Included in entitled, developed and under development projects
are the estimated costs of assets we expect to convey to utility
and improvement districts of $60,863,000 in 2009 and $76,173,000
in 2008, including about $37,062,000 at year-end 2009 and about
$49,529,000 at year-end 2008 related to our Cibolo Canyons
project near San Antonio, Texas. These costs relate to
water, sewer and other infrastructure assets we have submitted
to utility or improvement districts for review and approval. We
billed these districts $11,824,000 in 2009 and $27,581,000 in
2008. We collected $24,945,000 from these districts in 2009, of
which $20,270,000 related to our Cibolo Canyons project and was
accounted for as a reduction of our investment in the mixed-use
development. We collected $674,000 from these districts in 2008.
We expect to collect the remaining amounts billed when these
districts achieve adequate tax bases to support payment.
We recognized asset impairment charges of $5,718,000 in 2009
principally related to a condominium project in Austin, Texas.
We recognized asset impairments of $3,000,000 in 2008 and
$6,518,000 in 2007 related to residential projects principally
in Texas.
Depreciation expense, primarily related to commercial operating
properties, was $1,873,000 in 2009, $1,770,000 in 2008 and
$2,014,000 in 2007 and is included in other operating expense.
Please read Schedule III for additional information.
F-15
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 6 — | Timber |
We have about 227,000 acres of timber, primarily in
Georgia. We capitalized reforestation expenditures of $120,000
in 2009, $282,000 in 2008 and $411,000 in 2007. The cost of
timber cut and sold was $3,104,000 in 2009, $2,968,000 in 2008
and $4,060,000 in 2007.
| Note 7 — | Investment in Unconsolidated Ventures |
At year-end 2009, we had ownership interests ranging from 25 to
50 percent in 10 ventures that we account for using the
equity method. We have no real estate ventures that are
accounted for using the cost method. Our three largest ventures
at year-end 2009 are CL Realty, Temco and Palisades West. We own
a 50 percent interest in both CL Realty and Temco, and
Cousins Real Estate Corporation owns the other 50 percent
interest. We own a 25 percent interest in Palisades West,
Cousins Properties Incorporated owns a 50 percent interest
and Dimensional Fund Advisors LP owns the remaining
25 percent. Information regarding these ventures follows:
| • | CL Realty, L.L.C. was formed in 2002 for the purpose of developing residential and mixed-use communities in Texas and across the southeastern United States. At year-end 2009, the venture had 15 residential and mixed-use communities, of which 10 are in Texas, 3 are in Florida and 2 are in Georgia, representing about 7,270 residential lots and 560 commercial acres. | |
| • | Temco Associates, LLC was formed in 1991 for the purpose of acquiring and developing residential real estate sites in Georgia. At year-end 2009, the venture had 5 residential and mixed-use communities, representing about 1,560 planned residential lots, all of which are located in Paulding County, Georgia. The venture also owns approximately 5,500 acres of undeveloped land in Paulding County, Georgia. | |
| • | Palisades West LLC was formed in 2006 for the purpose of constructing a commercial office park in Austin, Texas. The project includes two office buildings totaling approximately 375,000 square feet and an accompanying parking garage. Construction of the project was completed in fourth quarter 2008 and is approximately 71 percent leased at year-end 2009. Our remaining commitment for investment in this venture as of year-end 2009 is $2,566,000. Effective fourth quarter 2008, we entered into a 10-year operating lease for approximately 32,000 square feet that we occupy as our corporate headquarters. Please read Note 17 — Commitments and Other Contingencies for additional information about operating leases. |
Combined summarized balance sheet information for our ventures
accounted for using the equity method follows:
| Year-End 2009 | Year-End 2008 | |||||||||||||||||||||||||||||||||||||||
|
Palisades
|
Other
|
Palisades
|
Other
|
|||||||||||||||||||||||||||||||||||||
| CL Realty | Temco | West | Ventures | Total | CL Realty | Temco | West | Ventures | Total | |||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||
|
Real estate
|
$ | 113,169 | $ | 60,402 | $ | 122,566 | $ | 89,507 | $ | 385,644 | $ | 124,418 | $ | 60,791 | $ | 120,953 | $ | 94,093 | $ | 400,255 | ||||||||||||||||||||
|
Total assets
|
114,598 | 60,751 | 125,396 | 96,711 | 397,456 | 126,728 | 61,832 | 123,290 | 102,928 | 414,778 | ||||||||||||||||||||||||||||||
|
Borrowings, principally
non-recourse
(a)
|
3,568 | 3,061 | — | 77,113 | 83,742 | 4,901 | 3,198 | — | 75,638 | 83,737 | ||||||||||||||||||||||||||||||
|
Total liabilities
|
5,414 | 3,268 | 51,158 | (b) | 88,273 | 148,113 | 8,684 | 3,570 | 50,548 | (b) | 89,579 | 152,381 | ||||||||||||||||||||||||||||
|
Equity
|
109,184 | 57,483 | 74,238 | 8,438 | 249,343 | 118,044 | 58,262 | 72,742 | 13,349 | 262,397 | ||||||||||||||||||||||||||||||
|
Our investment in real estate ventures:
|
||||||||||||||||||||||||||||||||||||||||
|
Our share of their
equity
(c)
|
54,592 | 28,742 | 18,559 | 15,673 | 117,566 | 59,022 | 29,131 | 18,779 | 18,295 | 125,227 | ||||||||||||||||||||||||||||||
|
Unrecognized deferred
gain
(d)
|
(7,059 | ) | — | — | (910 | ) | (7,969 | ) | (7,059 | ) | — | — | (614 | ) | (7,673 | ) | ||||||||||||||||||||||||
|
Investment in real estate ventures
|
$ | 47,533 | $ | 28,742 | $ | 18,559 | $ | 14,763 | $ | 109,597 | $ | 51,963 | $ | 29,131 | $ | 18,779 | $ | 17,681 | $ | 117,554 | ||||||||||||||||||||
F-16
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Combined summarized income statement information for our
ventures accounted for using the equity method follows:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Revenues:
|
||||||||||||
|
CL Realty
|
$ | 2,698 | $ | 8,065 | $ | 7,393 | ||||||
|
Temco
|
1,419 | 6,426 | 8,305 | |||||||||
|
Palisades West
|
12,496 | 1,421 | 267 | |||||||||
|
Other ventures
|
7,659 | 12,865 | 14,494 | |||||||||
|
Total
|
$ | 24,272 | $ | 28,777 | $ | 30,459 | ||||||
|
(Loss) Earnings:
|
||||||||||||
|
CL Realty
|
$ | (8,500 | ) | $ | 6,780 | $ | 3,400 | |||||
|
Temco
|
(2,729 | ) | 940 | 258 | ||||||||
|
Palisades West
|
4,626 | 1,218 | 230 | |||||||||
|
Other ventures
|
(2,628 | ) | (2,488 | ) | (406 | ) | ||||||
|
Total
|
$ | (9,231 | ) | $ | 6,450 | $ | 3,482 | |||||
|
Our equity in their (loss) earnings:
|
||||||||||||
|
CL
Realty
(e)
|
$ | (4,250 | ) | $ | 3,377 | $ | 1,700 | |||||
|
Temco
(f)
|
(1,365 | ) | 469 | 129 | ||||||||
|
Palisades West
|
1,156 | 304 | 58 | |||||||||
|
Other
ventures
(c)
|
(3,312 | ) | 482 | 1,499 | ||||||||
|
Recognition of deferred
gain
(d)
|
— | 10 | 346 | |||||||||
|
Total
|
$ | (7,771 | ) | $ | 4,642 | $ | 3,732 | |||||
| (a) | Total includes current maturities of $80,625,000 at year-end 2009 and $21,150,000 at year-end 2008. | |
| (b) | Principally includes deferred income from leasehold improvements funded by tenants in excess of leasehold improvement allowances. These amounts are recognized as rental income over the lease term and are offset by depreciation expense related to these tenant improvements. There is no effect on venture net income. | |
| (c) | Our share of the equity in other ventures reflects our ownership interests ranging from 25 to 50 percent, excluding venture losses that exceed our investment where we are not obligated to fund those losses. | |
| (d) | In 2003, we contributed real estate with a $13,800,000 carrying value to CL Realty in exchange for $13,800,000 cash and a 50 percent interest in the partnership. We deferred the $14,587,000 gain on the sale and are recognizing it as the partnership sells the real estate to third parties. The deferred gain is reflected as an offset to our investment in unconsolidated ventures. | |
| (e) | In 2009, CL Realty’s loss includes impairment charges of $3,300,000 related to two residential real estate projects located in Tampa, Florida and an impairment charge of $5,238,000 related to an equity investment in an unconsolidated venture. | |
| (f) | In 2009, Temco Associates’ loss includes an impairment charge of $1,263,000 related to a residential real estate project located in Atlanta, Georgia. |
In 2009, we invested $2,875,000 in these ventures and received
$4,056,000 in distributions; in 2008, we invested $17,845,000 in
these ventures and received $7,221,000 in distributions; and in
2007, we invested
F-17
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$14,492,000 in these ventures and received $6,102,000 in
distributions. Distributions include both return of investments
and distributions of earnings.
We provide development services for some of these ventures for
which we receive a fee. Fees for these services were $45,000 in
2009, $120,000 in 2008 and $344,000 in 2007 and are included in
real estate revenues.
| Note 8 — | Receivables |
Receivables consist of:
| At Year-End | ||||||||||||
| 2009 | 2008 | |||||||||||
| (In thousands) | ||||||||||||
|
Seller financing notes receivable, average interest rate of
5.76% in 2009 and 6.87% in 2008
|
$ | 1,112 | $ | 410 | ||||||||
|
Notes receivable, average interest rate of 9.60% in 2008
|
— | 1,336 | ||||||||||
|
Accrued interest and other
|
873 | 2,742 | ||||||||||
| $ | 1,985 | $ | 4,488 | |||||||||
|
Allowance for bad debts
|
(144 | ) | (226 | ) | ||||||||
| $ | 1,841 | $ | 4,262 | |||||||||
Seller financing notes receivable are generally secured by a
deed of trust with a minimum 10 percent down payment and
are generally due within three years.
Notes receivable are funds advanced to potential venture
partners and were satisfied in 2009 by assignment to us of the
venture partner’s profit participation interest in the real
estate.
