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, 20092010
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
Incorporation or Organization)		 (I.R.S. Employer
Incorporation or Organization)
Identification No.)
 
6300 Bee Cave Road
Building Two, Suite 500
Austin, Texas78746-5149
(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     Noo
 
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 ofRegulation 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 ofRegulation 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 thisForm 10-K or any amendment to thisForm 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” inRule12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer oAccelerated filer þNon-accelerated filer oSmaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o     Noþ
 
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, 2009,2010, was approximately $369$544 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, 2010,2011, there were 36,391,46735,420,348 shares of Common Stock outstanding.
 
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Selected portions of the Company’s definitive proxy statement for the 20102011 annual meeting of stockholders are incorporated by reference into Part III of thisForm 10-K.
 

 

 
TABLE OF CONTENTS
 
       
    Page
 
PART I.
Item 1.
 Business  1 
Item 1A.
 Risk Factors  1920 
Item 1B.
 Unresolved Staff Comments  2426 
Item 2.
 Properties  2426 
Item 3.
 Legal Proceedings  2526 
Item 4.
 Reserved  2526 
 
PART II.
Item 5.
 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  2527 
Item 6.
 Selected Financial Data  2829 
Item 7.
 Management’s Discussion and Analysis of Financial Condition and Results of Operations  2930 
Item 7A.
 Quantitative and Qualitative Disclosures About Market Risk  4649 
Item 8.
 Financial Statements and Supplementary Data  4750 
Item 9.
 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure  4750 
Item 9A.
 Controls and Procedures  4750 
Item 9B.
 Other Information  4850 
 
PART III.
Item 10.
 Directors, Executive Officers and Corporate Governance  4851 
Item 11.
 Executive Compensation  4851 
Item 12.
 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  4851 
Item 13.
 Certain Relationships and Related Transactions, and Director Independence  4952 
Item 14.
 Principal Accountant Fees and Services  4952 
 
PART IV.
Item 15.
 Exhibits and Financial Statement Schedules  4952 
    
SIGNATURES
  5255 
 EX-10.22
EX-10.23
 EX-21.1
 EX-23.1
 EX-23.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-99.1


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PART I
 
Item 1.  Business.
 
Overview
 
Forestar Group Inc. is committed to maximizing long-term shareholder value.a real estate and natural resources company. We own directly or through ventures over 251,000220,000 acres of real estate located in nine states and 12 markets and about 620,000606,000 net acres of oil and gas mineral interests. We have over 197,000 acres of timber on our real estate and about 18,000 acres of timber under lease. In 2009,2010, we generated revenues of $146$101 million and net income of $59$5 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, 2009,2010, and references to acreage owned includes 74,000 acres classified as assets held for sale in accordance with our near-term strategic initiatives andinclude 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,at year-end 2010 follows:
 
 
Our real estate segment provided 6467 percent of our 20092010 consolidated revenues. We secure entitlements and develop infrastructure, primarily for single-family residential and mixed-use communities. We own about 188,000167,000 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


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that possess key demographic and growth characteristics that we believe make them attractive for long-term real estate investment.
 
We have 2118 real estate projects representing over 31,000about 30,000 acres in the entitlement process, principally in Georgia. We also have 7576 entitled, developed or under development projects in seven states and 11 markets encompassing over 16,000 remaining acres, comprised of land planned for almost 30,000over 27,000 residential lots and over 2,300about 2,400 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 2009,2010, we sold over 18,000


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5,800 acres of undeveloped land through our retail land sales program at an average price of about $2,550$3,500 per acre.
 
Our mineral resources segment provided 25 percent of our 20092010 consolidated revenues. We promote the exploitation, exploration and development of oil and gas on our 620,000606,000 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 470490 producing wells owned and operated by third parties in Texas and Louisiana.Louisiana and lease bonus payments. Historically, these operations require low capital investment and are low risk.
 
Our fiber resources segment provided 118 percent of our 20092010 consolidated revenues. We sell wood fiber from our land, primarily in Georgia, and lease land for recreational uses. We have about 227,000197,000 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 Inc. 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,its stockholders, which we will refer to in this Annual Report onForm 10-K as the “spin-off” or the “separation.”.
 
Leveraging over 300 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-termrecognize and responsibly deliver the greatest value for our shareholders.from every acre.
 
Strategy
 
Our strategy is to maximize and grow long-term shareholder value through:is:
 
 • EntitlementRecognizing and development of real estate;
• Realization ofresponsibly delivering the greatest value from minerals, water and fiber resources;every acre; and
 
 • StrategicGrowing through strategic and disciplined investment in our business.investments.
 
We are focused on maximizing real estate valuesdelivering the greatest value from every acre 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 secondmove-up categories. We also actively market and sell undeveloped land. Commercialland through our retail sales program. We may develop multifamily commercial tracts areourselves or for other commercial tracts we may either soldsell to or venturedventure with commercial developers that specialize in the construction and operation of income-producingincome 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


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interests. In addition, weWe 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 7065 of our real estate projects were acquired in the open market, with the remainder coming from the entitlement efforts associated with our low-basislow basis lands principally located in and around Atlanta, Georgia. In 2009, given the continued decline2010, we acquired a 401 unit, Class A multifamily property in residential and commercial construction activity, we did not acquire additional real estate projects.Houston, Texas for $49,100,000.
 
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.


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Strategic Initiatives
 
In first quarter 2009, we announced our near-term strategic initiatives to enhance shareholder value byby: generating significant cash flow, principally from the sale of about 175,000 acres of higher and better use (HBU) timberland, andtimberland; reducing debt by approximately $150 million.million; and repurchasing up to 20 percent of our common stock.
 
In 2009, we sold about 95,000 acres of timber and timberland in Georgia and Alabama for approximately $160$159 million in two transactions generating combined net cash proceeds of $154 million, which were principally used to reduce debt and pay taxes, resultingtaxes. These transactions resulted in a combined gain on sale of assets of $104 million.
 
In 2010, we sold about 24,000 acres of timber and timberland in Georgia, Alabama and Texas for $39 million in seven transactions generating combined net proceeds of $38 million, which were principally used to reinvest in qualifying real estate under Internal Revenue Code (IRC) Section 1031. These transactions resulted in a combined gain on sale of assets of $29 million. In addition, in third quarter 2010, we repurchased 1,000,987 shares of our common stock at a cost of $15 million.
At year-end 2009,2010, assets held for sale include 74,000under these strategic initiatives includes about 55,000 acres of undeveloped land that iswith a carrying value of $14 million and related timber with a carrying value of $7 million. Though we continue to actively being marketedmarket this land, market conditions for timberland have deteriorated since second quarter 2009 due to increased investor return requirements, limited availability of financing and alternate investment options for buyers in the marketplace. We are a disciplined seller, and as a result, additional time will be required to complete the sale in accordance with our strategic initiatives.of these assets.
 
20092010 Highlights
 
In addition to the strategic initiative land sales described above, activitieshighlights during 20092010 include:
 
 • Receiving $24.9 million in reimbursementsOpening of the JW Marriott® San Antonio Hill Country Resort & Spa at Cibolo Canyons, entitling us to receive revenues related to hotel occupancy and sales taxes through 2034 from special public improvement districts;the 1,002 room hotel and golf resort;
 
 • Leasing over 25,80016,900 net mineral acres to oil and natural gas companies for exploration and production activities;
 
 • Investing approximately $19Entitling two projects which include over 1,000 acres, representing over 2,500 planned residential lots and 75 commercial acres;
• Acquiring a multifamily project in Houston, Texas with tax deferred IRC Section 1031 timberland sales proceeds and non-recourse borrowings;
• Repurchasing over one million in the resort and real estate development atshares of 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;common stock; and
 
 • Reducing total debt by over 35 percent or $121 million since year-end 2008.Acquiring a water resources company focused on providing sustainable volumes of ground water to central Texas and the Interstate-35 growth corridor.
 
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 251,000220,000 acres, including about 188,000167,000 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.


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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.chain:
 
 
We have nearly 204,000over 174,000 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 31,000almost 30,000 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 generate additional value for our business and may provide us the right to reimbursement of major infrastructure costs and generate additional value for our business.costs. We have over 16,000 acres entitled, developed and under development, comprised of land planned for almost 30,000over 27,000 residential lots and over 2,300about 2,400 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,tracts, internal development, 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 2009,2010, we sold over 18,0005,800 acres of undeveloped land through our retail land sales program at an average price of about $2,550$3,500 per acre.


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A summary of our real estate projects in the entitlement process(a) at year-end 20092010 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 ParkJacksonAtlanta700
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)
TravisAustin240
Woodlake Village(c)
MontgomeryHouston840
         
Total
      31,45029,670 
         
 
 
(a)A project is deemed to be in the entitlement process when customary steps necessary for the preparation and submittal of an application for governmental land-use approvals, 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 may develop multifamily properties on our commercial tracts. In addition, we sell 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 7576 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 30,000over 27,000 residential lots and over 2,300about 2,400 commercial acres. We focus our lot sales on the first and secondmove-up


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primary housing categories. First and secondmove-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 20092010 as we focused development on


5

markets and products which continued to generate sales activity.sales. We also actively market and sell undeveloped land.land through our retail sales program.
 
Commercial tracts are eitherdeveloped internally or sold to or ventured with commercial developers that specialize in the construction and operation of income-producingincome producing properties, such as apartments, retail centers, or office buildings. We sell land designated for commercial usesuse to national retailers and to regional and local commercial developers. We have over 2,300about 2,400 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 1,7001,400 residential lots, of which 590640 have been sold as of year-end 20092010 at an average price of $63,000$65,000 per lot. The residential component willis planned to include not only traditional single-family homes but also an active adult section and condominiums. Our commercial component is planned to include about 145220 acres designated for multifamily and retail uses, of which 64 acres have been sold as of year-end 2009. At2010. Located 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 Districtspecial 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.