Other receivables are miscellaneous operating receivables
arising in the normal course of business. We expect to collect
$718,000 in 2010.
| Note 9 — |
|
Debt consists of:
| At Year-End | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Term loan facility — average interest rate of 4.90% at
year-end 2009 and 4.77% at year-end 2008
|
$ | 125,000 | $ | 175,000 | ||||
|
Revolving loan facility — average interest rate of
5.12% at year-end 2008
|
— | 59,900 | ||||||
|
Secured promissory note — interest rate of 2.73% at
year-end 2009 and 3.01% at year-end 2008
|
16,716 | 16,000 | ||||||
|
Other indebtedness due through 2011 at variable interest rates
based on prime (3.25% at year-end 2009 and 2008) and at
fixed interest rates ranging from 8.00% to 9.50%
|
74,910 | 86,502 | ||||||
| $ | 216,626 | $ | 337,402 | |||||
Our senior credit facility and other debt agreements contain
terms, conditions and financial covenants customary for such
agreements including minimum levels of interest coverage and
limitations on leverage. At year-end 2009, we had complied with
the terms, conditions and financial covenants of these
agreements.
In 2009, we reduced our term loan by $50,000,000 and repaid our
revolving line of credit in the amount of $70,000,000 from
proceeds received as a result of selling about 95,000 acres
of timber and timberland in Georgia and Alabama, in accordance
with our near-term strategic initiatives.
At year-end 2009, our senior credit facility provides for a
$125,000,000 term loan and a $257,700,000 revolving line of
credit. The term loan and revolving line of credit may be
prepaid at any time without penalty. The senior credit facility
matures December 1, 2010. However, we amended our credit
facility in 2009 to
F-18
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
provide us with the option to extend the maturity date through
June 30, 2012 for up to $350,000,000. It is likely we will
exercise our extension option. The revolving line of credit
includes a sublimit for letters of credit equal to the lesser of
$100,000,000 or 22 percent of the aggregate facility
commitments, of which $3,071,000 was outstanding at year-end
2009. Total borrowings under our senior credit facility
(including the face amount of letters of credit) may not exceed
a borrowing base formula, and includes a minimum liquidity
requirement equal to the lesser of $35,000,000 or
7.5 percent of the aggregate facility commitments at each
quarter-end. At year-end 2009, we had $202,561,000 in net unused
borrowing capacity under our senior credit facility.
At our option, we can borrow at LIBOR plus 4.5 percent
(subject to a two percent LIBOR floor) or Prime plus
2.5 percent. All borrowings under the senior credit
facility are secured by (a) all timberland and high-value
timberland, (b) assignments of current and future leases,
rents and contracts, including our mineral leases, (c) a
security interest in our primary operating account,
(d) pledge of the equity interests in current and future
material operating subsidiaries or joint venture interests, or
if such pledge is not permitted, a pledge of the right to
distributions from such entities, and (e) negative pledge
(without a mortgage) on all other wholly-owned assets. The
senior credit facility provides for releases of real estate to
be conveyed provided that borrowing base compliance is
maintained.
We have incurred origination and other fees related to our
senior credit facility of $13,755,000, of which $5,068,000 is
unamortized at year-end 2009 and is included in other assets.
Amortization of deferred financing fees in connection with our
senior credit facility was $5,042,000 in 2009, $3,506,000 in
2008 and $139,000 in 2007 and is included in interest expense.
At year-end 2009, commercial operating properties having a book
value of $24,484,000 were subject to liens in connection with
$16,716,000 of debt. In 2008, we refinanced this debt through
2010 with interest payable at LIBOR plus 2.5 percent or
Prime plus 2 percent, at our option. At year-end 2009,
entitled, developed and under development projects having a book
value of $141,694,000 was subject to liens in connection with
$74,910,000 of principally non-recourse debt. Please read
Schedule III for additional information.
Maturities of our debt during the next five years are:
2010 — $175,873,000; 2011 — $40,753,000;
2012 — $0; 2013 — $0; 2014 — $0
and thereafter — $0.
| Note 10 — | Fair Value |
Fair Value Measurements and Disclosures are a three-tiered fair
value hierarchy, which prioritizes the inputs used in measuring
fair values as follows:
| • | Level 1 — Observable inputs such as quoted prices in active markets; | |
| • | Level 2 — Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and | |
| • | Level 3 — Unobservable inputs in which there is very little market data available and the company develops its own assumptions. |
Financial liabilities measured at fair value on a recurring
basis include our interest rate swap agreement. The fair value
of the interest rate swap agreement was determined using quoted
prices for similar instruments in active markets (Level 2).
In 2009, the fair value of our interest rate swap increased, and
as a result, we recognized an after-tax gain of $1,004,000 in
accumulated other comprehensive income.
Non-financial assets measured at fair value on a non-recurring
basis include real estate assets and assets held for sale which
were measured for impairment. In 2009, certain assets were
remeasured and reported at fair value due to events or
circumstances that indicated the carrying value may not be
recoverable. We determined estimated fair value of real estate
assets based on the appraised value or present value of future
F-19
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
probability weighted cash flows expected from the sale of the
long-lived assets. As a result, we recognized asset impairment
of $5,718,000 in 2009. The carrying value for these assets may
have subsequently increased or decreased from the fair value
reflected due to activity that has occurred since the
measurement date. We determined estimated fair value of assets
held for sale, which represents our undivided 15 percent
interest in corporate aircraft contributed to us by
Temple-Inland at spin-off, based on a third-party appraisal of
current value. As a result, we recognized asset impairments of
$2,213,000 in 2009.
| Fair Value Measurements |
Year-End
|
|||||||||||||||
| Level 1 | Level 2 | Level 3 | 2009 | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Financial Assets and Liabilities:
|
||||||||||||||||
|
Interest rate swap agreement
|
$ | — | $ | (393 | ) | $ | — | $ | (393 | ) | ||||||
|
Non-Financial Assets and Liabilities:
|
||||||||||||||||
|
Real estate
|
$ | — | $ | — | $ | 12,297 | $ | 12,297 | ||||||||
|
Assets held for sale
|
$ | — | $ | — | $ | 2,879 | $ | 2,879 | ||||||||
We elected not to use the fair value option for cash and cash
equivalents, accounts receivable, other current assets,
long-term debt, accounts payable and other current liabilities.
The carrying amounts of these financial instruments approximate
their fair values due to their short-term nature or variable
interest rates.
Information about our fixed rate debt that is not measured at
fair value follows:
| At Year-end 2009 | At Year-end 2008 | |||||||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
Valuation
|
||||||||||||||||
| Amount | Value | Amount | Value | Technique | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Fixed rate debt
|
$ | (3,431 | ) | $ | (3,505 | ) | $ | (8,372 | ) | $ | (8,654 | ) | Level 2 | |||||||
| Note 11 — | Derivative Instruments |
We are exposed to certain risks arising from both our business
operations and economic conditions. We principally manage
exposures to a wide variety of business and operational risks
through management of our core business activities. We manage
economic risks including interest rate and liquidity by managing
the amount, sources and duration of our debt funding and through
the use of derivative instruments. Specifically, we may enter
into derivative instruments to mitigate the risk inherent in
interest rate fluctuations.
Cash
Flow Hedges
Our objective for using interest rate derivatives is to manage
exposure to significant movements in interest rates. To
accomplish this objective, we use interest rate swaps as part of
our interest rate risk management strategy. Interest rate swaps
designated as cash flow hedges involve the receipt of
variable-rate amounts from a counterparty in exchange for our
fixed-rate payment over the life of the agreements without
exchange of the underlying notional amount.
At year-end 2009, our $100,000,000 notional amount interest rate
swap agreement, which matures in March 2010, requires that we
pay a fixed interest rate of 6.57 percent and receive a
floating interest rate of one month LIBOR plus 4 percent
(4.24 percent at year-end 2009).
In 2009 and 2008, there was no hedge ineffectiveness.
F-20
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The table below presents the fair value of our derivative
instrument as well as its classification on the consolidated
balance sheets:
| Liability Derivatives | ||||||||||||||||
| Year-End 2009 | Year-End 2008 | |||||||||||||||
|
Balance Sheet
|
Fair
|
Balance Sheet
|
Fair
|
|||||||||||||
| Location | Value | Location | Value | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
|
Derivatives designated as hedging instruments:
|
||||||||||||||||
|
Interest rate swap agreement
|
Other liabilities | $ | 393 | Other liabilities | $ | 1,939 | ||||||||||
The change in fair value of our interest rate swap recognized in
other comprehensive income was a gain of $1,004,000 in 2009 and
a loss of $1,260,000 in 2008. No amounts were reclassified from
other comprehensive income into income in 2009 or 2008.
Please read Note 10 — Fair Value for a
description of how the above derivative instrument is valued.
| Note 12 — | Capital Stock |
Pursuant to our shareholder rights plan, each share of common
stock outstanding is coupled with one-quarter of a preferred
stock purchase right (Right). Each Right entitles our
shareholders to purchase, under certain conditions, one
one-hundredth of a share of newly issued Series A Junior
Participating Preferred Stock at an exercise price of $100.
Rights will be exercisable only if someone acquires beneficial
ownership of 20 percent or more of our common shares or
commences a tender or exchange offer, upon consummation of which
they would beneficially own 20 percent or more of our
common shares. We will generally be entitled to redeem the
Rights at $0.001 per Right at any time until the
10th business day following public announcement that a
20 percent position has been acquired. The Rights will
expire on December 11, 2017.
Please read Note 19 — Share-Based Compensation
for information about additional shares of common stock that
could be issued under terms of our share-based compensation
plans.
As a result of our spin-off from Temple-Inland, all of
Temple-Inland’s outstanding share-based compensation awards
were equitably adjusted into separate awards: one related to our
common stock, one related to Temple-Inland common stock and one
related to Guaranty Financial Group, Inc. common stock. Guaranty
is no longer operating as a going concern. All awards issued as
part of this adjustment are subject to their original vesting
schedules and terms.