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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 20092010 follows:
 
                                                
       Residential Lots(c) Commercial Acres(d)        Residential Lots(c) Commercial Acres(d) 
       Lots Sold
   Acres Sold
          Lots Sold
   Acres Sold
   
     Interest
 Since
 Lots
 Since
 Acres
      Interest
 Since
 Lots
 Since
 Acres
 
Project County Market Owned(b) Inception Remaining Inception Remaining  County Market Owned(b) Inception Remaining Inception Remaining 
Projects we own
                                                
California
                                                
San Joaquin River Contra Costa/ Sacramento Oakland  100%   —   —   —   288  Contra Costa/Sacramento Oakland  100%   —   —   —   288 
 
Colorado
                                                
Buffalo Highlands Weld Denver  100%   —   164   —   —  Weld Denver  100%   —   164   —   — 
Johnstown Farms Weld Denver  100%   115   493   2   8  Weld Denver  100%   115   494   2   8 
Pinery West Douglas Denver  100%   —   —   —   115  Douglas Denver  100%   —   —   —   115 
Stonebraker Weld Denver  100%   —   603   —   13  Weld Denver  100%   —   603   —   13 
Westlake Highlands Jefferson Denver  100%   6   15   —   —  Jefferson Denver  100%   21   —   —   — 
Texas
                                                
Arrowhead Ranch Hays Austin  100%   —   232   —   6  Hays Austin  100%   —   259   —   6 
Caruth Lakes Rockwall Dallas/Fort Worth  100%   279   370   —   —  Rockwall Dallas/Fort Worth  100%   310   339   —   — 
Cibolo Canyons Bexar San Antonio  100%   590   1,157   64   81  Bexar San Antonio  100%   640   775   64   157 
Harbor Lakes Hood Dallas/Fort Worth  100%   199   250   —   14  Hood Dallas/Fort Worth  100%   201   248   2   12 
Harbor Mist Calhoun Corpus Christi  100%   —   200   —   — 
Hunter’s Crossing Bastrop Austin  100%   322   169   38   68  Bastrop Austin  100%   340   150   38   71 
La Conterra Williamson Austin  100%   60   449   —   60  Williamson Austin  100%   76   424   —   58 
Maxwell Creek Collin Dallas/Fort Worth  100%   672   339   10   —  Collin Dallas/Fort Worth  100%   700   299   10   — 
Oak Creek Estates Comal San Antonio  100%   67   581   13   —  Comal San Antonio  100%   69   578   13   — 
The Colony Bastrop Austin  100%   410   2,242   22   49  Bastrop Austin  100%   412   734   22   31 
The Gables at North Hill Collin Dallas/Fort Worth  100%   195   88   —   —  Collin Dallas/Fort Worth  100%   199   84   —   — 
The Preserve at Pecan Creek Denton Dallas/Fort Worth  100%   264   554   —   9  Denton Dallas/Fort Worth  100%   306   512   —   9 
The Ridge at Ribelin Ranch Travis Austin  100%   —   —   179   16  Travis Austin  100%   —   —   179   16 
Westside at Buttercup Creek Williamson Austin  100%   1,290   231   66   —  Williamson Austin  100%   1,318   196   66   — 
Other projects (7) Various Various  100%   1,550   19   197   23 
Other projects (9) Various Various  100%   1,554   18   197   24 
Georgia
                                                
Towne West Bartow Atlanta  100%   —   2,674   —   121  Bartow Atlanta  100%   —   2,674   —   121 
Other projects (14) Various Atlanta  100%   —   2,934   —   705 
Other projects (13) Various Atlanta  100%   —   2,934   —   705 
Missouri and Utah
                                                
Other projects (2) Various Various  100%   443   321   —   —  Various Various  100%   458   96   —   — 
                  
          6,462   14,085   591   1,576           6,719   11,581   593   1,634 
                  
Projects in entities we consolidate
Projects in entities we consolidate
Projects in entities we consolidate
Texas
                                                
City Park Harris Houston  75%   1,099   212   50   105  Harris Houston  75%   1,134   177   50   115 
Lantana Denton Dallas/Fort Worth  55%(e)  498   1,802   —   —  Denton Dallas/Fort Worth  55%(e)  593   1,639   —   — 
Light Farms Collin Dallas/Fort Worth  65%   —   2,517   —   —  Collin Dallas/Fort Worth  65%   —   2,868   —   — 
Stoney Creek Dallas Dallas/Fort Worth  90%   69   685   —   —  Dallas Dallas/Fort Worth  90%   107   647   —   — 
Timber Creek Collin Dallas/Fort Worth  88%   —   614   —   —  Collin Dallas/Fort Worth  88%   —   614   —   — 
Other projects (5) Various Various  Various   936   271   26   21  Various Various  Various   953   254   26   25 
                  
          2,602   6,101   76   126           2,787   6,199   76   140 
                  
Total owned and consolidated
          9,064   20,186   667   1,702           9,506   17,780   669   1,774 
                  
Projects in ventures that we account for using the equity method
Projects in ventures that we account for using the equity method
Projects in ventures that we account for using the equity method
Georgia
                                                
Seven Hills Paulding Atlanta  50%   634   446   26   —  Paulding Atlanta  50%   636   445   26   113 
The Georgian Paulding Atlanta  38%   288   1,097   —   —  Paulding Atlanta  38%   288   1,097   —   — 
Other projects (5) Various Atlanta  Various   1,845   77   3   — 
Other projects (4) Various Atlanta  Various   1,820   77   3   — 
Texas
                                                
Bar C Ranch Tarrant Dallas/Fort Worth  50%   192   1,007   —   —  Tarrant Dallas/Fort Worth  50%   232   967   —   — 
Entrada Travis Austin  50%   —   821   —   3 
Fannin Farms West Tarrant Dallas/Fort Worth  50%   279   101   —   15  Tarrant Dallas/Fort Worth  50%   309   72   —   15 
Harper’s Preserve Montgomery Houston  50%   —   1,722   —   72 
Lantana Denton Dallas/Fort Worth  Various(e)  1,436   34   14   75  Denton Dallas/Fort Worth  Various(e)  1,436   116   14   76 
Long Meadow Farms Fort Bend Houston  19%   607   1,499   72   138  Fort Bend Houston  19%   693   1,390   87   133 
Southern Trails Brazoria Houston  40%   372   655   —   —  Brazoria Houston  40%   452   575   —   — 
Stonewall Estates Bexar San Antonio  25%   220   161   —   —  Bexar San Antonio  25%   261   121   —   — 
Summer Creek Ranch Tarrant Dallas/Fort Worth  50%   796   1,772   —   363  Tarrant Dallas/Fort Worth  50%   796   478   —   71 
Summer Lakes Fort Bend Houston  50%   325   798   56   —  Fort Bend Houston  50%   345   778   56   — 
Village Park Collin Dallas/Fort Worth  50%   339   221   3   2  Collin Dallas/Fort Worth  50%   356   211   3   2 
Waterford Park Fort Bend Houston  50%   —   493   —   37  Fort Bend Houston  50%   —   210   —   90 
Other projects (2) Various Various  Various   296   228   —   15  Various Various  Various   296   228   —   15 
Florida
                                                
Other projects (3) Various Tampa  Various   473   372   —   —  Various Tampa  Various   519   326   —   — 
                  
Total in ventures
          8,102   8,961   174   645           8,439   9,634   189   590 
                  
Combined total
          17,166   29,147   841   2,347           17,945   27,414   858   2,364 
                  


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(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.lots and are subject to change based on business plan revisions.
 
(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 1518 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 20092010 follows:
 
             
      Interest
     
Project
 County Market Owned(a)  Type Description
 
Broadstone MemorialHarrisHouston100%Multifamily401 unit luxury apartment
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  4959% Multi-FamilyMultifamily 414 unit luxury apartment
 
 
(a)Interest owned reflects our net equity interest in the project, whether owned directly or indirectly.
 
Markets
Current U.S. market conditions in the single-family residential industry continue to be difficult, characterized by depressed sales volumes and prices, increased foreclosures, high unemployment rates and low consumer confidence. 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 2011.
 
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 aforementionedthese growth characteristics, as well as by immigration and in-migration. Currently, most of our development projects are located within the major metropolitan areasmarkets 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, productsand/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 usand/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


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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


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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 mineral interests on approximately 606,000 net acres principally in Texas, Louisiana, Georgia and Alabama. All our oil and gas mineral interests on approximately 620,000 net acresare located in Texas, Louisiana, Georgia, Alabama, California and Colorado.the United States. 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 620,000606,000 net acres of oil and gas mineral interests, about 480,000488,000 net acres are available for lease. We have about 140,000118,000 net acres leased for exploration activities, of which about 27,00030,000 net acres are held by production from over 470490 oil and gas wells that are owned and operated by others.


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Our principal areas of ownership follow:
 
East Texas and Gulf Coast Basins
 
We have about 252,000251,000 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 42,00040,000 net mineral acres in Alabama and 180,000about 168,000 net mineral acres in Georgia. These areas have historically had very little oil and gas exploration activity. However,activity, although since 2006 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.interests.
 
A summary of our oil and gas mineral acres(a) at year-end 20092010 follows:
 
                                
     Held By
        Held By
   
State
 Unleased Leased(b) Production(c) Total(d)  Unleased Leased(b) Production(c) Total(d) 
 (Net acres)  (Net acres) 
Texas  130,000   103,000   20,000   253,000   157,000   70,000   25,000   252,000 
Louisiana  129,000   8,000   7,000   144,000   121,000   18,000   5,000   144,000 
Georgia  180,000   —   —   180,000   168,000   —   —   168,000 
Alabama  40,000   2,000   —   42,000   40,000   —   —   40,000 
California  1,000   —   —   1,000   1,000   —   —   1,000 
Indiana  1,000   —   —   1,000 
                  
  480,000   113,000   27,000   620,000   488,000   88,000   30,000   606,000 
                  
 
 
(a)Includes ventures.
 
(b)Includes leases in primary lease term only.or for which a delayed rental payment has been received.
 
(c)Acres being held by production are producing oil or natural gas in paying quantities.
 
(d)Texas, Louisiana, California and CaliforniaIndiana 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 481463 net mineral acres located in Colorado.Colorado including 382 acres leased and 26 acres held by production.


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A summary of our Texas and Louisiana mineral acres(a) by county or parish at year-end 20092010 follows:
 
                    
TexasTexas Louisiana Texas Louisiana(b) 
County
 Net Acres 
Parish
 Net Acres  Net Acres 
Parish
 Net Acres 
Trinity  47,000  Beauregard  79,000   46,000  Beauregard  79,000 
Angelina  42,000  Vernon  39,000   42,000  Vernon  39,000 
Houston  29,000  Calcasieu  17,000   29,000  Calcasieu  17,000 
Anderson  25,000  Allen  7,000   25,000  Allen  7,000 
Cherokee  23,000  Rapides  1,000   24,000  Rapides  1,000 
Sabine  22,000  Other  1,000   23,000  Other  1,000 
      
Red River  14,000     144,000   14,000     144,000 
      
Newton  14,000         13,000       
San Augustine  13,000         13,000       
Jasper  11,000         12,000       
Other  13,000         11,000       
      
  253,000         252,000       
      
 
 
(a)Includes ventures.
(b)A significant portion of our Louisiana net mineral acres were severed from the surface estate shortly before our spin-off. Under Louisiana law, portions of our net mineral acres that are not producing minerals upon the tenth anniversary of severance from the surface estate will revert back to the surface estate owner.
 
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. CapitalOur 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 ifas long as 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$73.09 in 2010, $56.85 in 2009 and $106.66 in 2008 and $65.24 in 2007 and per thousand cubic feet of gas of $4.09$4.26 in 2010, $4.10 in 2009 and $8.76 in 2008 and $6.69 in 2007.2008.
 
We have water interests in about 1.6 million acres includingwhich includes 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.Alabama, and about 17,800 acres of ground water leases in central Texas acquired in 2010. We have not received anysignificant income from this interest.these interests.
 
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 averagebeginning-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.