At year-end 2009, Temple-Inland directors and employees held
22,000 equity-settled restricted stock awards on our stock. The
following table summarizes outstanding stock option awards on
our stock held by Temple-Inland and Guaranty personnel at
year-end 2009:
|
Weighted
|
Aggregate
|
|||||||||||||||
|
Average
|
Intrinsic Value
|
|||||||||||||||
|
Weighted
|
Remaining
|
(Current
|
||||||||||||||
|
Average
|
Contractual
|
Value Less
|
||||||||||||||
| Shares | Exercise Price | Term | Exercise Price) | |||||||||||||
| (In thousands) | (Per share) | (In years) | (In thousands) | |||||||||||||
|
Outstanding
|
1,341 | $ | 20.16 | 5 | $ | 5,938 | ||||||||||
|
Exercisable
|
1,204 | $ | 19.10 | 4 | $ | 5,938 | ||||||||||
F-21
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 13 — | Other Comprehensive Income |
Other comprehensive income consists of:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Consolidated net income
|
$ | 61,574 | $ | 14,209 | $ | 30,566 | ||||||
|
Change in fair value of interest rate swap agreement
|
1,546 | (1,939 | ) | — | ||||||||
|
Income tax effect of change in fair value
|
(542 | ) | 679 | — | ||||||||
|
Other comprehensive income
|
62,578 | 12,949 | 30,566 | |||||||||
|
Less: Comprehensive income attributable to noncontrolling
interests
|
(2,467 | ) | (2,235 | ) | (5,771 | ) | ||||||
|
Other comprehensive income attributable to Forestar Group
Inc.
|
$ | 60,111 | $ | 10,714 | $ | 24,795 | ||||||
| Note 14 — | Net Income per Share |
Our basic and diluted weighted average common shares outstanding
used to compute net income per share are as follows:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Weighted average common shares outstanding — basic
|
35,805 | 35,455 | 35,380 | |||||||||
|
Dilutive effect of stock options
|
94 | 305 | — | |||||||||
|
Dilutive effect of restrict stock and restricted stock units
|
203 | 132 | — | |||||||||
|
Weighted average common shares outstanding — diluted
|
36,102 | 35,892 | 35,380 | |||||||||
At year-end 2009, the effect of 1,812,000 stock options and
unvested shares of restricted stock were not included in the
computation of diluted weighted average shares outstanding
because their impact would have been anti-dilutive.
At year-end 2008, the effect of 1,713,000 stock options and
unvested shares of restricted stock were not included in the
computation of diluted weighted average shares outstanding
because their impact would have been anti-dilutive.
For 2007, we computed basic and diluted net income per share
based upon the number of shares of our common stock distributed
by Temple-Inland on December 28, 2007.
F-22
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 15 — | Income Taxes |
Income tax expense consists of:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Current tax provision:
|
||||||||||||
|
U.S. Federal
|
$ | (51,210 | ) | $ | (14,954 | ) | $ | (28,782 | ) | |||
|
State and other
|
(7,031 | ) | (1,680 | ) | (3,133 | ) | ||||||
| (58,241 | ) | (16,634 | ) | (31,915 | ) | |||||||
|
Deferred tax provision:
|
||||||||||||
|
U.S. Federal
|
21,639 | 11,124 | 16,509 | |||||||||
|
State and other
|
969 | 275 | 1,497 | |||||||||
| 22,608 | 11,399 | 18,006 | ||||||||||
|
Income tax expense
|
$ | (35,633 | ) | $ | (5,235 | ) | $ | (13,909 | ) | |||
Our income tax expense reflects a benefit of $901,000 in 2009
and $800,000 in 2008 from a federal income tax rate change for
qualified timber gains due to the Food, Conservation and Energy
Act of 2008.
A reconciliation of the federal statutory rate to the effective
income tax rate on continuing operations follows:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Federal statutory rate
|
35 | % | 35 | % | 35 | % | ||||||
|
State, net of federal benefit
|
4 | 5 | 3 | |||||||||
|
Finalization of deferred tax balance transferred at spin-off
|
— | 2 | — | |||||||||
|
Noncontrolling interests
|
(1 | ) | (4 | ) | (5 | ) | ||||||
|
Percentage depletion
|
— | (6 | ) | (2 | ) | |||||||
|
Qualified timber gains
|
(1 | ) | (4 | ) | — | |||||||
|
Other
|
— | (1 | ) | — | ||||||||
|
Effective tax rate
|
37 | % | 27 | % | 31 | % | ||||||
F-23
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Significant components of deferred taxes are:
| At Year-End | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Deferred Tax Assets:
|
||||||||
|
Real estate
|
$ | 52,592 | $ | 44,711 | ||||
|
Employee benefits
|
8,528 | 3,594 | ||||||
|
Accruals not deductible until paid
|
141 | 986 | ||||||
|
Other
|
140 | 696 | ||||||
|
Gross deferred tax assets
|
61,401 | 49,987 | ||||||
|
Deferred Tax Liabilities:
|
||||||||
|
Undeveloped land
|
(16,150 | ) | (25,869 | ) | ||||
|
Timber
|
(3,708 | ) | (5,638 | ) | ||||
|
Other
|
(792 | ) | (1,296 | ) | ||||
|
Gross deferred tax liabilities
|
(20,650 | ) | (32,803 | ) | ||||
|
Net Deferred Tax Asset
|
$ | 40,751 | $ | 17,184 | ||||
Subsequent to our spin-off, we file our own income tax returns
in the U.S. federal jurisdiction and in various state
jurisdictions. In 2009, the Internal Revenue Service (IRS) began
an examination of our 2008 and 2007 (one day of operations)
federal income tax returns. As of year-end 2009, the IRS has not
proposed any adjustments to these tax returns.
Prior to our spin-off, we were included in Temple-Inland’s
consolidated income tax returns. In conjunction with our
spin-off, we entered into an agreement with Temple-Inland
whereby we agreed to indemnify Temple-Inland for any adjustments
related to our tax positions reported in their pre-spin income
tax returns. With few exceptions, we are no longer subject to
U.S. federal or state income tax examinations by tax
authorities for years prior to 2006. In 2009, Temple-Inland
informed us that the IRS began an examination of its 2007 and
2006 federal income tax returns. As of year-end 2009, we were
informed that the IRS has not proposed any adjustments affecting
our reported tax positions.
A reconciliation of the beginning and ending amount of tax
benefits not recognized for book purposes is as follows:
| For the Year | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Balance at beginning of year
|
$ | — | $ | — | ||||
|
Additions based on tax positions related to the current year
|
7,441 | — | ||||||
|
Additions for tax positions of prior years
|
— | — | ||||||
|
Reductions for tax positions of prior years
|
— | — | ||||||
|
Settlements
|
— | — | ||||||
|
Balance at end of year
|
$ | 7,441 | $ | — | ||||
Of the $7,441,000 tax benefits not recognized for book purposes
at year-end 2009, $6,066,000 would affect the annual effective
tax rate, if recognized.
The Company recognizes interest accrued related to unrecognized
tax benefits in income tax expense. In 2009, we recognized
approximately $96,000 in interest. Unrecognized tax benefits
include $96,000 of accrued interest and no penalties related to
tax years 2006 through 2009.
F-24
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 16 — | Litigation and Environmental Contingencies |
We are involved in various legal proceedings that arise from
time to time in the ordinary course of doing business and
believe that adequate reserves have been established for any
probable losses. We do not believe that the outcome of any of
these proceedings should have a significant adverse effect on
our financial position, long-term results of operations or cash
flows. It is possible; however, that charges related to these
matters could be significant to our results or cash flows in any
one accounting period.
Environmental remediation liabilities arise from time to time in
the ordinary course of doing business, and we believe we have
established adequate reserves for any probable losses. We own
288 acres near Antioch, California, portions of which were
sites of a Temple-Inland paper manufacturing operation that are
in remediation. We increased our reserves for environmental
remediation by about $3,600,000 in 2009. We estimate the cost to
complete remediation activities will be about $4,400,000, which
is included in other accrued expenses and will likely be paid in
2010 and 2011. Our estimate requires us to make assumptions
regarding the scope of required remediation, the effectiveness
of planned remediation activities, and approvals by regulatory
authorities. Our estimate is subject to revision as new
information becomes available.
| Note 17 — | Commitments and Other Contingencies |
We lease timberland, facilities and equipment under
non-cancelable long-term operating lease agreements. In
addition, we have various obligations under other office space
and equipment leases of less than one year. Rent expense on
timberland was $366,000 in 2009, $346,000 in 2008 and $428,000
in 2007. Rent expense on facilities and equipment was $1,982,000
in 2009, $1,789,000 in 2008 and $536,000 in 2007. Future minimum
rental commitments under non-cancelable operating leases having
a remaining term in excess of one year are: 2010 —
$2,081,000; 2011 — $2,101,000; 2012 —
$1,957,000; 2013 — $1,753,000; 2014 —
$1,643,000; and thereafter — $11,166,000.
We have 16 years remaining on a
65-year
timber lease of over 16,000 acres. At year-end 2009, the
remaining contractual obligation for this lease is $7,574,000.
In 2009, we committed to loan $10,000,000 to a third-party
equity investor in the JW
Marriott
®
San Antonio Hill Country Resort & Spa resort
development. This commitment was funded in January 2010.
In 2008, we entered into a
10-year
operating lease for approximately 32,000 square feet in the
Palisades West Office Park in Austin, Texas. Effective in fourth
quarter 2008, we occupy this space as our corporate
headquarters. This lease contains predetermined fixed increases
of the minimum rental rate during the initial lease term and a
construction allowance for leasehold improvements. The remaining
contractual obligation for this lease is $11,397,000.
In connection with our unconsolidated venture operations, we
have provided performance bonds and letters of credit
aggregating $1,798,000 at year-end 2009. Generally these
performance bonds and letters of credit would be drawn on due to
lack of specific performance by the ventures, such as failure to
deliver streets and utilities in accordance with local codes and
ordinances. In addition, we own a 25 percent interest in
Palisades West LLC to which all the members have committed to
make additional proportionate capital contributions, our share
of which is $2,566,000 at year-end 2009.
Temple-Inland has received a private letter ruling from the
Internal Revenue Service that the spin-off qualifies for
tax-free treatment under applicable sections of the Internal
Revenue Code, and has also received an opinion of tax counsel
that the spin-off so qualifies. However, if the spin-off fails
to qualify for tax-free treatment, under the tax matters
agreement between Temple-Inland and us we may be required to
indemnify Temple-Inland against any tax resulting from the
distribution of our shares of stock to the extent that such tax
resulted from any of our representations or undertakings being
incorrect or violated.
F-25
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 18 — | Segment Information |
In 2008, we changed our reportable segments to reflect our
post-spin management of the operations transferred to us from
Temple-Inland. All prior period segment information has been
reclassified to conform to the current presentation. We operate
three business segments: real estate, mineral resources and
fiber resources. Real estate secures entitlements and develops
infrastructure on our lands for single-family residential and
mixed-use communities and manages our undeveloped land and our
commercial operating properties. Mineral resources includes our
oil, natural gas and water interests. Fiber resources manages
our timber and recreational leases.
We evaluate performance based on segment earnings before
unallocated items and income taxes. Segment earnings consist of
operating income, equity in earnings of unconsolidated ventures
and net income attributable to noncontrolling interests.
Unallocated items consist of general and administrative expense,
share-based compensation, gain on sale of assets, interest
expense and other non-operating income and expense. The
accounting policies of the segments are the same as those
described in the accounting policy note to the consolidated
financial statements. Our revenues are derived from our
U.S. operations and all of our assets are located in the
U.S. In 2009, revenues of $15,807,000 from one customer of
our mineral resources segment exceeded 10 percent of our
total revenues.
|
Items Not
|
||||||||||||||||||||
|
Real
|
Mineral
|
Fiber
|
Allocated to
|
|||||||||||||||||
| Estate | Resources | Resources | Segments | Total | ||||||||||||||||
|
For the year or at year-end 2009:
|
||||||||||||||||||||
|
Revenues
|
$ | 94,436 | $ | 36,256 | $ | 15,559 | $ | — | $ | 146,251 | ||||||||||
|
Depreciation and amortization
|
2,167 | 253 | 35 | 7,331 | 9,786 | |||||||||||||||
|
Equity in (loss) earnings of unconsolidated ventures
|
(8,161 | ) | 390 | — | — | (7,771 | ) | |||||||||||||
|
Income before taxes
|
3,182 | 32,370 | 9,622 | 49,566 | (a) | 94,740 | ||||||||||||||
|
Total assets
|
654,250 | 1,356 | 20,088 | 109,040 | 784,734 | |||||||||||||||
|
Investment in unconsolidated ventures
|
109,597 | — | — | — | 109,597 | |||||||||||||||
|
Capital
expenditures
(b)
|
5,368 | 1,284 | 120 | 523 | 7,295 | |||||||||||||||
|
For the year or at year-end 2008:
|
||||||||||||||||||||
|
Revenues
|
$ | 98,859 | $ | 47,671 | $ | 13,192 | $ | — | $ | 159,722 | ||||||||||
|
Depreciation and amortization
|
2,076 | — | 36 | 5,561 | 7,673 | |||||||||||||||
|
Equity in earnings of unconsolidated ventures
|
3,480 | 1,162 | — | — | 4,642 | |||||||||||||||
|
Income (loss) before taxes
|
9,075 | 44,076 | 8,896 | (44,838 | ) (a) | 17,209 | ||||||||||||||
|
Total assets
|
732,401 | 376 | 51,321 | 50,478 | 834,576 | |||||||||||||||
|
Investment in unconsolidated ventures
|
117,554 | — | — | — | 117,554 | |||||||||||||||
|
Capital
expenditures
(b)
|
508 | 370 | 282 | 4,037 | 5,197 | |||||||||||||||
|
For the year or at year-end 2007:
|
||||||||||||||||||||
|
Revenues
|
$ | 142,729 | $ | 20,818 | $ | 14,439 | $ | — | $ | 177,986 | ||||||||||
|
Depreciation and amortization
|
2,839 | — | 76 | — | 2,915 | |||||||||||||||
|
Equity in earnings of unconsolidated ventures
|
3,732 | — | — | — | 3,732 | |||||||||||||||
|
Income (loss) before taxes
|
39,507 | 18,581 | 7,950 | (27,334 | ) (a) | 38,704 | ||||||||||||||
|
Total assets
|
658,813 | — | 55,011 | 34,902 | 748,726 | |||||||||||||||
|
Investment in unconsolidated ventures
|
101,687 | — | — | — | 101,687 | |||||||||||||||
|
Capital
expenditures
(b)
|
2,788 | — | 410 | — | 3,198 | |||||||||||||||
| (a) | Items not allocated to segments consists of: |
F-26
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
General and administrative
|
$ | (22,399 | ) | $ | (19,318 | ) | $ | (11,119 | ) | |||
|
Expense allocation from Temple-Inland (see Note 21)
|
— | — | (6,294 | ) | ||||||||
|
Share-based compensation (allocated from Temple-Inland in 2007,
see Note 19)
|
(11,998 | ) | (4,516 | ) | (1,397 | ) | ||||||
|
Gain on sale of assets
|
104,047 | — | — | |||||||||
|
Interest expense
|
(20,459 | ) | (21,283 | ) | (9,229 | ) | ||||||
|
Other non-operating income
|
375 | 279 | 705 | |||||||||
| $ | 49,566 | $ | (44,838 | ) | $ | (27,334 | ) | |||||
| (b) | Consists of expenditures for property and equipment and reforestation. |
In 2009, general and administrative expense includes about
$3,200,000 paid to outside advisors regarding an evaluation by
our Board of Directors of an unsolicited shareholder proposal
and a $2,213,000 impairment charge related to our undivided
15 percent interest in corporate aircraft contributed to us
by Temple-Inland at spin-off.
Share-based compensation increased in 2009 principally due to
our higher stock price and a greater number of cash-settled
awards granted in 2009.
In 2009, gain on sale of assets represents our gain from selling
about 75,000 acres of timber and timberland in Georgia and
Alabama for $119,702,000 to Hancock Timber Resource Group, which
acquired the assets on behalf of its investor clients, and about
20,000 acres of timber and timberland in Georgia for
$38,901,000 to St. Regis Paper Company, LLC, affiliate of
Holland M. Ware.
| Note 19 — | Share-Based Compensation |
Post-Spin
Awards
A summary of the awards granted under our 2007 Stock Incentive
Plan follows.
Cash-settled
awards
Cash-settled awards granted to our employees in the form of
restricted stock units or stock appreciation rights vest over
two to four years from the date of grant and generally provide
for accelerated vesting upon death, disability or if there is a
change in control. Vesting for some awards is also conditioned
upon achievement of a minimum one percent annualized return on
assets over a three-year period. Cash-settled stock appreciation
rights have a ten-year term, generally become exercisable
ratably over three to four years and provide for accelerated or
continued vesting upon retirement, death, disability or if there
is a change in control. Stock appreciation rights were granted
with an exercise price equal to the market value of our stock on
the date of grant.
Cash-settled awards granted to our directors in the form of
restricted stock units are fully vested at the time of grant and
payable upon retirement.
F-27
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the activity of cash-settled
awards granted in 2009:
|
Weighted
|
||||||||
|
Average
|
||||||||
|
Grant Date
|
||||||||
| Equivalent Units | Fair Value | |||||||
| (In thousands) | (Per unit) | |||||||
|
Non-vested at beginning of year
|
5 | $ | 28.85 | |||||
|
Granted
|
1,147 | 6.00 | ||||||
|
Vested
|
(146 | ) | 11.10 | |||||
|
Forfeited
|
(1 | ) | 28.85 | |||||
|
Non-vested at end of year
|
1,005 | $ | 5.35 | |||||
To settle vested cash awards, we paid $23,000 in 2009. The
aggregate current value of non-vested awards was $15,242,000 at
year-end 2009.
Equity-settled
awards
There were no equity-settled awards in the form of restricted
stock units granted in 2009, and there were no unvested
equity-settled restricted stock unit awards at year-end 2009.
Restricted
stock
Restricted stock awards vest after three years and generally
require achievement of a minimum one percent annualized return
on assets over such three-year period. The following table
summarizes the activity of restricted stock awards granted in
2009:
|
Weighted
|
||||||||
|
Average
|
||||||||
|
Grant Date
|
||||||||
| Restricted Shares | Fair Value | |||||||
| (In thousands) | (Per share) | |||||||
|
Non-vested at beginning of year
|
207 | $ | 21.89 | |||||
|
Granted
|
125 | 10.20 | ||||||
|
Vested
|
— | — | ||||||
|
Forfeited
|
(1 | ) | 28.85 | |||||
|
Non-vested at end of year
|
331 | $ | 17.43 | |||||
The aggregate current value of non-vested awards was $7,264,000
at year-end 2009.
Stock
options
Stock options have a ten-year term, generally become exercisable
ratably over three to four years and provide for accelerated or
continued vesting upon retirement, death, disability or if there
is a change in
F-28
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
control. Options were granted with an exercise price equal to
the market value of our stock on the date of grant. The
following table summarizes the activity of stock option awards
granted in 2009:
|
Weighted
|
||||||||||||
|
Weighted
|
Average
|
|||||||||||
|
Average
|
Remaining
|
|||||||||||
|
Options
|
Exercise
|
Contractual
|
||||||||||
| Outstanding | Price | Term | ||||||||||
| (In thousands) | (Per share) | (In years) | ||||||||||
|
Balance at beginning of year
|
622 | $ | 28.85 | 9 | ||||||||
|
Granted
|
161 | 9.29 | ||||||||||
|
Exercised
|
— | — | ||||||||||
|
Forfeited
|
(3 | ) | 28.85 | |||||||||
|
Balance at end of year
|
780 | $ | 24.80 | 8 | ||||||||
|
Exercisable at end of year
|
183 | $ | 28.85 | 8 | ||||||||
The aggregate intrinsic value of stock options outstanding was
$2,052,000 at year-end 2009. There was no aggregate intrinsic
value of stock options exercisable at year-end 2009.
Stock options are valued based upon the Black-Scholes option
pricing model. Awards granted were valued based upon the
following assumptions:
| For the Year | ||||||||
| 2009 | 2008 | |||||||
|
Expected dividend yield
|
0.0 | % | 0.0 | % | ||||
|
Expected stock price volatility
|
41.8 | % | 31.0 | % | ||||
|
Risk-free interest rate
|
1.8 | % | 2.7 | % | ||||
|
Expected life of options (years)
|
6 | 6 | ||||||
|
Weighted average estimated fair value of options granted
|
$ | 3.94 | $ | 10.22 | ||||
We have limited historical experience as a stand-alone company
so we utilized alternative methods in determining our valuation
assumptions. The expected life was based on the simplified
method utilizing the midpoint between the vesting period and the
contractual life of the awards. The expected stock price
volatility was based on historical prices of our peers’
common stock for a period corresponding to the expected life of
the options. Pre-vesting forfeitures are estimated based upon
the pool of participants and their expected activity.
Pre-Spin
Awards
Prior to the spin-off, we participated in Temple-Inland’s
share-based compensation plans, and as a result, certain of our
employees received share-based compensation in the form of
restricted or performance stock units, restricted stock, or
options to purchase shares of Temple-Inland’s common stock.
Concurrent with Temple-Inland’s distribution of our common
stock, all outstanding Temple-Inland awards were adjusted into
three separate awards: one related to Forestar common stock, one
related to Guaranty common stock and one related to
Temple-Inland common stock.
In 2007, the expense for share-based compensation awards granted
to our employees under Temple-Inland’s plans was allocated
to us by Temple-Inland. We continue to recognize share-based
compensation expense over the remaining vesting periods
associated with our employees’ and directors’ awards
in Forestar, Guaranty and Temple-Inland stock.
F-29
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Cash-settled
awards
Cash-settled awards generally vest and are paid after three
years from the date of grant or the attainment of defined
performance goals, generally measured over a three-year period.