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Our net proved developed oil and natural gas reserves as of year-end 2010, 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


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our 593,000over 576,000 undeveloped net mineral acres because we are solely royalty and non-operating working interest owners soand as a result 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 asrelated to our royalty and non-operating working interests follows:
 
Summary of Oil and Gas Reserves as of Year-End
                
 Net Reserves  Net Reserves
 Oil
 Natural Gas
  Oil
 Natural Gas
 (Barrels) (Mcf)  (Barrels) (Mcf)
 (In thousands)  (In thousands)
Consolidated entities:              
Year-end 2010  609   6,659 
Year-end 2009  580   6,660   580   6,660 
Year-end 2008  457   7,538   457   7,538 
Our share of ventures accounted for using the equity method:              
Year-end 2010  —   3,871 
Year-end 2009  —   2,508   —   2,508 
Year-end 2008  —   125   —   125 
Total consolidated and our share of equity method ventures:              
Year-end 2010  609   10,530 
Year-end 2009  580   9,168   580   9,168 
Year-end 2008  457   7,663   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 reserveReserve estimates were based on the economic and operating conditions existing at year-end 2010, 2009 and 2008. For 2010 and 2009, oil prices are based on a twelve month average price of $75.96 and $57.65 per barrel of West Texas Intermediate Crude and natural gas prices are based on a twelve month average price of $4.38 and $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) into our consolidated financial statements included in this Annual Report onForm 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.


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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 onForm 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 and non-operating working interests follows(a):follows:
 
                        
 For the Year For the Year
 2009 2008 2007 2010 2009 2008
Consolidated entities:
         
Oil production (barrels)  107,200   87,900   94,900   115,400   107,200   87,900 
Average price per barrel $56.86  $106.66  $65.24  $73.09  $56.85  $106.66 
Natural gas production (millions of cubic feet)  1,575.8   1,363.4   967.3   1,223.6   1,411.6   1,363.4 
Average price per thousand cubic feet $4.09  $8.76  $6.69  $4.32  $4.12  $8.76 
Our share of ventures accounted for using the equity method:
         
Natural gas production (millions of cubic feet)  572.8   82.1   — 
Average price per thousand cubic feet $4.12  $3.80  $— 
Total consolidated and our share of equity method ventures:
         
Oil production (barrels)  115,400   107,200   87,900 
Average price per barrel $73.09  $56.85  $106.66 
Natural gas production (millions of cubic feet)  1,796.4   1,493.7   1,363.4 
Average price per thousand cubic feet $4.26  $4.10  $8.76 
(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 2009,2010, production lifting costs, which exclude ad valorem and severance taxes, were $1.29 per Mcfe (thousand cubic feet equivalent) related to six wells in which we have a non-operating working interest. At year-end 2009, production lifting costs 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 2010, 2009 2008 or 2007,2008, and we are not presently conducting any such activities. In 2010, third-party oil and gas operators to whom we have leased our minerals drilled seven exploratory wells and 16 productive development wells within units where we own mineral interests. In 2009, third-party oil and gas operators to whom we have leased our minerals drilled seven exploratory wells and twenty-four24 productive development wells within units where we own mineral interests. At year-end 2009,2010, there were no wells being drilled by third-party oil and gas operators on units where we own an interest; however, there were seventwo 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.


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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 2010, 2009 and 2008, follows:
 
                    
 Wells(a) Wells(a)
 Oil Natural Gas Total Oil Natural Gas Total
Consolidated entities:                  
Year-end 2010  262   209   471 
Year-end 2009  262   194   456   262   194   456 
Year-end 2008  257   181   438   257   181   438 
Ventures accounted for using the equity method:                  
Year-end 2010  —   23   23 
Year-end 2009  —   16   16   —   16   16 
Year-end 2008  —   1   1   —   1   1 
Total consolidated and equity method ventures:                  
Year-end 2010  262   232   494 
Year-end 2009  262   210   472   262   210   472 
Year-end 2008  257   182   439   257   182   439 
 
 
(a)We have royalty interests in all wells at year-end 2010, 2009 and 2008. We also have non-operating working interests in six of these wells at year-end 2010 and 2009 and in three of these wells at year-end 2008. Total net wells from our royalty interests are 43, 41 and 38 at year-end 2010, 2009 and 2008. Net wells from our non-operating working interests are not significant.
 
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 2010, 2009 or 2008. We do not have any plugging liabilities as a royalty interest owner.owner, and we believe any liability as a non-operating working interest owner is not significant.
 
At year-end 2009,2010, our proved developed acreage includes 27,00030,000 net mineral acres in which we have royalty interests. In addition, we have 593,000over 576,000 net undeveloped mineral acres of which 113,00088,000 net acres are leased to third parties for oil and gas 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 natural 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 natural 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.


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Fiber Resources
 
We sell wood fiber from portions of our land, primarily in Georgia, and lease land for hunting and other recreational uses.


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Products
 
We have about 227,000over 197,000 acres of timber on our lands and about 18,000 acres of timber under lease. In 2009,2010, we sold at market prices, primarily to Temple-Inland, about 1,141,000over 537,000 tons of timber from our lands. We manage our timberland in accordance with the Sustainable Forestry Initiative® program of Sustainable Forestry Initiative, Inc. Over 213,000At year-end 2010, about 198,000 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. These leases do not inhibit our ability to harvest timber.
Fiber sales volumes and recreational leasing has decreased due to the sale of over 140,000 acres of timberland in 2010 and 2009.
 
Information about our principleprincipal timber products follows:
 
                    
 For the Year For the Year
 2009 2008 2010 2009 2008
Pulpwood tons sold  810,100   917,000   392,900   810,100   917,000 
Average pulpwood price per ton $9.93  $8.53  $8.52 
Sawtimber tons sold  331,300   162,900   144,300   331,300   162,900 
     
Average sawtimber price per ton $17.94  $19.82  $19.51 
Total tons sold  1,141,400   1,079,900   537,200   1,141,400   1,079,900 
     
Average price per ton $12.08  $11.81  $10.17 
Information about our recreational leases follows:
             
  For the Year
  2010 2009 2008
 
Average recreational acres leased  208,100   249,200   287,200 
Average price per leased acre $8.32  $8.25  $7.44 
 
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 9392 employees. None of our employees participate in collective bargaining arrangements. We believe we have a good relationship with our employees.


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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 changes may adversely affect our ability to harvest and sell timber, develop minerals, remediate contaminated properties or develop real estate. These laws and regulations may relate to, among other things, the protection of timberlands, endangered species, timber harvesting practices, protection and restoration of natural resources, air and water quality, and remedial standards for contaminated property and groundwater. Additionally, 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 real estate 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.


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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$2.5 million.
 
Oil and natural 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 natural gas activities on our properties. Well operators are responsible for compliance with oil and natural gas laws and regulations, which include requiring the operator of oil and natural 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.
 
On December 15, 2009, the Environmental Protection Agency (EPA) finalized its “Endangerment Finding,” an official finding that emissions of carbon dioxide, methane and other greenhouse gases (GHGs) present an endangerment to human health and the environment because emissions of such gases are, according to EPA, contributing to warming of the Earth’s atmosphere and other climatic changes. On November 30, 2010, the EPA issued a final rule requiring reporting of GHG emissions from the oil and gas industry. The adoption and implementation of any regulations imposing reporting obligations on, or limiting emissions of GHGs from, oil and gas operations could increase costs or could adversely affect demand for the oil and gas produced from our lands. In addition, although various climate change legislative measures have been under consideration by the U.S. Congress, it is not possible at this time to predict whether or when Congress may act on climate change legislation.


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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, Texas78746-5149. 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 onForm 10-K, quarterly reports onForm 10-Q, current reports onForm8-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


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 • corporate governance information that includes ourour:
 
 • 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 at1-800-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.


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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 pagesbeginning on page F-1 through F-37 to this Annual Report onForm 10-K.
 
Executive Officers
 
The names, ages and titles of our executive officers are:
 
       
Name
 Age Position
 
James M. DeCosmo  5152  President and Chief Executive Officer
Christopher L. Nines  3839  Chief Financial Officer
Craig A. Knight  6263  Chief Real Estate Officer
Flavious J. Smith, Jr.   5152  Executive Vice President
Phillip J. Weber  4950  Executive Vice President
Charles T. Etheredge, Jr.   4647  Executive Vice President
David M. Grimm  4950  Chief Administrative Officer, General Counsel and Secretary
Charles D. Jehl  4142  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.


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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 our 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.


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Item 1A.  Risk Factors.
 
Risks Related to our Real Estate Operations
 
A continued 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 or declining 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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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


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influenced by factors unrelated to our business. We may also be subject to adverse business consequences if the market reputation or financial condition 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.
 
Our partners’ inability to fund their capital commitments and otherwise fulfill their operating and financial obligations related to a venture could have an adverse effect on the venture and us.
When we enter into a venture, we may rely on our venture partner to fund its share of capital commitments to the venture and to otherwise fulfill its operating and financial obligations. Failure of a venture partner to timely satisfy its funding or other obligations to the venture could require us to elect whether to increase our financial or other operating support of the venture in order to preserve our investment, which may reduce our returns or cause us to incur losses, or to not fund such obligations, which may subject the venture and us to adverse consequences.
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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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.


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Risks Related to our Mineral Resources Operations
 
We cannothave limited control over the activities on oil or gas properties we do not operate.
 
We do not operate any of theThe properties in which we have oil or gas mineral interestsan interest are operated by other companies and involve third-party working interest owners. As a result, we have very limited ability to exerciseinfluence or control the operation or future development of such properties, including compliance with environmental, safety and other regulations, or the amount of capital expenditures that we will be required to fund with respect to such properties. Moreover, we are dependent on the other working interest owners of such projects to fund their contractual share of the capital expenditures of such projects. These limitations and our dependence on the operator and other working interest owners for these projects could cause us to incur unexpected future costs and materially and adversely affect our financial condition and results of operations.
In addition, operators determine when and where to drill wells and we have no influence over operations for these propertiesdecisions. New wells may not be productive or their associated costs. The success and timingmay not produce at a level to enable us to recover all or any portion of drilling, development and exploitation activities on properties operated by others depend onour capital investment where we have 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.non-operating working interest.
 
Volatile oil and natural 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 natural gas prices, which are volatile. Any substantial or extended decline in the price of oil and natural gas could have a negative impact on our business operations and future revenues. Moreover, oil and natural gas prices depend on factors we cannot control, such as: changes in foreign and domestic supply and demand for oil and natural 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; domestic and international drilling activity; price and availability of alternate fuel sources; the value of the U.S. dollar relative to other major currencies; the level and effect of trading in commodity markets, the effect of worldwide energy conservation measures, and governmental regulations.
The ability to sell and deliver oil and natural gas produced from wells on our mineral interests could be materially and adversely affected if adequate gathering, processing, compression and transportation services are not obtained.
The sale of oil and natural gas produced from wells on our mineral interests depends on a number of factors beyond our control, including the availability, proximity and capacity of, and costs associated with, gathering, processing, compression and transportation facilities owned by third parties. These facilities may be temporarily unavailable due to market conditions, mechanical reasons or other factors or conditions, and may not be available to us in the future on terms we consider acceptable, if at all. Any significant change in market or other conditions affecting these facilities or the availability of these facilities, including due to our failure or inability to obtain access to these facilities on terms acceptable to us or at all, could materially and adversely affect our business and, in turn, our financial condition and results of operations.
Our reserves and production will decline from their current levels.
The rate of production from oil and natural gas properties generally declines as reserves are produced. Our reserves will decline as they are produced which could materially and adversely affect our future cash flow and results of operations.
A portion of our oil and natural gas production may be subject to interruptions that could have a material and adverse effect on us.
A portion of oil and natural gas production from our minerals may be interrupted, or shut in, from time to time for various reasons, including as a result of accidents, weather conditions, loss of gathering, processing, compression or transportation facility access or field labor issues, or intentionally as a result of market conditions such as oil and natural gas prices that we deem uneconomic. If a substantial amount of