A summary of cash-settled awards outstanding to our employees at
year-end 2009, following the adjustments described previously,
follows:
|
Aggregate
|
||||||||
|
Equivalent
|
Current
|
|||||||
| Units | Value | |||||||
| (In thousands) | (Per unit) | |||||||
|
Awards on Forestar stock
|
24 | $ | 524 | |||||
|
Awards on Guaranty stock
|
24 | — | ||||||
|
Awards on Temple-Inland stock
|
72 | 1,510 | ||||||
| $ | 2,034 | |||||||
To settle vested cash awards, we paid $394,000 in 2009 and
$166,000 in 2008.
Restricted
stock
All outstanding restricted stock awards at year-end 2007 vested
in first quarter 2008.
Stock
options
Stock options have a ten-year term, generally become exercisable
ratably over four years and provide for accelerated or continued
vesting upon retirement, death, disability or if there is a
change in control. Options were granted with an exercise price
equal to the market value of Temple-Inland common stock on the
date of grant. A summary of stock option awards outstanding to
our employees at year-end 2009, following the adjustments
described previously, follows:
|
Aggregate
|
||||||||||||||||
|
Weighted
|
Intrinsic
|
|||||||||||||||
|
Average
|
Value
|
|||||||||||||||
|
Weighted
|
Remaining
|
(Current
|
||||||||||||||
|
Average
|
Contractual
|
Value Less
|
||||||||||||||
| Shares | Exercise Price | Term | Exercise Price) | |||||||||||||
| (In thousands) | (Per share) | (In years) | (In thousands) | |||||||||||||
|
Outstanding on Forestar stock
|
81 | $ | 21.53 | 5 | $ | 316 | ||||||||||
|
Outstanding on Guaranty stock
|
86 | 13.55 | 5 | — | ||||||||||||
|
Outstanding on Temple-Inland stock
|
218 | 18.01 | 5 | 904 | ||||||||||||
| $ | 1,220 | |||||||||||||||
|
Exercisable on Forestar stock
|
66 | $ | 19.73 | 5 | $ | 316 | ||||||||||
|
Exercisable on Guaranty stock
|
70 | 12.41 | 5 | — | ||||||||||||
|
Exercisable on Temple-Inland stock
|
172 | 16.59 | 5 | 904 | ||||||||||||
| $ | 1,220 | |||||||||||||||
F-30
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The intrinsic value of options exercised was $287,000 in 2009.
Share-Based
Compensation Expense
Share-based compensation expense for post-spin and pre-spin
awards consists of:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Cash-settled awards
|
$ | 8,174 | $ | (488 | ) | $ | 763 | |||||
|
Equity-settled awards
|
— | 750 | — | |||||||||
|
Restricted stock
|
1,741 | 1,264 | 142 | |||||||||
|
Stock options
|
2,083 | 2,990 | 492 | |||||||||
|
Pre-tax share-based compensation expense
|
11,998 | 4,516 | 1,397 | |||||||||
|
Income tax benefit
|
(4,439 | ) | (1,355 | ) | (503 | ) | ||||||
| $ | 7,559 | $ | 3,161 | $ | 894 | |||||||
Share-based compensation increased in 2009 principally due to
our higher stock price and a greater number of cash-settled
awards granted in 2009.
The fair value of awards granted to retirement-eligible
employees and expensed at the date of grant was $183,000 in 2009
and $1,321,000 in 2008.
Pre-tax share-based compensation expense is included in:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
General and administrative
|
$ | 7,527 | $ | 2,910 | $ | 1,211 | ||||||
|
Other operating
|
4,471 | 1,606 | 186 | |||||||||
| $ | 11,998 | $ | 4,516 | $ | 1,397 | |||||||
We did not capitalize any share-based compensation in 2009, 2008
or 2007.
Unrecognized share-based compensation for post-spin awards not
vested was $5,392,000 at year-end 2009. The weighted average
period over which this amount will be recognized is estimated to
be 1.8 years. Unrecognized share-based compensation for
pre-spin awards not vested was $175,000 at year-end 2009. The
weighted average period over which this amount will be
recognized is estimated to be 0.6 years.
In 2009, we withheld 118,725 shares having a value of
$2,347,000 in connection with vesting of restricted stock awards
and exercises of stock options. These shares are accounted for
as treasury stock and are reflected in financing activities in
our consolidated statement of cash flows.
| Note 20 — | Retirement, Pension and Postretirement Plans |
Our defined contribution retirement plans include a 401(k) plan,
which is funded, and a supplemental plan for certain employees,
which is unfunded. The expense of our defined contribution
retirement plans was $717,000 in 2009 and $1,134,000 in 2008.
The unfunded liability for our supplemental plan was $205,000 at
year-end 2009 and $132,000 at year-end 2008 and is included in
other liabilities.
Prior to the spin-off, we participated in Temple-Inland’s
retirement, pension and postretirement plans. The retirement
expense for certain of our employees was $262,000 in 2007. The
pension and postretirement expense allocated to us by
Temple-Inland for certain of our employees was $218,000 in 2007.
Subsequent to the spin-off, our employees no longer participate
in the Temple-Inland postretirement plans, and our employees
F-31
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
who participate in Temple-Inland retirement and pension plans
will not accrue any additional benefits. The liability for their
benefits as of the spin-off date has been retained by
Temple-Inland.
| Note 21 — | Pre-Spin Transactions with Temple-Inland |
Prior to the spin-off, we reimbursed Temple-Inland for expenses
incurred on our behalf and allocated to us. Additional allocated
expenses incurred by Temple-Inland but not directly attributable
to us were allocated to us and recognized as expense with a
corresponding increase to Temple-Inland’s investment, net
of tax. Please read Note 1 and Note 2 for additional
information.
A summary of allocated expenses from Temple-Inland in 2007
follows (in thousands):
|
Legal, human resources and other administrative costs
|
$ | 2,842 | ||
|
Variable compensation
|
883 | |||
|
Accounting and finance
|
1,425 | |||
|
Information technology support
|
935 | |||
|
Internal audit, governance and other
|
209 | |||
| 6,294 | ||||
|
Share-based compensation
|
1,397 | |||
|
Pension and postretirement
|
218 | |||
| $ | 7,909 | |||
Prior to the spin-off, we paid income taxes to Temple-Inland as
if we filed a separate income tax return. Please read
Note 15 — Income Taxes for additional
information. In addition, rent paid to a former subsidiary of
Temple-Inland was $190,000 in 2007.
We own an undivided 15 percent interest in corporate
aircraft contributed to us by Temple-Inland at spin-off. Under
the terms of a joint ownership agreement, we pay 15 percent
of the fixed costs associated with ownership of the aircraft and
pay our portion of the variable costs based on our usage. The
joint ownership agreement expired on December 28, 2009, and
our interest is being disposed of pursuant to the terms of the
agreement. At year-end 2009, the carrying value of the aircraft
of $2,879,000 is included in assets held for sale.
Fiber resources and other revenues include sales of timber to
Temple-Inland of $12,167,000 in 2007. Cost of fiber resources
includes cost of timber sold to Temple-Inland of $3,241,000 in
2007.
| Note 22 — | Supplemental Oil and Gas Disclosures (Unaudited) |
The following unaudited information regarding our oil and
natural gas reserves has been prepared and is presented pursuant
to requirements of the Securities and Exchange Commission (SEC)
and the Financial Accounting Standards Board (FASB).
We lease our oil and natural gas mineral interests, principally
in Texas and Louisiana, to third-party entities for the
exploration and production of oil and natural gas. When we lease
our mineral interests, we may negotiate a lease bonus payment
and we retain a royalty interest and may take an additional
participation in production, including a non-operating working
interest in which we pay a share of the costs to drill, complete
and operate a well and receive a proportionate share of the
production revenues. We are not an operator with respect to any
of the oil and gas activities on our properties.
We initiated an internal reserve analysis of producing wells
where we have a royalty interest and engaged independent oil and
natural gas consultants, Netherland, Sewell &
Associates, Inc. to independently prepare estimates of our
proved developed oil and natural gas reserves, all of which are
located in the U.S., and future net cash flows as of year-end
2009 and 2008. These estimates were based on the economic and
operating
F-32
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
conditions existing at year-end 2009 and 2008. Estimates of oil
and gas reserve information related to our interests in 2007,
the period prior to our spin-off, are unknown to us. Proved
developed reserves are those quantities of petroleum from
existing wells and facilities, which by analysis of geosciences
and engineering data, can be estimated with reasonable certainty
to be commercially recoverable, from a given date forward for
known reservoirs and under defined economic conditions,
operating methods and government regulations. This reserve
information does not include estimates of reserves and future
cash flows associated with proved undeveloped reserves or any
potential value related to our 593,000 undeveloped mineral acres
because we are solely royalty and non-operating working interest
owners so we do not determine whether or when proved undeveloped
reserves will be converted to developed reserves. The
third-party operators to which we lease our mineral interests do
not provide us with their adopted development plans related to
our royalty interests.
In December 2009, we adopted revised oil and gas reserve
estimation and disclosure requirements to conform to the SEC
“Modernization of Oil and Gas Reporting” rules, which
were issued in December 2008. The new rules require disclosure
of proved reserves using the twelve-month average
beginning-of-month
price for the year, rather than year-end prices. These same
twelve month average prices are also used in calculating the
amount of (and changes in) future net cash inflows related to
the standardized measure of discounted future net cash flows.
As a result of these changes, for 2009, oil prices are based on
a twelve month average price of $57.65 per barrel of West Texas
Intermediate Crude and natural gas prices are based on a twelve
month average prices of $3.87 per MMBTU per the Henry Hub spot
market. For 2008, oil prices are based on a year-end 2008, West
Texas Intermediate posted price of $41.00 per barrel and natural
gas prices are based on a year-end 2008, Henry Hub spot market
price of $5.71 per MMBTU. All prices were adjusted for quality,
transportation fees and regional price differentials. The
process of estimating proved reserves and future net cash flows
is complex involving decisions and assumptions in evaluating the
available engineering and geologic data and prices for oil and
natural gas and the cost to produce these reserves and other
factors, many of which are beyond our control. As a result,
these estimates are imprecise and should be expected to change
as future information becomes available. These changes could be
significant. In addition, this information should not be
construed as being the current fair market value of our proved
developed reserves.