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production is interrupted, our cash flow and, in turn, our results of operations could be materially and adversely affected.
We may acquire properties that are not as commercially productive as we initially believed.
From time to time, we may seek to acquire oil and gas properties. Although we perform reviews of properties to be acquired in a manner that we believe is consistent with industry practices, reviews of records and properties may not necessarily reveal existing or potential problems, nor may they permit a buyer to become sufficiently familiar with the properties in order to assess fully their deficiencies and potential. Even when problems with a property are identified, we may assume environmental and other risks and liabilities in connection with acquired properties pursuant to the acquisition agreements. Moreover, there are numerous uncertainties inherent in estimating quantities of oil and gas reserves, actual future production rates and associated costs with respect to acquired properties. Actual reserves, production rates and costs may vary substantially from those assumed in our estimates.
Weather and climate may have a significant and adverse impact on us.
Demand for natural gas is, to a significant degree, dependent on weather and climate, which impacts, among other things, the price we receive for the commodities produced from wells on our mineral interests and, in turn, our cash flow and results of operations. For example, relatively warm temperatures during a winter season generally result in relatively lower demand for natural gas (as less natural gas is used to heat residences and businesses) and, as a result, relatively lower prices for natural gas production.
We do not insure against all potential losses and could be materially and adversely affected by unexpected liabilities.
The exploration for, and production of, oil and natural gas can be hazardous, involving natural disasters and other unforeseen occurrences such as blowouts, cratering, fires and loss of well control, which can damage or destroy wells or production facilities, result in injury or death, and damage property and the environment. We maintain insurance against many, but not all, potential losses or liabilities arising from operations on our property in accordance with what we believe are customary industry practices and in amounts and at costs that we believe to be prudent and commercially practicable. In addition, we require third party operators to maintain customary and commercially practicable types and limits of insurance, but potential losses or liabilities may not be covered by such third party’s insurance which may subject us to liability as the mineral estate owner. The occurrence of any of these events and any costs or liabilities incurred as a result of such events could have a material adverse effect on our business, financial condition and results of operations.
 
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 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 reserves to reflect production history, development, prevailing oil and natural gas prices and other factors, many of which are beyond our control.
 
Changes in environmental or other regulations for extraction of oil or natural 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


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hydraulic fracturing could substantially increase the cost or risk associated with extracting oil or natural 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. CongressFederal government is currently considering legislation to amend the Safe Drinking Water Actregulations to require the disclosure of chemicals used by the oil and natural gas industry in the hydraulic fracturing process. The sponsors of the bills haveIt has been asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. The proposed legislationSuch regulations would require the reporting and public disclosure of chemicals used in the fracturing process as well as additional levels of regulation thatand 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 natural 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.
A significant portion of our Louisiana net mineral acres are subject to prescription under Louisiana law.
A significant portion of our Louisiana net mineral acres were severed from the surface estate shortly before our spin-off. Under Louisiana law, any portions of the mineral estate that are not producing minerals upon the tenth anniversary of severance from the surface estate will revert back to the surface estate owner. Upon such a reversion, we will no longer own such portions of the mineral estate and will no longer have the right to lease, explore or produce from such portions of the mineral estate.
Our water interests may require governmental permits, the consent of third parties and/or completion of significant transportation infrastructure prior to commercialization, all of which are dependent on the actions of others.
Many jurisdictions require governmental permits to withdraw and transport water for commercial uses, the granting of which may be subject to discretionary determinations by such jurisdictions regarding necessity. In addition, we do not own the executory rights related to our non-participating royalty interest, and as a result, third-party consent from the executor rights owner(s) would be required prior to production. The process to obtain permits can be lengthy, and governmental jurisdictions or third parties from whom we seek permits or consent may not provide the approvals we seek. We may be unable to secure a buyer at commercially economic prices for water that we have a right to extract and transport, and transportation infrastructure across property not owned or controlled by us is required for transport of water prior to commercial use. Such infrastructure can require significant capital and may also require the consent of third parties. We may not have cost effective means to transport water from property we own, lease or manage to buyers. As a result, we may lose some or all of our investment in water assets, or our returns may be diminished.
 
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


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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 natural 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. 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.
 
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 aremay be negatively affected by the existence of these conditions.


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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 timber harvesting, 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


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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.


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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 onForm 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.


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PART II
 
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 20092010 and 20082009 were:
 
                                
 2009 2008  2010 2009
 Price Range Price Range  Price Range Price Range
 High Low High Low  High Low High Low
First Quarter $13.50  $5.74  $29.49  $16.50  $22.85  $16.80  $13.50  $5.74 
Second Quarter  14.17   7.36   27.30   18.39   23.54   16.23   14.17   7.36 
Third Quarter  18.39   10.32   21.03   12.01   18.32   13.21   18.39   10.32 
Fourth Quarter  22.98   14.31   15.50   2.93   19.78   16.47   22.98   14.31 
For the Year  22.98   5.74   29.49   2.93   23.54   13.21   22.98   5.74 
 
Shareholders
 
Our stock transfer records indicated that as of February 25, 2010,2011, there were approximately 4,1703,969 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.
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 (10/1/2010 — 10/31/2010)  —  $—   —   5,999,013 
Month 2 (11/1/2010 — 11/30/2010)  646  $18.20   —   5,999,013 
Month 3 (12/1/2010 — 12/31/2010)  —  $—   —   5,999,013 
                 
Total  646       —     
                 
(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. In third quarter 2010, we repurchased 1,000,987 shares of our common stock at a cost of $15,178,000 or $15.16 average price paid per share. We have no plans or programs that expired during the period covered by the table above and no 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.


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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.


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Item 6.Selected Financial Data.
                     
  For the Year 
  2010  2009  2008  2007  2006 
  (In thousands, except per share amounts) 
 
Revenues:                    
Real estate $68,269  $94,436  $98,859  $142,729  $180,151 
Mineral resources  24,790   36,256   47,671   20,818   27,980 
Fiber resources  8,301   15,559   13,192   14,439   17,429 
                     
Total revenues $101,360  $146,251  $159,722  $177,986  $225,560 
                     
Segment earnings (loss):                    
Real estate $(4,634) $3,182  $9,075  $39,507  $70,271 
Mineral resources  22,783   32,370   44,076   18,581   26,305 
Fiber resources  5,058   9,622   8,896   7,950   6,711 
                     
Total segment earnings  23,207   45,174   62,047   66,038   103,287 
Items not allocated to segments:                    
General and administrative  (17,341)  (22,399)  (19,318)  (17,413)  (14,048)
Share-based compensation  (11,596)  (11,998)  (4,516)  (1,397)  (1,275)
Gain on sale of assets(a)
  28,607   104,047   —   —   — 
Interest expense  (16,446)  (20,459)  (21,283)  (9,229)  (6,229)
Other non-operating income(b)
  1,164   375   279   705   79 
                     
Income before taxes  7,595   94,740   17,209   38,704   81,814 
Income tax expense  (2,470)  (35,633)  (5,235)  (13,909)  (29,970)
                     
Net income $5,125  $59,107  $11,974  $24,795  $51,844 
                     
Diluted net income per common share(c)
 $0.14  $1.64  $0.33  $0.70  $1.47 
Average diluted common shares outstanding(c)
  36,377   36,102   35,892   35,380   35,380 
At year-end:                    
Assets $789,324  $784,734  $834,576  $748,726  $620,174 
Debt $221,589  $216,626  $337,402  $266,015  $161,117 
Noncontrolling interest $4,715  $5,879  $6,660  $8,629  $7,746 
Forestar Group Inc. shareholders’/Parent’s equity $509,564  $512,456  $447,292  $433,201  $418,052 
Ratio of total debt to total capitalization  30%  29%  43%  38%  27%
(a)Gain on sale of assets represents gains from timberland sales in accordance with our near-term strategic initiatives announced first quarter 2009.
(b)In 2010, other non-operating income principally represents interest income related to a loan to a third-party equity investor in the resort development located at our Cibolo Canyons development. We received payment in full plus interest in fourth quarter 2010.
(c)Prior to December 28, 2007, we were a wholly-owned subsidiary of Temple-Inland Inc. For 2007 and 2006, 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.


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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Annual Report onForm 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 natural 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 natural gas and fluctuations in oil and natural 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;
• water withdrawal or usage may be subject to state and local laws, regulations or permit requirements, and there is no assurance that all our water interests or rights will be available for withdrawal or use; 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 onForm 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.


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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.
Background
On December 28, 2007, Temple-Inland distributed all of the issued and outstanding shares of our common stock to its stockholders in a transaction commonly referred to as a spin-off.
Strategy
Our strategy is:
• Recognizing and responsibly delivering the greatest value from every acre; and
• Growing through strategic and disciplined investments.
In 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 timberland; reducing debt by approximately $150,000,000; and repurchasing up to 20 percent of our common stock.
In 2009, we sold about 95,000 acres of timber and timberland in Georgia and Alabama for $158,603,000 in two transactions generating combined net proceeds of $153,851,000, which were principally used to reduce debt and pay taxes. These transactions resulted in a combined gain on sale of assets of $104,047,000.
In 2010, we sold about 24,000 acres of timber and timberland in Georgia, Alabama and Texas for $38,778,000 in seven transactions generating combined net proceeds of $38,040,000, which were principally used to reinvest in qualifying real estate under Internal Revenue Code (IRC) Section 1031. These transactions resulted in a combined gain on sale of assets of $28,607,000. In addition, in third quarter 2010, we repurchased 1,000,987 shares of our common stock at a cost of $15,178,000.
At year-end 2010, assets held for sale under these strategic initiatives includes about 55,000 acres of undeveloped land with a carrying value of $14,513,000 and related timber with a carrying value of $6,609,000. Though we continue to actively market this land, market conditions for timberland have deteriorated since second quarter 2009 principally due to increased investor return requirements, limited availability of financing and alternate investment options for buyers in the marketplace. We are a disciplined seller, and as a result, additional time will be required to complete the sale of these assets.


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Results of Operations for the Years Ended 2010, 2009 and 2008
A summary of our consolidated results follows:
             
  For the Year 
  2010  2009  2008 
  (In thousands) 
 
Revenues:            
Real estate $68,269  $94,436  $98,859 
Mineral resources  24,790   36,256   47,671 
Fiber resources  8,301   15,559   13,192 
             
Total revenues $101,360  $146,251  $159,722 
             
Segment earnings (loss):            
Real estate $(4,634) $3,182  $9,075 
Mineral resources  22,783   32,370   44,076 
Fiber resources  5,058   9,622   8,896 
             
Total segment earnings  23,207   45,174   62,047 
Items not allocated to segments:            
General and administrative  (17,341)  (22,399)  (19,318)
Share-based compensation  (11,596)  (11,998)  (4,516)
Gain on sale of assets  28,607   104,047   — 
Interest expense  (16,446)  (20,459)  (21,283)
Other non-operating income  1,164   375   279 
             
Income before taxes  7,595   94,740   17,209 
Income tax expense  (2,470)  (35,633)  (5,235)
             
Net income $5,125  $59,107  $11,974 
             
Significant aspects of our results of operations follow:
2010
• Real estate segment earnings declined principally due to lower undeveloped land sales from our retail sales program. In addition, segment earnings include $11,271,000 of non-cash impairment charges principally associated with residential development projects located near Atlanta, Georgia and Fort Worth, Texas and with a commercial real estate project near the Texas gulf coast.
• Mineral resources segment earnings declined principally due to decreased lease bonus revenues as a result of reduced leasing activity by exploration and production companies that are now concentrating investments in drilling activities to hold existing leases rather than leasing new mineral interests in our basins. This decline in lease bonus revenue was partially offset by increased oil and natural gas production and higher oil prices, including our share of venture activity.
• Fiber resources segment earnings decreased principally due to reduced harvest activity resulting from the sale of over 140,000 acres of timberland in 2010 and 2009 and postponing harvest plans on about 55,000 acres classified as held for sale.
• Gain on sale of assets represents the sale of about 24,000 acres of timber and timberland in Georgia, Alabama and Texas for $38,778,000 in accordance with our near-term strategic initiatives.