Estimated
Quantities of Proved Developed Oil and Natural Gas
Reserves
Estimated quantities of proved developed oil and natural gas
reserves are summarized as follows:
| Net Reserves | ||||||||
|
Oil
|
Natural Gas
|
|||||||
| (Barrels) | (Mcf) | |||||||
| (In thousands) | ||||||||
|
Consolidated entities:
|
||||||||
|
Year-end 2008
|
457 | 7,538 | ||||||
|
Revisions of previous estimates
|
171 | (402 | ) | |||||
|
Extensions and discoveries
|
59 | 1,018 | ||||||
|
Production
|
(107 | ) | (1,494 | ) | ||||
|
Year-end 2009
|
580 | 6,660 | ||||||
|
Our share of ventures accounted for using the equity method
|
||||||||
|
Year-end 2008
|
— | 125 | ||||||
|
Revisions of previous estimates
|
— | 2 | ||||||
|
Extensions and discoveries
|
— | 2,463 | ||||||
|
Production
|
— | (82 | ) | |||||
|
Year-end 2009
|
— | 2,508 | ||||||
|
Total consolidated and our share of equity method ventures at
year-end 2009
|
580 | 9,168 | ||||||
F-33
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The effect of applying twelve month average prices, versus
2009 year-end prices of $76.00 per barrel and $5.79 per
MMBTU of gas, decreased net remaining reserve volumes by
8 percent of total proved reserves. We do not have any
estimated reserves of synthetic oil, synthetic natural gas or
products of other non-renewable natural resources that are
intended to be upgraded into synthetic oil and gas.
The upward revision in oil reserves was predominately
attributable to stimulation treatments to two existing wells,
remedial work on a high volume oil well, improved performance
from a change in the operating conditions of a natural water
drive reservoir, addition of natural gas liquids reserves and
reactivation of idle oil wells. The downward revision in natural
gas reserves is largely due to accounting for consumption of
natural gas in operations and sale of dry natural gas volumes.
This consumption of natural gas, shrink of natural gas due to
processing, and the amounts of natural gas liquids production
and sales, were not known when estimating reserves for year-end
2008 as our new processes to obtain such information were not in
place.
Capitalized
Cost Related to Oil and Natural Gas-Producing
Activities
Capitalized cost related to our oil and natural gas producing
activities are as follows:
| At Year End | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Consolidated entities:
|
||||||||
|
Proved oil and gas properties
|
$ | 450 | $ | 131 | ||||
|
Accumulated depreciation, depletion and amortization
|
(69 | ) | — | |||||
|
Net Capitalized Costs
|
$ | 381 | $ | 131 | ||||
We have not capitalized any costs for our share in ventures
accounted for using the equity method. Prior to our spin-off,
capitalized mineral rights acquisition costs were fully
amortized. In 2009, accumulated depletion represents our
proportional share of exploration and development costs related
to our non-operating working interest in wells that began
production in 2009.
Costs
Incurred in Oil and Natural Gas Property Acquisition,
Exploration and Development
Costs incurred in oil and natural gas property exploration and
development activities, whether capitalized or expensed, follows:
| For the Year | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Consolidated entities:
|
||||||||
|
Acquisition of properties
|
$ | — | $ | — | ||||
|
Exploration costs
|
209 | 95 | ||||||
|
Development costs
|
215 | 36 | ||||||
|
Our share in ventures accounted for using the equity method:
|
||||||||
|
Acquisition of properties
|
$ | — | $ | — | ||||
|
Exploration costs
|
— | — | ||||||
|
Development costs
|
— | — | ||||||
Standardized
Measure of Discounted Future Net Cash Flows
Estimates of future cash flows from proved developed oil and
natural gas reserves are shown in the following table. Estimated
income taxes are calculated by applying the appropriate year-end
tax rates to the
F-34
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
estimated future pre-tax net cash flows less depreciation of the
tax basis of properties and the statutory depletion allowance.
| At Year End | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Consolidated entities:
|
||||||||
|
Future cash inflows
|
$ | 57,416 | $ | 58,904 | ||||
|
Future production and development costs
|
(8,379 | ) | (6,450 | ) | ||||
|
Future income tax expenses
|
(15,362 | ) | (16,575 | ) | ||||
|
Future net cash flows
|
33,675 | 35,879 | ||||||
|
10% annual discount for estimated timing of cash flows
|
(12,537 | ) | (13,994 | ) | ||||
|
Standardized measure of discounted future net cash flows
|
$ | 21,138 | $ | 21,885 | ||||
|
Our share in ventures accounted for using the equity method:
|
||||||||
|
Future cash inflows
|
8,265 | 633 | ||||||
|
Future production and development costs
|
(886 | ) | (68 | ) | ||||
|
Future income tax expenses
|
(2,333 | ) | (179 | ) | ||||
|
Future net cash flows
|
5,046 | 386 | ||||||
|
10% annual discount for estimated timing of cash flows
|
(2,374 | ) | (198 | ) | ||||
|
Standardized measure of discounted future net cash flows
|
2,672 | 188 | ||||||
|
Total consolidated and our share of equity method ventures
standardized measure of discounted future net cash flows
|
$ | 23,810 | $ | 22,073 | ||||
Future net cash flows were computed using prices used in
estimating proved developed and natural gas reserves, year-end
costs, and statutory tax rates (adjusted for tax deductions)
that relate to proved developed oil and natural gas reserves.
Changes in the standardized measure of discounted future net
cash flow follow:
| For the Year 2009 | ||||||||||||
|
Our Share of Equity
|
||||||||||||
| Consolidated | Method Ventures | Total | ||||||||||
| (In thousands) | ||||||||||||
|
Beginning of year
|
$ | 21,885 | $ | 188 | $ | 22,073 | ||||||
|
Changes resulting from:
|
||||||||||||
|
Net change in sales prices and production costs
|
(3,043 | ) | (97 | ) | (3,140 | ) | ||||||
|
Sales of oil and natural gas, net of production costs
|
(11,157 | ) | (299 | ) | (11,456 | ) | ||||||
|
Net change due to extensions and discoveries
|
4,139 | 3,844 | 7,983 | |||||||||
|
Net change due to revisions of quantity estimates
|
5,693 | 1,169 | 6,862 | |||||||||
|
Accretion of discount
|
2,408 | 21 | 2,429 | |||||||||
|
Net change in income taxes
|
1,213 | (2,154 | ) | (941 | ) | |||||||
|
Aggregate change for the year
|
$ | (747 | ) | $ | 2,484 | $ | 1,737 | |||||
|
End of year
|
$ | 21,138 | $ | 2,672 | $ | 23,810 | ||||||
Results
of Operations
Our royalty interests are contractually defined and based on a
percentage of production by the owner operator at prevailing
market prices. We receive our percentage of production in cash.
Our royalty revenues fluctuate based on changes in the market
prices for oil and gas, the inevitable decline in production in
existing wells, and other factors affecting the third-party oil
and natural gas exploration and production companies,
F-35
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
including the cost of development and production. In 2007, our
royalty revenues were allocated to us by Temple-Inland.
Information about the results of operations of our oil and
natural gas interests follows:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Consolidated entities:
|
||||||||||||
|
Royalty revenues
|
$ | 11,910 | $ | 21,639 | $ | 13,114 | ||||||
|
Production costs
|
(753 | ) | (1,714 | ) | — | |||||||
|
Exploration expenses
|
(100 | ) | — | — | ||||||||
|
Depreciation, depletion, amortization
|
(253 | ) | — | — | ||||||||
|
Administrative expenses
|
(3,546 | ) | (3,121 | ) | (2,237 | ) | ||||||
|
Income tax expenses
|
(2,200 | ) | (5,152 | ) | (3,327 | ) | ||||||
|
Results of operations
|
$ | 5,058 | $ | 11,652 | $ | 7,550 | ||||||
|
Our share in ventures accounted for using the equity
method
(a)
:
|
||||||||||||
|
Royalty revenues
|
$ | 312 | $ | — | $ | — | ||||||
|
Production costs
|
(13 | ) | — | — | ||||||||
|
Exploration expenses
|
— | — | — | |||||||||
|
Depreciation, depletion, amortization
|
— | — | — | |||||||||
|
Administrative expenses
|
(18 | ) | — | — | ||||||||
|
Income tax expenses
|
(84 | ) | — | — | ||||||||
|
Results of operations
|
$ | 197 | $ | — | $ | — | ||||||
|
Total results of operations
|
$ | 5,255 | $ | 11,652 | $ | 7,550 | ||||||
| (a) | Producing wells in ventures accounted for using the equity method began generating royalties in 2009. |
In 2009 and 2008, production costs represent our share of oil
and natural gas production severance taxes. In 2007, oil and
natural gas production severance taxes were reflected as a
reduction of royalty revenues and were allocated to us by
Temple-Inland.
Oil and natural gas produced and average unit prices related to
our royalty interests
follows
(a)
:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Oil production (barrels)
|
107,200 | 87,900 | 94,900 | |||||||||
|
Average price per barrel
|
$ | 56.86 | $ | 106.66 | $ | 65.24 | ||||||
|
Natural gas production (millions of cubic feet)
|
1,575.8 | 1,363.4 | 967.3 | |||||||||
|
Average price per thousand cubic feet
|
$ | 4.09 | $ | 8.76 | $ | 6.69 | ||||||
| (a) | Includes 100 percent of venture activity. In 2009, our share of activity in ventures accounted for using the equity method was 82 Mcf of natural gas from one venture in which we have a 50 percent interest. We had no production from ventures accounted for using the equity method in 2008 and 2007. |
F-36
Table of Contents
FORESTAR
GROUP INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 23 — | Summary of Quarterly Results of Operations (Unaudited) |
Summarized quarterly financial results for 2009 and 2008 follows:
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
|
2009
|
||||||||||||||||
|
Total revenues
|
$ | 29,077 | $ | 40,466 | $ | 45,307 | $ | 31,401 | ||||||||
|
Gross profit
|
19,339 | 27,605 | 31,843 | 16,839 | ||||||||||||
|
Operating income
|
323 | 91,283 | 38,753 | (5,297 | ) | |||||||||||
|
Equity in earnings (loss) of unconsolidated ventures
|
(572 | ) | (4,048 | ) | (2,443 | ) | (708 | ) | ||||||||
|
Income (loss) before taxes
|
(5,364 | ) | 82,232 | 31,157 | (10,818 | ) | ||||||||||
|
Net income (loss) attributable to Forestar Group Inc.
|
(3,892 | ) | 50,917 | 19,476 | (7,394 | ) | ||||||||||
|
Net income (loss) per share — basic
|
(0.11 | ) | 1.42 | 0.54 | (0.21 | ) | ||||||||||
|
Net income (loss) per share — diluted
|
(0.11 | ) | 1.41 | 0.54 | (0.21 | ) | ||||||||||
|
2008
|
||||||||||||||||
|
Total revenues
|
$ | 37,223 | $ | 51,597 | $ | 33,943 | $ | 36,959 | ||||||||
|
Gross profit
|
19,305 | 36,951 | 21,368 | 21,896 | ||||||||||||
|
Operating income
|
4,167 | 17,849 | 5,601 | 8,189 | ||||||||||||
|
Equity in earnings (loss) of unconsolidated ventures
|
1,534 | 2,018 | 1,436 | (346 | ) | |||||||||||
|
Income before taxes
|
117 | 14,937 | 2,037 | 2,353 | ||||||||||||
|
Net income (loss) attributable to Forestar Group Inc.
|
(238 | ) | 9,596 | 872 | 1,744 | |||||||||||
|
Net income (loss) per share — basic
|
(0.01 | ) | 0.27 | 0.02 | 0.05 | |||||||||||
|
Net income (loss) per share — diluted
|
(0.01 | ) | 0.27 | 0.02 | 0.05 | |||||||||||
| Note 24 — | Subsequent Events |
We have evaluated subsequent events through March 3, 2010,
the date of issuance of these financial statements.