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• Interest expense decreased principally due to lower interest rates as a result of the maturity of our interest rate swap agreement and decreased amortization of prepaid loan fees due to refinancing and extending our senior credit facility in 2010.
2009
• Real estate segment earnings were negatively impacted by $10,619,000 of non-cash 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 $3,702,000 in 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 expenses include 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 the sale of our undivided 15 percent interest in corporate aircraft contributed to us by Temple-Inland at spin-off.
• Share-based compensation increased principally due to our higher stock price and increased number of cash-settled equity awards.
• Gain on sale of assets represents the sale of about 95,000 acres of timber and timberland in Georgia and Alabama for $158,603,000 in accordance with our near-term strategic initiatives.
• Interest expense decreased as result of lower debt levels.
2008
• Real estate segment earnings were negatively impacted by decreased sales of residential lots, decreased commercial sales activity, increased costs associated with environmental remediation, and asset impairments.
• Mineral resources segment earnings benefited from 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 development of corporate functions as well asstart-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.
Current Market Conditions
Current U.S. market conditions in the single-family residential industry continue to be difficult, characterized by depressed sales volumes and prices, increased foreclosures, high unemployment rates and low consumer confidence. 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 2011.


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Oil prices have increased partially due to tightening of international supply and anticipation that future demand will outpace supply growth as global economic activity improves. Natural gas prices have remained depressed as production remains strong and U.S. domestic demand is lower resulting in increased inventory levels. In our areas of operations, exploration and production companies remain focused on reducing capital expenditures for lease acquisition due to lower natural gas prices and drilling activity to hold existing leases. 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. Sawtimber prices remain depressed due to decreased demand for lumber as a result of lower new home construction activity.
Business Segments
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 (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures and net income (loss) attributable to noncontrolling interests. Unallocated items consist of general and administrative expenses, 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 and home builder 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 220,000 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 167,000 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 income producing properties, primarily a hotel and a multifamily property.
In addition, on December 29, 2010, we acquired a 401 unit, Class A multifamily property in Houston, Texas for $49,100,000. Results of operations for this acquisition, included in income producing properties, were not significant in 2010. Pro forma real estate segment earnings assuming this acquisition occurred at the beginning of 2009 would not be significantly different than those reported.


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A summary of our real estate results follows:
             
  For the Year 
  2010  2009  2008 
  (In thousands) 
 
Revenues $68,269  $94,436  $98,859 
Cost of sales  (46,225)  (46,307)  (55,131)
Operating expenses  (28,598)  (34,319)  (35,898)
             
   (6,554)  13,810   7,830 
Equity in earnings (loss) of unconsolidated ventures  2,629   (8,161)  3,480 
Less: Net income attributable to noncontrolling interests  (709)  (2,467)  (2,235)
             
Segment (loss) earnings $(4,634) $3,182  $9,075 
             
In 2010, cost of sales includes $9,042,000 in non-cash impairment charges principally associated with residential development projects located near Atlanta, Georgia and Fort Worth, Texas. Operating expenses principally consist of $7,205,000 in property taxes, $6,188,000 in employee compensation and benefits, $4,471,000 in professional services, $2,826,000 in depreciation, $1,716,000 in community maintenance and $1,142,000 in marketing and advertising.
In 2010, equity in earnings (loss) of unconsolidated ventures includes about $4,869,000 in gains that were previously deferred by us due to our continuing involvement with the property. In fourth quarter 2010, the property was sold to a third party. In addition, equity in earnings (loss) of unconsolidated ventures includes $2,229,000 in non-cash impairment charges primarily related to a commercial real estate project located near the Texas gulf coast.
In 2009, cost of sales includes $5,718,000 in non-cash 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, $3,532,000 in professional services, $2,167,000 in depreciation, $2,054,000 in community maintenance, $1,212,000 in marketing and advertising and $3,702,000 related to environmental remediation charges.
In 2009, equity in earnings (loss) of unconsolidated ventures includes $4,901,000 in non-cash impairment charges related to two residential real estate projects located in Tampa, Florida and an equity investment in an unconsolidated venture.
In 2008, cost of sales includes $3,000,000 in non-cash 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, $2,909,000 in professional services, $2,076,000 in depreciation, $1,342,000 in community maintenance, $2,345,000 in marketing and advertising, and $3,007,000 related to environmental remediation activities. 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.
Revenues in our owned and consolidated ventures consist of:
             
  For the Year 
  2010  2009  2008 
  (In thousands) 
 
Residential real estate $24,540  $27,677  $38,110 
Commercial real estate  352   793   9,440 
Undeveloped land  20,111   46,580   26,005 
Income producing properties  21,225   18,214   21,488 
Other  2,041   1,172   3,816 
             
Total revenues $68,269  $94,436  $98,859 
             


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Units sold in our owned and consolidated ventures consist of:
             
  For the Year
  2010 2009 2008
 
Residential real estate:            
Lots sold  442   483   812 
Average price per lot sold $55,076  $53,469  $45,712 
Commercial real estate:            
Acres sold  2   2   55 
Average price per acre sold $146,047  $433,406  $172,346 
Undeveloped land:            
Acres sold  5,812   18,204   5,577 
Average price per acre sold $3,460  $2,550  $4,663 
Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. In 2010 and 2009, residential real estate revenues declined principally as a result of decreased demand for single-family lots due to the overall decline in the housing industry. 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 decrease in commercial real estate revenues in 2010 and 2009 is attributable to limited availability of commercial real estate acquisition and development mortgages to potential third-party purchasers.
In 2010, undeveloped land sales decreased due to current market conditions significantly influenced by limited availability of financing and alternate investment options to buyers in the marketplace. However, average price per acre sold increased principally as a result of selling about 700 acres of land in the entitlement process in Georgia for about $8,200 per acre. As market conditions for residential and commercial real estate sales began to deteriorate in 2008, we allocated additional internal resources and focused our strategic marketing efforts toward sale of undeveloped land through our retail land sales program. 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.


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Information about our real estate projects and our real estate ventures follows:
         
  Year-End
  2010 2009
 
Owned and consolidated ventures:
        
Entitled, developed and under development projects        
Number of projects  54   54 
Residential lots remaining  17,780   20,186 
Commercial acres remaining  1,774   1,702 
Undeveloped land and land in the entitlement process        
Number of projects  18   19 
Acres in entitlement process  29,670   30,370 
Acres undeveloped(a)
  168,724   198,063 
Ventures accounted for using the equity method:
        
Ventures’ lot sales (for the year)        
Lots sold  362   159 
Average price per lot sold $42,602  $60,589 
Ventures’ entitled, developed and under development projects        
Number of projects  22   21 
Residential lots remaining  9,634   8,961 
Commercial acres sold (for the year)  15   4 
Average price per acre sold $81,318  $188,144 
Commercial acres remaining  590   645 
Ventures’ undeveloped land and land in the entitlement process        
Number of projects  —   2 
Acres in entitlement process  —   1,080 
Acres sold (for the year)  —   1 
Average price per acre sold $—  $10,000 
Acres undeveloped  5,731   5,517 
(a)Includes 55,000 acres classified as assets held for sale.
Mineral Resources
We own directly or through ventures about 606,000 net acres of mineral interests. Our mineral resources segment revenues are principally derived from royalties and other lease revenues from our mineral interests located principally in Texas, Louisiana, Georgia and Alabama. At year-end 2010, we have about 88,000 net acres under lease and about 30,000 net acres held by production.
In addition, on December 22, 2010, we acquired a water resources company for $12,000,000. It is focused on providing sustainable volumes of ground water to central Texas and the Interstate-35 growth corridor and its principal assets are approximately 17,800 acres of ground water leases. Results of operations for this acquisition were not significant in 2010. Pro forma mineral resources segment earnings assuming this acquisition had occurred at the beginning of 2009 would not be significantly different from those reported.


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A summary of our mineral resources results follows:
             
  For the Year 
  2010  2009  2008 
  (In thousands) 
 
Revenues $24,790  $36,256  $47,671 
Cost of sales  (1,097)  (922)  (1,714)
Operating expenses  (2,982)  (3,354)  (3,043)
             
   20,711   31,980   42,914 
Equity in earnings of unconsolidated ventures  2,072   390   1,162 
             
Segment earnings $22,783  $32,370  $44,076 
             
Cost of sales represents 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 2010, operating expenses principally consist of $1,182,000 in employee compensation and benefits, $566,000 in professional services, $269,000 in depreciation, $255,000 in property taxes and $244,000 in information technology.
In 2009, operating expenses principally consist of $1,299,000 in employee compensation and benefits, $872,000 in professional services, $184,000 in depreciation, $301,000 in property taxes and $257,000 in information technology.
In 2008, operating expenses principally consist of $911,000 in employee compensation and benefits, $1,251,000 in professional services as we resourced our operations with a contract workforce while recruiting our minerals team, and $250,000 in property taxes.
In 2010 and 2009, equity in earnings of unconsolidated ventures includes our share of royalty revenue from new wells that began producing from the Barnett Shale natural gas formation. In 2008, 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.
Revenues consist of:
             
  For the Year 
  2010  2009  2008 
  (In thousands) 
 
Royalties $13,724  $11,910  $21,639 
Other lease revenues  11,066   24,346   26,032 
             
Total revenues $24,790  $36,256  $47,671 
             
In 2010, royalty revenues increased as a result of higher oil prices and oil production partially offset by decreases in natural gas production in owned and consolidated properties. Increased oil prices contributed $1,873,000 while production increases contributed $466,000. The production increase primarily relates to new oil wells commencing production in late 2009 and early 2010. At year-end 2010, there were 494 active wells owned and operated by others on our leased mineral acres.
In 2010, other lease revenues include $7,655,000 in lease bonus payments as a result of leasing about 16,900 net mineral acres for an average of $453 per acre and $2,168,000 related to delay rental payments. In addition, other lease revenues include about $1,126,000 as a result of an option exercised to extend an existing lease on over 3,200 acres.
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


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commencing production. At year-end 2009, there were 472 active wells owned and operated by others on our leased mineral acres.
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. At year-end 2008, there were 439 active wells owned and operated by others on our leased mineral acres.
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 Bossier-Haynesville natural gas formations.
Oil and natural gas produced and average unit prices related to our royalty and non-operating working interests follows:
             
  For the Year
  2010 2009 2008
 
Consolidated entities:
            
Oil production (barrels)  115,400   107,200   87,900 
Average price per barrel $73.09  $56.85  $106.66 
Natural gas production (millions of cubic feet)  1,223.6   1,411.6   1,363.4 
Average price per thousand cubic feet $4.32  $4.12  $8.76 
Our share of ventures accounted for using the equity method:
            
Natural gas production (millions of cubic feet)  572.8   82.1   — 
Average price per thousand cubic feet $4.12  $3.80  $— 
             
Total consolidated and our share of equity method ventures:
            
Oil production (barrels)  115,400   107,200   87,900 
Average price per barrel $73.09  $56.85  $106.66 
Natural gas production (millions of cubic feet)  1,796.4   1,493.7   1,363.4 
Average price per thousand cubic feet $4.26  $4.10  $8.76 
Our share of ventures natural gas production increased as a result of 16 wells that began producing from the Barnett Shale natural gas formation in 2010.
A summary of our mineral acres(a) at year-end 2010 follows:
                 
        Held By
    
State
 Unleased  Leased(b)  Production(c)  Total(d) 
  (Net acres) 
 
Texas  157,000   70,000   25,000   252,000 
Louisiana  121,000   18,000   5,000   144,000 
Georgia  168,000   —   —   168,000 
Alabama  40,000   —   —   40,000 
California  1,000   —   —   1,000 
Indiana  1,000   —   —   1,000 
                 
   488,000   88,000   30,000   606,000 
                 
(a)Includes ventures.
(b)Includes leases in primary lease term or for which a delayed rental payment has been received.
(c)Acres being held by production are producing oil or natural gas in paying quantities.


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(d)Texas, Louisiana, California and Indiana 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 463 net mineral acres located in Colorado including 382 acres leased and 26 acres held by production.
In addition, we have water interests in about 1,600,000 acres, including a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from approximately 1,400,000 acres in Texas, Louisiana, Georgia and Alabama and about 17,800 acres of ground water leases in central Texas. We have not received significant income from these interests.
Fiber Resources
Our fiber resources segment focuses principally on the management of our timber holdings and recreational leases. We have over 197,000 acres of timber, primarily in Georgia, and about 18,000 acres of timber under lease. Our fiber resources segment revenues are principally derived from the sales of wood fiber from our land and leases for recreational uses. We sold about 30,000 acres of undeveloped land in 2010 and over 110,000 acres in 2009 through our retail land sales program and our strategic initiatives. In addition, we are postponing harvest plans and actively marketing about 55,000 acres classified as held for sale. As a result of the reduced acreage from executing these land sales, future segment revenues and earnings are anticipated to be lower.
A summary of our fiber resources results follows:
             
  For the Year 
  2010  2009  2008 
  (In thousands) 
 
Revenues $8,301  $15,559  $13,192 
Cost of sales  (1,640)  (3,396)  (3,357)
Operating expenses  (2,274)  (2,728)  (2,611)
             
   4,387   9,435   7,224 
Other operating income  671   187   1,672 
             
Segment earnings $5,058  $9,622  $8,896 
             
In 2010, operating expenses principally consist of $1,115,000 in employee compensation and benefits, $424,000 in facility and long-term timber lease costs and $342,000 in professional services.
In 2009, operating expenses principally consist of $1,241,000 in employee compensation and benefits, $544,000 in facility and long-term timber lease costs and $471,000 in professional services.
In 2008, operating expenses principally consist of $1,036,000 related to employee compensation and benefits, $418,000 in facility and long-term timber lease costs and $652,000 related to professional services.
In 2010, 2009 and 2008, other operating income principally reflects gains from partial termination of a timber lease related to land sold from Ironstob LLC. We have a 58 percent ownership interest in this venture, which controls over 16,000 acres of undeveloped land near Atlanta, Georgia.
Revenues consist of:
             
  For the Year 
  2010  2009  2008 
  (In thousands) 
 
Fiber $6,491  $13,478  $10,987 
Recreational leases and other  1,810   2,081   2,205 
             
Total revenues $8,301  $15,559  $13,192 
       ��     


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Fiber sold consists of:
             
  For the Year
  2010 2009 2008
 
Pulpwood tons sold  392,900   810,100   917,000 
Average pulpwood price per ton $9.93  $8.53  $8.52 
Sawtimber tons sold  144,300   331,300   162,900 
Average sawtimber price per ton $17.94  $19.82  $19.51 
Total tons sold  537,200   1,141,400   1,079,900 
Average price per ton $12.08  $11.81  $10.17 
In 2010, total tons sold decreased due to reduction in harvest volume as a result of selling over 140,000 acres of timberland in 2010 and 2009 and postponing harvest plans on about 55,000 acres classified as held for sale. In 2010 and 2009, total price per ton increased due to sales including a higher proportional mix of sawtimber versus pulpwood. In 2008, average price per ton was lower because we harvested and sold higher levels of pulpwood. The majority of our sales were to Temple-Inland at market prices.
Information about our recreational leases follows:
             
  For the Year
  2010 2009 2008
 
Average recreational acres leased  208,100   249,200   287,200 
Average price per leased acre $8.32  $8.25  $7.44 
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 expenses principally consist 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 2010, general and administrative expenses principally consist of $5,480,000 in employee compensation and benefits, $3,324,000 in professional services, $1,480,000 in depreciation expense, $1,235,000 in insurance, $1,214,000 in facilities expense and $996,000 in director fees.
In 2009, general and administrative expenses principally consist of $5,687,000 in employee compensation and benefits, $6,363,000 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 the sale of 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, $1,143,000 in facilities expense and $1,111,000 in director fees.
In 2008, general and administrative expenses principally consist of $6,846,000 in employee compensation and benefits, $3,896,000 in professional services, $1,445,000 in depreciation expense, $1,542,000 in insurance, $689,000 in facilities expense and $1,100,000 in director fees.
Our share-based compensation expense fluctuates because a significant portion of our awards are cash settled and as a result are affected by changes in the market price of our common stock. In 2009, the increase in share-based compensation was due to our higher stock price and increased number of cash-settled awards.
In accordance with our previously announced near-term strategic initiatives to enhance shareholder value, in 2010, we recognized gains of $28,607,000 resulting from the sale of about 24,000 acres of timber and timberland in Georgia, Alabama and Texas for $38,778,000, and in 2009, we recognized gains of


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$104,047,000 resulting from the sale of about 95,000 acres of timber and timberland in Georgia and Alabama for $158,603,000.
In 2010, interest expense decreased principally due to lower interest rates as a result of the maturity of our interest rate swap agreement and decreased amortization of prepaid loan fees due to refinancing and extending our senior credit facility. In 2009, interest expense decreased as result of lower debt levels. In 2008, 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 30 percent and 3 percent in 2010, 37 percent and 1 percent in 2009 and 27 percent and 4 percent in 2008. Our 2010 rate includes significant benefits for percentage depletion and charitable contributions associated with donated conservation easements while our 2009 and 2008 rates 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.
We have not provided a valuation allowance for our deferred tax asset because we believe it is likely it will be recoverable in future periods.
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 income producing 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, income producing properties, 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 $13,551,000 in 2010, $142,120,000 in 2009 and ($51,889,000) in 2008.
In 2010, operating cash flow was adversely affected by lower operating income primarily due to difficult conditions in the housing industry and lower proceeds from the sale of assets in accordance with our near-term strategic initiatives. Expenditures for real estate development were slightly less than non-cash cost of real estate sales due to a reduction in development. In 2010, we sold about 24,000 acres of timber and timberland in Georgia, Alabama and Texas generating net proceeds of $38,040,000, of which $24,392,000 was held by a qualified intermediary under IRC Section 1031. At year-end 2010, we have about $1,347,000 remaining with the qualified intermediary pending reinvestment in qualifying real estate.
In 2009, the sale of about 95,000 acres of timber and timberland in Georgia and Alabama generated net proceeds of $153,851,000. Expenditures for real estate development slightly exceeded non-cash cost of sales due to our capital 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, of which $16,235,000 was invested in the resort development. We received $24,945,000 in reimbursements from utility


42

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 in 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.
Cash Flows from Investing Activities
Capital contributions to and capital distributions from unconsolidated ventures and business acquisitions 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 2010, net cash (used for) investing activities was ($26,597,000). In fourth quarter 2010, we acquired a 401 unit, Class A multifamily property in Houston, Texas for $49,100,000. We used $23,045,000 of the proceeds held by a qualified intermediary under IRC Section 1031 and $26,500,000 of non-recourse borrowings to fund this acquisition, including closing costs. In addition, we acquired a water resources company in central Texas for $12,000,000.
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.
Cash Flows from Financing Activities
In 2010, net cash (used for) financing activities was ($2,639,000) as we repurchased 1,000,987 shares of our common stock for $15,178,000 and incurred $6,304,000 in bank fees primarily related to our amendment and extension of our senior credit facility, which was partially offset by a net increase in our debt of $18,170,000 which is principally due to $26,500,000 in non-recourse borrowings used to finance a 401��unit, Class A multifamily property acquired on December 29, 2010.
In 2009, net cash (used for) financing activities was ($122,823,000) as 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, net cash provided by financing activities was $69,163,000 as 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.
Non-Cash Financial Information
In 2010, our real estate assets decreased by $11,865,000, debt decreased by $13,207,000 and other liabilities increased by $1,342,000 due to lender foreclosure of a lien on a condominium property in Austin, Texas owned by a consolidated variable interest entity. The limited partnership has no other significant assets. The lien secured debt guaranteed by the unrelated general partner who managed day to day operations of the partnership. At year-end 2010, the limited partnership has total liabilities of $3,083,000. The partnership liabilities will be settled as the partnership is liquidated.