F-37
Table of Contents
Forestar
Group Inc.
Year-End
2009
(In thousands)
(In thousands)
|
Costs Capitalized
|
||||||||||||||||||||||||||||||||||||||||||||
| Subsequent to Acquisition | ||||||||||||||||||||||||||||||||||||||||||||
| Initial Cost to Company |
Improvements
|
Gross Amount Carried at End of Period | ||||||||||||||||||||||||||||||||||||||||||
|
Buildings &
|
Less Cost of
|
Carrying
|
Land & Land
|
Buildings &
|
Accumulated
|
Date of
|
Date
|
|||||||||||||||||||||||||||||||||||||
|
Description
|
Encumbrances | Land | Improvements | Sales and Other | Costs (a) | Improvements | Improvements | Total | Depreciation | Construction | Acquired | |||||||||||||||||||||||||||||||||
|
Entitled, Developed, and Under Development
Projects:
|
||||||||||||||||||||||||||||||||||||||||||||
|
CALIFORNIA
|
||||||||||||||||||||||||||||||||||||||||||||
|
Contra Costa County
|
||||||||||||||||||||||||||||||||||||||||||||
|
San Joaquin River
|
$ | 12,225 | $ | (3,430 | ) | $ | 8,795 | $ | 8,795 | |||||||||||||||||||||||||||||||||||
|
COLORADO
|
||||||||||||||||||||||||||||||||||||||||||||
|
Douglas County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Pinery West
|
7,308 | 1,826 | 9,134 | 9,134 | 2006 | 2006 | ||||||||||||||||||||||||||||||||||||||
|
Weld County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Buffalo Highlands
|
3,001 | 615 | 3,616 | 3,616 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||||
|
Johnstown Farms
|
2,749 | 9,028 | $ | 188 | 11,965 | 11,965 | 2002 | 2002 | ||||||||||||||||||||||||||||||||||||
|
Stonebraker
|
3,878 | 1,388 | 5,266 | 5,266 | 2005 | 2005 | ||||||||||||||||||||||||||||||||||||||
|
GEORGIA
|
||||||||||||||||||||||||||||||||||||||||||||
|
Bartow County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Towne West
|
936 | 923 | 1,859 | 1,859 | 2007 | |||||||||||||||||||||||||||||||||||||||
|
Coweta County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Cedar Creek Preserve
|
852 | 244 | 1,096 | 1,096 | ||||||||||||||||||||||||||||||||||||||||
|
Corinth Landing
|
607 | 585 | 1,192 | 1,192 | ||||||||||||||||||||||||||||||||||||||||
|
Coweta South Industrial Park
|
532 | 477 | 1,009 | 1,009 | ||||||||||||||||||||||||||||||||||||||||
|
Fox Hall
|
166 | 5,832 | 5,998 | 5,998 | 2007 | |||||||||||||||||||||||||||||||||||||||
|
Genesee
|
480 | 1,167 | 1,647 | 1,647 | ||||||||||||||||||||||||||||||||||||||||
|
TEXAS
|
||||||||||||||||||||||||||||||||||||||||||||
|
Bastrop County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Hunter’s Crossing
|
3,613 | 7,396 | 311 | 11,320 | 11,320 | 2001 | 2001 | |||||||||||||||||||||||||||||||||||||
|
The Colony
|
8,726 | 13,511 | 161 | 22,398 | 22,398 | 1999 | 1999 | |||||||||||||||||||||||||||||||||||||
|
Bexar County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Cibolo Canyons
|
25,568 | 61,308 | 928 | 87,804 | 87,804 | 2004 | 1986 | |||||||||||||||||||||||||||||||||||||
|
Calhoun County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Caracol
|
$ | 9,500 | 8,603 | 8,336 | 2,047 | 18,986 | 18,986 | 2006 | 2006 | |||||||||||||||||||||||||||||||||||
|
Harbor Mist
|
2,822 | 1,047 | 3,869 | 3,869 | 2007 | |||||||||||||||||||||||||||||||||||||||
|
Collin County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Light Farms
|
33,533 | 30,101 | 20,902 | 51,003 | 51,003 | 2007 | 2007 | |||||||||||||||||||||||||||||||||||||
|
Maxwell Creek
|
9,904 | (1,499 | ) | 418 | 8,823 | 8,823 | 2000 | 2000 | ||||||||||||||||||||||||||||||||||||
|
The Gables at North Hill
|
2,160 | (589 | ) | 63 | 1,634 | 1,634 | 2004 | 2001 | ||||||||||||||||||||||||||||||||||||
|
Timber Creek
|
3,431 | 7,282 | 2,593 | 9,875 | 9,875 | 2007 | 2007 | |||||||||||||||||||||||||||||||||||||
S-1
Table of Contents
Forestar
Group Inc.
Schedule III —
Consolidated Real Estate and Accumulated
Depreciation — (Continued)
|
Costs Capitalized
|
||||||||||||||||||||||||||||||||||||||||||||
| Subsequent to Acquisition | ||||||||||||||||||||||||||||||||||||||||||||
| Initial Cost to Company |
Improvements
|
Gross Amount Carried at End of Period | ||||||||||||||||||||||||||||||||||||||||||
|
Buildings &
|
Less Cost of
|
Carrying
|
Land & Land
|
Buildings &
|
Accumulated
|
Date of
|
Date
|
|||||||||||||||||||||||||||||||||||||
|
Description
|
Encumbrances | Land | Improvements | Sales and Other | Costs (a) | Improvements | Improvements | Total | Depreciation | Construction | Acquired | |||||||||||||||||||||||||||||||||
|
Comal County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Oak Creek Estates
|
1,921 | 3,090 | 175 | 5,186 | 5,186 | 2006 | 2005 | |||||||||||||||||||||||||||||||||||||
|
Dallas County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Stoney Creek
|
5,297 | 12,822 | 3,446 | 16,268 | 16,268 | 2007 | 2007 | |||||||||||||||||||||||||||||||||||||
|
Denton County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Lantana
|
9,942 | 31,451 | 2,308 | 33,759 | 33,759 | 2000 | 1999 | |||||||||||||||||||||||||||||||||||||
|
The Preserve at Pecan Creek
|
5,855 | (387 | ) | 313 | 5,781 | 5,781 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
|
Harris County
|
||||||||||||||||||||||||||||||||||||||||||||
|
City Park
|
3,946 | (2,530 | ) | 1,641 | 3,057 | 3,057 | 2002 | 2001 | ||||||||||||||||||||||||||||||||||||
|
Hays County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Arrowhead Ranch
|
12,856 | 1,560 | 14,416 | 14,416 | 2007 | |||||||||||||||||||||||||||||||||||||||
|
Hood County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Harbor Lakes
|
3,514 | 5,080 | 312 | 8,906 | 8,906 | $ | (635 | ) | 2000 | 1998 | ||||||||||||||||||||||||||||||||||
|
Nueces County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Tortuga Dunes
|
12,080 | 10,530 | 22,610 | 22,610 | 2008 | 2006 | ||||||||||||||||||||||||||||||||||||||
|
Rockwall County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Caruth Lakes
|
1,624 | 3,278 | 100 | 5,002 | 5,002 | 1997 | 1996 | |||||||||||||||||||||||||||||||||||||
|
Travis County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Presidio at Judge’s Hill
|
13,207 | 1,500 | 9,685 | 786 | 11,971 | 11,971 | 2006 | 2006 | ||||||||||||||||||||||||||||||||||||
|
The Ridge at Ribelin Ranch
|
23,751 | (19,663 | ) | 51 | 4,139 | 4,139 | 2006 | 2006 | ||||||||||||||||||||||||||||||||||||
|
Williamson County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Westside at Buttercup Creek
|
13,149 | (6,058 | ) | 449 | 7,540 | 7,540 | 1993 | 1993 | ||||||||||||||||||||||||||||||||||||
|
Chandler Road Properties
|
3,552 | (2,826 | ) | 726 | 726 | 2004 | 2004 | |||||||||||||||||||||||||||||||||||||
|
La Conterra
|
4,024 | 2,026 | 265 | 6,315 | 6,315 | 2008 | 2006 | |||||||||||||||||||||||||||||||||||||
|
MISSOURI
|
||||||||||||||||||||||||||||||||||||||||||||
|
Clay County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Somerbrook
|
3,061 | (219 | ) | 13 | 2,855 | 2,855 | 2003 | 2001 | ||||||||||||||||||||||||||||||||||||
|
UTAH
|
||||||||||||||||||||||||||||||||||||||||||||
|
Weber County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Fort Bingham Estates
|
3,284 | (1,869 | ) | 88 | 1,503 | 1,503 | 2003 | 1998 | ||||||||||||||||||||||||||||||||||||
|
Other
|
21,017 | (12,052 | ) | 759 | 9,724 | 9,724 | ||||||||||||||||||||||||||||||||||||||
| Total Entitled, Developed, and Under Development Projects | $ | 74,910 | $ | 290,920 | $ | — | $ | 127,059 | $ | 9,068 | $ | 427,047 | $ | — | $ | 427,047 | $ | (635 | ) | |||||||||||||||||||||||||
S-2
Table of Contents
Forestar
Group Inc.