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Liquidity and Contractual Obligations
Liquidity
In third quarter 2010, we entered into an amended and restated senior credit facility effecting the following amendments to: extend the maturity date of the revolving loan to August 6, 2013 (with a one-year extension option to August 6, 2014) and of the term loan to August 6, 2015; reduce the revolving loan commitment to $175 million, subject to the ability to increase the aggregate facility by up to $150 million by securing additional commitments; eliminate any additional required commitment reductions during the term of the facility; reduce the interest coverage ratio from 1.75x to 1.05x; provide that during any period when the minimum interest coverage ratio falls below 1.50x, the interest rate on outstanding loans will increase by two percent and no new acquisitions, discretionary capital expenditures or distributions will be permitted; reduce the minimum value to commitment ratio from 1.75:1.00 to 1.60:1.00; and provide that if the interest coverage ratio does not exceed 3.0x, we may not repurchase our common stock. We incurred fees of about $5,800,000 related to this amendment.
At year-end 2010, our senior credit facility provides for a $125,000,000 term loan and a $175,000,000 revolving line of credit. The term loan includes a prepayment penalty for payments in excess of $25,000,000 prior to February 6, 2012. The revolving line of credit may be prepaid at any time without penalty. At year-end 2010, net unused borrowing capacity under our senior credit facility is calculated as follows:
     
  Senior
 
  Credit Facility 
  (In thousands) 
 
Borrowing base availability $300,000 
Less: borrowings  (125,000)
Less: letters of credit  (3,007)
     
Unused borrowing capacity $171,993 
     
Our unused borrowing capacity during 2010 ranged from a high of $200,902,000 to a low of $149,993,000. This facility is used primarily to fund our operating cash needs, which fluctuate due to timing of residential real estate, undeveloped land sales, mineral lease bonus payments, timber sales, payment of payables and expenses and capital expenditures.
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 2010, 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.
The following table details our compliance with the financial covenants calculated as provided in the senior credit facility:
Financial Covenant
Requirement
Year-End 2010
Interest Coverage Ratio(a)
³ 1.05:1.04.17:1.0
Revenues/Capital Expenditures Ratio(b)
³ 1.00:1.06.26:1.0
Total Leverage Ratio(c)
£ 40%19.6%
Net Worth(d)
> $411 million$503 million
Collateral Value to Loan Commitment Ratio(e)
³ 1.60:1.02.39:1.0
(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 excluding loan fees. 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


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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 by which consolidated total assets exceeds consolidated total liabilities. At year-end 2010, the requirement is $411,323,000, computed as: $409,500,000, 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.
(e)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.
To make additional investments, acquisitions, or distributions, we must maintain available liquidity equal to the lesser of $35,000,000 or 10% of the aggregate commitments in place. At year-end 2010, this requirement was $30,000,000 resulting in approximately $176,586,000 in available liquidity, which represents our unused borrowing capacity under our senior credit facility plus unrestricted cash and cash equivalents. The failure to maintain such minimum liquidity does not constitute a default or event of default of our senior credit facility.
Contractual Obligations
At year-end 2010, contractual obligations consist of:
                     
  Payments Due or Expiring by Year 
  Total  2011  2012-13  2014-15  Thereafter 
  (In thousands) 
 
Debt(a)
 $221,589  $47,506  $16,916  $127,231  $29,936 
Interest payments on debt  51,300   10,993   20,896   16,640   2,771 
Purchase obligations  11,392   11,392   —   —   — 
Operating leases  22,390   2,621   4,828   3,979   10,962 
Venture contributions  1,708   1,708   —   —   — 
                     
Total $308,379  $74,220  $42,640  $147,850   43,669 
                     
(a)Items included in our balance sheet. In 2011, payments due or expiring include about $34,366,000 in consolidated venture borrowings which are non-recourse to us. We believe it is likely that the venture will be able to extend or refinance these borrowings in 2011; however, there is no assurance that this can be done. We do not believe that the ultimate resolution of this matter will have a significant effect on our earnings or financial position.
Our sources of funding are our operating cash flows and borrowings under our senior credit facility. Our contractual obligations due in 2011 will likely be paid from operating cash flows and from borrowings under our senior credit facility.
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 assuming that the outstanding balances and interest rates that existed at year-end 2010 remain constant through maturity.


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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, equipment and ground water leases. In second quarter 2008, we entered into a10-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 2010, the remaining contractual obligation is $10,207,000. Also included in operating leases is a long-term timber lease of over 16,000 acres that has a remaining lease term of 15 years and a remaining contractual obligation of $8,793,000 and about 17,800 acres of ground water leases with remaining contractual obligations of $940,000.
Venture contributions 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.
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 2010, our off-balance sheet unfunded arrangements, excluding contractual interest payments, purchase obligations, operating lease obligations and venture contributions included in the table of contractual obligations, consist of:
                     
  Payments Due or Expiring by Year 
  Total  2011  2012-13  2014-15  Thereafter 
  (In thousands) 
 
Performance bonds $5,820  $5,325  $475  $20  $— 
Standby letters of credit  3,007   3,000   7   —   — 
Recourse obligations  3,231   751   131   1,057   1,292 
                     
Total $12,058  $9,076  $613  $1,077  $1,292 
                     
Performance bonds, letters of credit and recourse obligations are primarily for our real estate development activities and include $2,476,000 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.
At year-end 2010, we participate in three partnerships that have $72,364,000 of borrowings classified as current maturities. These partnerships have total assets of $55,262,000 and other liabilities of $11,799,000. These partnerships are managed by third parties who intend to extend or refinance these borrowings; however, there is no assurance that this can be done. Although these borrowings may be guaranteed by third parties, we may under certain circumstances elect or be required to provide additional equity to these partnerships. We do not believe that the ultimate resolution of these matters will have a significant effect on our earnings or financial position. Our investment in these partnerships is $3,139,000 at year-end 2010. These three partnerships are variable interest entities.
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 $88,528,000 invested in Cibolo Canyons at year-end 2010.


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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 has been provided.
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 receipts 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 in January 2010.
In fourth quarter 2010, we received approximately $1,000,000 from the SPID related to our share of hotel occupancy revenues and other resort sales revenues collected as taxes by the SPID in 2010. We accounted for this as a reduction of our investment. At year-end 2010, we have $41,869,000 invested in the resort development.
In fourth quarter 2010, we received payment in full plus interest for the $10,000,000 loan to a third-party equity investor in the resort development which was funded in first quarter 2010.
Mixed-Use Development
The mixed-use development we own consists of 2,100 acres planned to include about 1,400 residential lots and about 220 commercial acres designated for multifamily and retail uses, of which 640 lots and 64 commercial acres have been sold through year-end 2010.
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 2010, we have submitted and received approval for reimbursement of about $57,322,000 of infrastructure costs and have received reimbursements totaling $20,770,000, of which $500,000 was received in 2010 and $20,270,000 was received in 2009. At year-end 2010, we have $36,552,000 in approved and pending reimbursements, excluding interest.
Since the amount of each reimbursement 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 uncertainty as to the amount and timing of reimbursements under this agreement. We expect to recover our investment from lot and tract sales and reimbursement of approved infrastructure costs from the SPID. 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 2010, we have $46,659,000 invested in the mixed-use development.


47

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 1 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 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 and historical trends.
• 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 and permanent 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. In addition, when we believe a tax position is supportable but the outcome uncertain, we include the item in our tax return but do not recognize the related benefit in our provision for taxes. Instead, we record a reserve for unrecognized tax benefits, which represents our expectation of the most likely outcome considering the technical merits and specific facts of the position. Changes to liabilities are only made when an event occurs that changes the most likely outcome, such as settlement with the relevant tax authority, expiration of statutes of


48

limitations, changes in tax law, or recent court rulings. Adjustments to temporary differences, permanent differences or uncertain tax positions could materially impact our financial position, cash flow and results of operation.
• 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 four new accounting pronouncements in 2010, the adoption of which did not have a significant effect on our earnings or financial position. There are two pending accounting pronouncements that we will be required to adopt in 2011 and adoption is not anticipated to have a significant effect on our earnings or financial position. Please read Note 2 — 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 our variable-rate debt, which was $191,658,000 at year-end 2010 and $213,195,000 at year-end 2009. In 2009, our outstanding variable rate debt includes the effect of a $100,000,000 notional amount interest rate swap, which matured on March 1, 2010.
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 2010, with comparative year-end 2009 information. 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
 2010 2009
  (In thousands)
 
+2% $(3,728) $(4,100)
+1%  (1,917)  (2,132)
−1%  1,917   2,132 
−2%  3,833   4,264 


49

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 onpage F-1, and are attached beginning onpage F-1 to this Annual Report onForm 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 inRules 13a-15(e) and15d-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 onForm 10-K onpage F-2.
(c) Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined inRules 13a-15(f) and15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.Other Information.
None.


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PART III
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  63   2007  Non-Executive Chairman of Forestar Group Inc.
Louis R. Brill  69   2007  Former Chief Accounting Officer of Temple-Inland Inc.
Kathleen Brown  65   2007  Chairman of Investment Banking for the Midwest Region, Goldman, Sachs & Co.
William G. Currie  63   2007  Chairman of Universal Forest Products, Inc.
James M. DeCosmo  52   2007  President and Chief Executive Officer of Forestar Group Inc.
Michael E. Dougherty  70   2008  Founder and Chairman of Dougherty Financial Group LLC
James A. Johnson  67   2007  Vice Chairman of Perseus LLC
William C. Powers, Jr.   64   2007  President of The University of Texas at Austin
James A. Rubright  64   2007  Chairman and Chief Executive Officer of Rock-Tenn Company
Richard M. Smith  65   2007  President of Pinkerton Foundation
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 thisForm 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 is incorporated by reference from our Definitive Proxy Statement.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Equity Compensation Plan InformationBusiness Segments
 
We have only one equity compensation plan, the Forestar 2007 Stock Incentive Plan, which was approved bymanage 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 
operations through three business segments:
 
(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.Real estate,
 
(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 aboveMineral resources, 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.Fiber resources.
We evaluate performance based on earnings before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures and net income (loss) attributable to noncontrolling interests. Unallocated items consist of general and administrative expenses, 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 and home builder 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 220,000 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 167,000 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 income producing properties, primarily a hotel and a multifamily property.
In addition, on December 29, 2010, we acquired a 401 unit, Class A multifamily property in Houston, Texas for $49,100,000. Results of operations for this acquisition, included in income producing properties, were not significant in 2010. Pro forma real estate segment earnings assuming this acquisition occurred at the beginning of 2009 would not be significantly different than those reported.


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Performance GraphA summary of our real estate results follows:
             
  For the Year 
  2010  2009  2008 
  (In thousands) 
 
Revenues $68,269  $94,436  $98,859 
Cost of sales  (46,225)  (46,307)  (55,131)
Operating expenses  (28,598)  (34,319)  (35,898)
             
   (6,554)  13,810   7,830 
Equity in earnings (loss) of unconsolidated ventures  2,629   (8,161)  3,480 
Less: Net income attributable to noncontrolling interests  (709)  (2,467)  (2,235)
             
Segment (loss) earnings $(4,634) $3,182  $9,075 
             
 
We composed an indexIn 2010, cost of our peers consistingsales includes $9,042,000 in non-cash impairment charges principally associated with residential development projects located near Atlanta, Georgia and Fort Worth, Texas. Operating expenses principally consist of Avatar Holdings Inc., Consolidated-Tomoka Land Co., Tejon Ranch Co.$7,205,000 in property taxes, $6,188,000 in employee compensation and The St. Joe Company (Peer Index). Our cumulative total shareholder return following our spin-off compared to the Russell 2000 Indexbenefits, $4,471,000 in professional services, $2,826,000 in depreciation, $1,716,000 in community maintenance and to the Peer Index was as shown$1,142,000 in the following graph (assuming $100 invested on January 1, 2008):marketing and advertising.
 
In 2010, equity in earnings (loss) of unconsolidated ventures includes about $4,869,000 in gains that were previously deferred by us due to our continuing involvement with the property. In fourth quarter 2010, the property was sold to a third party. In addition, equity in earnings (loss) of unconsolidated ventures includes $2,229,000 in non-cash impairment charges primarily related to a commercial real estate project located near the Texas gulf coast.
 