Schedule III —
Consolidated Real Estate and Accumulated
Depreciation — (Continued)
|
Costs Capitalized
|
||||||||||||||||||||||||||||||||||||||||||||
| Subsequent to Acquisition | ||||||||||||||||||||||||||||||||||||||||||||
| Initial Cost to Company |
Improvements
|
Gross Amount Carried at End of Period | ||||||||||||||||||||||||||||||||||||||||||
|
Buildings &
|
Less Cost of
|
Carrying
|
Land & Land
|
Buildings &
|
Accumulated
|
Date of
|
Date
|
|||||||||||||||||||||||||||||||||||||
|
Description
|
Encumbrances | Land | Improvements | Sales and Other | Costs (a) | Improvements | Improvements | Total | Depreciation | Construction | Acquired | |||||||||||||||||||||||||||||||||
|
Undeveloped Land:
|
||||||||||||||||||||||||||||||||||||||||||||
|
ALABAMA
|
||||||||||||||||||||||||||||||||||||||||||||
|
Cherokee County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
$ | 749 | $ | 16 | $ | 765 | $ | 765 | ||||||||||||||||||||||||||||||||||||
|
Cleburne County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
454 | 51 | 505 | 505 | ||||||||||||||||||||||||||||||||||||||||
|
CALIFORNIA
|
||||||||||||||||||||||||||||||||||||||||||||
|
Los Angeles County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Land In Entitlement Process
|
3,969 | 8,639 | 12,608 | 12,608 | 1997 | |||||||||||||||||||||||||||||||||||||||
|
GEORGIA
|
||||||||||||||||||||||||||||||||||||||||||||
|
Banks County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
705 | 5 | 710 | 710 | ||||||||||||||||||||||||||||||||||||||||
|
Land In Entitlement Process
|
504 | 48 | 552 | 552 | ||||||||||||||||||||||||||||||||||||||||
|
Bartow County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
5,821 | 90 | 5,911 | 5,911 | ||||||||||||||||||||||||||||||||||||||||
|
Carroll County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
8,014 | 118 | 8,132 | 8,132 | ||||||||||||||||||||||||||||||||||||||||
|
Land In Entitlement Process
|
9,308 | 2,314 | 11,622 | 11,622 | ||||||||||||||||||||||||||||||||||||||||
|
Chattooga County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
679 | 43 | 722 | 722 | ||||||||||||||||||||||||||||||||||||||||
|
Cherokee County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
3,753 | 99 | 3,852 | 3,852 | ||||||||||||||||||||||||||||||||||||||||
|
Land In Entitlement Process
|
2,449 | 549 | 2,998 | 2,998 | ||||||||||||||||||||||||||||||||||||||||
|
Coweta County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
524 | 10 | 534 | 534 | ||||||||||||||||||||||||||||||||||||||||
|
Land In Entitlement Process
|
2,793 | 561 | 3,354 | 3,354 | ||||||||||||||||||||||||||||||||||||||||
|
Dawson County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
2,570 | 9 | 2,579 | 2,579 | ||||||||||||||||||||||||||||||||||||||||
|
Land In Entitlement Process
|
702 | 902 | 1,604 | 1,604 | ||||||||||||||||||||||||||||||||||||||||
|
Elbert County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
640 | 16 | 656 | 656 | ||||||||||||||||||||||||||||||||||||||||
|
Floyd County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
2,130 | 82 | 2,212 | 2,212 | ||||||||||||||||||||||||||||||||||||||||
S-3
Table of Contents
Forestar
Group Inc.
Schedule III —
Consolidated Real Estate and Accumulated
Depreciation — (Continued)
|
Costs Capitalized
|
||||||||||||||||||||||||||||||||||||||||||||
| Subsequent to Acquisition | ||||||||||||||||||||||||||||||||||||||||||||
| Initial Cost to Company |
Improvements
|
Gross Amount Carried at End of Period | ||||||||||||||||||||||||||||||||||||||||||
|
Buildings &
|
Less Cost of
|
Carrying
|
Land & Land
|
Buildings &
|
Accumulated
|
Date of
|
Date
|
|||||||||||||||||||||||||||||||||||||
|
Description
|
Encumbrances | Land | Improvements | Sales and Other | Costs (a) | Improvements | Improvements | Total | Depreciation | Construction | Acquired | |||||||||||||||||||||||||||||||||
|
Gilmer County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
3,031 | 35 | 3,066 | 3,066 | ||||||||||||||||||||||||||||||||||||||||
|
Gordon County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
1,779 | 11 | 1,790 | 1,790 | ||||||||||||||||||||||||||||||||||||||||
|
Hall County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
731 | 61 | 792 | 792 | ||||||||||||||||||||||||||||||||||||||||
|
Haralson County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
2,194 | 129 | 2,323 | 2,323 | ||||||||||||||||||||||||||||||||||||||||
|
Land In Entitlement Process
|
506 | 89 | 595 | 595 | ||||||||||||||||||||||||||||||||||||||||
|
Heard County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
1,443 | 412 | 1,855 | 1,855 | ||||||||||||||||||||||||||||||||||||||||
|
Jackson County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
969 | 64 | 1,033 | 1,033 | ||||||||||||||||||||||||||||||||||||||||
|
Land In Entitlement Process
|
491 | 246 | 737 | 737 | ||||||||||||||||||||||||||||||||||||||||
|
Lumpkin County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
3,120 | 4 | 3,124 | 3,124 | ||||||||||||||||||||||||||||||||||||||||
|
Paulding County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
1,406 | 61 | 1,467 | 1,467 | ||||||||||||||||||||||||||||||||||||||||
|
Pickens County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
3,378 | 43 | 3,421 | 3,421 | ||||||||||||||||||||||||||||||||||||||||
|
Polk County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
978 | 17 | 995 | 995 | ||||||||||||||||||||||||||||||||||||||||
|
TEXAS
|
||||||||||||||||||||||||||||||||||||||||||||
|
Angelina County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
951 | 19 | 970 | 970 | ||||||||||||||||||||||||||||||||||||||||
S-4
Table of Contents
Forestar
Group Inc.
Schedule III —
Consolidated Real Estate and Accumulated
Depreciation — (Continued)
|
Costs Capitalized
|
||||||||||||||||||||||||||||||||||||||||||||
| Subsequent to Acquisition | ||||||||||||||||||||||||||||||||||||||||||||
| Initial Cost to Company |
Improvements
|
Gross Amount Carried at End of Period | ||||||||||||||||||||||||||||||||||||||||||
|
Buildings &
|
Less Cost of
|
Carrying
|
Land & Land
|
Buildings &
|
Accumulated
|
Date of
|
Date
|
|||||||||||||||||||||||||||||||||||||
|
Description
|
Encumbrances | Land | Improvements | Sales and Other | Costs (a) | Improvements | Improvements | Total | Depreciation | Construction | Acquired | |||||||||||||||||||||||||||||||||
|
Hardin County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
871 | 2 | 873 | 873 | ||||||||||||||||||||||||||||||||||||||||
|
Harris County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Land in Entitlement Process
|
685 | 853 | 1,538 | 1,538 | ||||||||||||||||||||||||||||||||||||||||
|
Liberty County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
662 | 25 | 687 | 687 | ||||||||||||||||||||||||||||||||||||||||
|
Montgomery County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Land in Entitlement Process
|
2,675 | 152 | 2,827 | 2,827 | 2007 | |||||||||||||||||||||||||||||||||||||||
|
San Augustine County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
1,085 | 1,085 | 1,085 | |||||||||||||||||||||||||||||||||||||||||
|
Other
|
||||||||||||||||||||||||||||||||||||||||||||
|
Undeveloped Land
|
2,309 | 208 | 2,517 | 2,517 | ||||||||||||||||||||||||||||||||||||||||
|
Total Undeveloped Land
|
$ | — | $ | 75,028 | $ | — | $ | 15,983 | $ | — | $ | 91,011 | $ | — | $ | 91,011 | $ | — | ||||||||||||||||||||||||||
|
Commercial Operating Properties:
|
||||||||||||||||||||||||||||||||||||||||||||
|
TEXAS
|
||||||||||||||||||||||||||||||||||||||||||||
|
Travis County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Radisson Hotel & Suites
|
$ | 16,716 | $ | 16,316 | $ | 31,586 | $ | 47,902 | $ | 47,902 | $ | (23,417 | ) | |||||||||||||||||||||||||||||||
|
Hood County
|
||||||||||||||||||||||||||||||||||||||||||||
|
Harbor Lakes Golf Club
|
1,269 | 1,269 | 1,269 | (365 | ) | 2000 | 1998 | |||||||||||||||||||||||||||||||||||||
| Total Commercial Operating Properties | $ | 16,716 | $ | — | $ | 17,585 | $ | 31,586 | $ | — | $ | — | $ | 49,171 | $ | 49,171 | $ | (23,782 | ) | |||||||||||||||||||||||||
|
Total
|
$ | 91,626 | $ | 365,948 | $ | 17,585 | $ | 174,628 | $ | 9,068 | $ | 518,058 | $ | 49,171 | $ | 567,229 | $ | (24,417 | ) | |||||||||||||||||||||||||
| (a) | We do not capitalize carrying costs until development begins. |
S-5
Table of Contents
Forestar
Group Inc.
Schedule III —
Consolidated Real Estate and Accumulated Depreciation
Reconciliation
of real estate:
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Balance at beginning of year
|
$ | 633,130 | $ | 572,984 | $ | 468,724 | ||||||
|
Amounts capitalized
|
38,971 | 100,639 | 181,430 | |||||||||
|
Amounts retired or adjusted
|
(104,872 | ) | (40,493 | ) | (77,170 | ) | ||||||
|
Balance at close of period
|
$ | 567,229 | $ | 633,130 | $ | 572,984 | ||||||
Reconciliation
of accumulated depreciation:
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Balance at beginning of year
|
$ | (22,544 | ) | $ | (20,774 | ) | $ | (20,907 | ) | |||
|
Depreciation expense
|
(1,873 | ) | (1,770 | ) | (2,014 | ) | ||||||
|
Amounts retired or adjusted
|
— | — | 2,147 | |||||||||
|
Balance at close of period
|
$ | (24,417 | ) | $ | (22,544 | ) | $ | (20,774 | ) | |||
S-6
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. ReservedPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement SchedulesNote 1 BackgroundNote 2 Summary Of Significant Accounting PoliciesNote 3 New Accounting PronouncementsNote 4 Strategic Initiatives and Assets Held For SaleNote 5 Real EstateNote 6 TimberNote 7 Investment in Unconsolidated VenturesNote 8 ReceivablesNote 9 DebtNote 10 Fair ValueNote 11 Derivative InstrumentsNote 12 Capital StockNote 13 Other Comprehensive IncomeNote 14 Net Income Per ShareNote 15 Income TaxesNote 16 Litigation and Environmental ContingenciesNote 17 Commitments and Other ContingenciesNote 18 Segment InformationNote 19 Share-based CompensationNote 20 Retirement, Pension and Postretirement PlansNote 21 Pre-spin Transactions with Temple-inlandNote 22 Supplemental Oil and Gas Disclosures (unaudited)Note 23 Summary Of Quarterly Results Of Operations (unaudited)Note 24 Subsequent Events