PursuantIn 2009, cost of sales includes $5,718,000 in non-cash impairment charges related principally to SEC rules, returnsa residential condominium project located in Austin, Texas. Operating expenses principally consist of each$9,115,000 in property taxes, $6,112,000 in employee compensation and benefits, $3,532,000 in professional services, $2,167,000 in depreciation, $2,054,000 in community maintenance, $1,212,000 in marketing and advertising and $3,702,000 related to environmental remediation charges.
In 2009, equity in earnings (loss) of the companiesunconsolidated ventures includes $4,901,000 in the Peer Index are weighted accordingnon-cash impairment charges related to the respective company’s stock market capitalization at the beginningtwo residential real estate projects located in Tampa, Florida and an equity investment in an unconsolidated venture.
In 2008, cost of each period forsales includes $3,000,000 in non-cash 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, $2,909,000 in professional services, $2,076,000 in depreciation, $1,342,000 in community maintenance, $2,345,000 in marketing and advertising, and $3,007,000 related to environmental remediation activities. Segment earnings benefited from $943,000 in recovered project infrastructure costs from an improvement district related to a project in Texas in which a return is indicated.we no longer have an investment.
Revenues in our owned and consolidated ventures consist of:
             
  For the Year 
  2010  2009  2008 
  (In thousands) 
 
Residential real estate $24,540  $27,677  $38,110 
Commercial real estate  352   793   9,440 
Undeveloped land  20,111   46,580   26,005 
Income producing properties  21,225   18,214   21,488 
Other  2,041   1,172   3,816 
             
Total revenues $68,269  $94,436  $98,859 
             


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Item 6.Selected Financial Data.
Units sold in our owned and consolidated ventures consist of:
 
                     
  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%
             
  For the Year
  2010 2009 2008
 
Residential real estate:            
Lots sold  442   483   812 
Average price per lot sold $55,076  $53,469  $45,712 
Commercial real estate:            
Acres sold  2   2   55 
Average price per acre sold $146,047  $433,406  $172,346 
Undeveloped land:            
Acres sold  5,812   18,204   5,577 
Average price per acre sold $3,460  $2,550  $4,663 
Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. In 2010 and 2009, residential real estate revenues declined principally as a result of decreased demand for single-family lots due to the overall decline in the housing industry. 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 decrease in commercial real estate revenues in 2010 and 2009 is attributable to limited availability of commercial real estate acquisition and development mortgages to potential third-party purchasers.
In 2010, undeveloped land sales decreased due to current market conditions significantly influenced by limited availability of financing and alternate investment options to buyers in the marketplace. However, average price per acre sold increased principally as a result of selling about 700 acres of land in the entitlement process in Georgia for about $8,200 per acre. As market conditions for residential and commercial real estate sales began to deteriorate in 2008, we allocated additional internal resources and focused our strategic marketing efforts toward sale of undeveloped land through our retail land sales program. 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.


36

Information about our real estate projects and our real estate ventures follows:
         
  Year-End
  2010 2009
 
Owned and consolidated ventures:
        
Entitled, developed and under development projects        
Number of projects  54   54 
Residential lots remaining  17,780   20,186 
Commercial acres remaining  1,774   1,702 
Undeveloped land and land in the entitlement process        
Number of projects  18   19 
Acres in entitlement process  29,670   30,370 
Acres undeveloped(a)
  168,724   198,063 
Ventures accounted for using the equity method:
        
Ventures’ lot sales (for the year)        
Lots sold  362   159 
Average price per lot sold $42,602  $60,589 
Ventures’ entitled, developed and under development projects        
Number of projects  22   21 
Residential lots remaining  9,634   8,961 
Commercial acres sold (for the year)  15   4 
Average price per acre sold $81,318  $188,144 
Commercial acres remaining  590   645 
Ventures’ undeveloped land and land in the entitlement process        
Number of projects  —   2 
Acres in entitlement process  —   1,080 
Acres sold (for the year)  —   1 
Average price per acre sold $—  $10,000 
Acres undeveloped  5,731   5,517 
 
 
(a)Beginning in 2006, we eliminated our historical one-month lag in accountingIncludes 55,000 acres classified as assets held 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.sale.
Mineral Resources
We own directly or through ventures about 606,000 net acres of mineral interests. Our mineral resources segment revenues are principally derived from royalties and other lease revenues from our mineral interests located principally in Texas, Louisiana, Georgia and Alabama. At year-end 2010, we have about 88,000 net acres under lease and about 30,000 net acres held by production.
In addition, on December 22, 2010, we acquired a water resources company for $12,000,000. It is focused on providing sustainable volumes of ground water to central Texas and the Interstate-35 growth corridor and its principal assets are approximately 17,800 acres of ground water leases. Results of operations for this acquisition were not significant in 2010. Pro forma mineral resources segment earnings assuming this acquisition had occurred at the beginning of 2009 would not be significantly different from those reported.


37

A summary of our mineral resources results follows:
             
  For the Year 
  2010  2009  2008 
  (In thousands) 
 
Revenues $24,790  $36,256  $47,671 
Cost of sales  (1,097)  (922)  (1,714)
Operating expenses  (2,982)  (3,354)  (3,043)
             
   20,711   31,980   42,914 
Equity in earnings of unconsolidated ventures  2,072   390   1,162 
             
Segment earnings $22,783  $32,370  $44,076 
             
Cost of sales represents 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 2010, operating expenses principally consist of $1,182,000 in employee compensation and benefits, $566,000 in professional services, $269,000 in depreciation, $255,000 in property taxes and $244,000 in information technology.
In 2009, operating expenses principally consist of $1,299,000 in employee compensation and benefits, $872,000 in professional services, $184,000 in depreciation, $301,000 in property taxes and $257,000 in information technology.
In 2008, operating expenses principally consist of $911,000 in employee compensation and benefits, $1,251,000 in professional services as we resourced our operations with a contract workforce while recruiting our minerals team, and $250,000 in property taxes.
In 2010 and 2009, equity in earnings of unconsolidated ventures includes our share of royalty revenue from new wells that began producing from the Barnett Shale natural gas formation. In 2008, 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.
Revenues consist of:
             
  For the Year 
  2010  2009  2008 
  (In thousands) 
 
Royalties $13,724  $11,910  $21,639 
Other lease revenues  11,066   24,346   26,032 
             
Total revenues $24,790  $36,256  $47,671 
             
In 2010, royalty revenues increased as a result of higher oil prices and oil production partially offset by decreases in natural gas production in owned and consolidated properties. Increased oil prices contributed $1,873,000 while production increases contributed $466,000. The production increase primarily relates to new oil wells commencing production in late 2009 and early 2010. At year-end 2010, there were 494 active wells owned and operated by others on our leased mineral acres.
In 2010, other lease revenues include $7,655,000 in lease bonus payments as a result of leasing about 16,900 net mineral acres for an average of $453 per acre and $2,168,000 related to delay rental payments. In addition, other lease revenues include about $1,126,000 as a result of an option exercised to extend an existing lease on over 3,200 acres.
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


38

commencing production. At year-end 2009, there were 472 active wells owned and operated by others on our leased mineral acres.
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. At year-end 2008, there were 439 active wells owned and operated by others on our leased mineral acres.
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 Bossier-Haynesville natural gas formations.
Oil and natural gas produced and average unit prices related to our royalty and non-operating working interests follows:
             
  For the Year
  2010 2009 2008
 
Consolidated entities:
            
Oil production (barrels)  115,400   107,200   87,900 
Average price per barrel $73.09  $56.85  $106.66 
Natural gas production (millions of cubic feet)  1,223.6   1,411.6   1,363.4 
Average price per thousand cubic feet $4.32  $4.12  $8.76 
Our share of ventures accounted for using the equity method:
            
Natural gas production (millions of cubic feet)  572.8   82.1   — 
Average price per thousand cubic feet $4.12  $3.80  $— 
             
Total consolidated and our share of equity method ventures:
            
Oil production (barrels)  115,400   107,200   87,900 
Average price per barrel $73.09  $56.85  $106.66 
Natural gas production (millions of cubic feet)  1,796.4   1,493.7   1,363.4 
Average price per thousand cubic feet $4.26  $4.10  $8.76 
Our share of ventures natural gas production increased as a result of 16 wells that began producing from the Barnett Shale natural gas formation in 2010.
A summary of our mineral acres(a) at year-end 2010 follows:
                 
        Held By
    
State
 Unleased  Leased(b)  Production(c)  Total(d) 
  (Net acres) 
 
Texas  157,000   70,000   25,000   252,000 
Louisiana  121,000   18,000   5,000   144,000 
Georgia  168,000   —   —   168,000 
Alabama  40,000   —   —   40,000 
California  1,000   —   —   1,000 
Indiana  1,000   —   —   1,000 
                 
   488,000   88,000   30,000   606,000 
                 
(a)Includes ventures.
 
(b)In 2009, gain on sale of assets represents Georgia and Alabama timberland salesIncludes leases in accordance with our near-term strategic initiatives.primary lease term or for which a delayed rental payment has been received.
 
(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 distributedAcres being held by Temple-Inland on December 28, 2007.production are producing oil or natural gas in paying quantities.


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Item 7.(d)Management’s DiscussionTexas, Louisiana, California and AnalysisIndiana net acres are calculated as the gross number of Financial Conditionsurface acres multiplied by our percentage ownership of the mineral interest. Alabama and ResultsGeorgia net acres are calculated as the gross number of Operations.surface acres multiplied by our estimated percentage ownership of the mineral interest based on county sampling. Excludes 463 net mineral acres located in Colorado including 382 acres leased and 26 acres held by production.
 
In addition, we have water interests in about 1,600,000 acres, including a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from approximately 1,400,000 acres in Texas, Louisiana, Georgia and Alabama and about 17,800 acres of ground water leases in central Texas. We have not received significant income from these interests.
Forward-Looking StatementsFiber Resources
 
This Annual ReportOur fiber resources segment focuses principally onForm 10-K the management of our timber holdings and other materialsrecreational leases. We have over 197,000 acres of timber, primarily in Georgia, and about 18,000 acres of timber under lease. Our fiber resources segment revenues are principally derived from the sales of wood fiber from our land and leases for recreational uses. We sold about 30,000 acres of undeveloped land in 2010 and over 110,000 acres in 2009 through our retail land sales program and our strategic initiatives. In addition, we have filed or may file with the Securitiesare postponing harvest plans and Exchange Commission contain “forward-looking statements” within the meaningactively marketing about 55,000 acres classified as held for sale. As a result of the federal securities laws. These forward-looking statementsreduced acreage from executing these land sales, future segment revenues and earnings are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “likely,” “intend,” “may,” “plan,” “expect,” and similar expressions, including referencesanticipated 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 onForm 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.be lower.
 
Any forward-looking statement speaks only asA summary of the date onour fiber resources results follows:
             
  For the Year 
  2010  2009  2008 
  (In thousands) 
 
Revenues $8,301  $15,559  $13,192 
Cost of sales  (1,640)  (3,396)  (3,357)
Operating expenses  (2,274)  (2,728)  (2,611)
             
   4,387   9,435   7,224 
Other operating income  671   187   1,672 
             
Segment earnings $5,058  $9,622  $8,896 
             
In 2010, operating expenses principally consist of $1,115,000 in employee compensation and benefits, $424,000 in facility and long-term timber lease costs and $342,000 in professional services.
In 2009, operating expenses principally consist of $1,241,000 in employee compensation and benefits, $544,000 in facility and long-term timber lease costs and $471,000 in professional services.
In 2008, operating expenses principally consist of $1,036,000 related to employee compensation and benefits, $418,000 in facility and long-term timber lease costs and $652,000 related to professional services.
In 2010, 2009 and 2008, other operating income principally reflects gains from partial termination of a timber lease related to land sold from Ironstob LLC. We have a 58 percent ownership interest in this venture, 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 occurrencecontrols over 16,000 acres of unanticipated events.undeveloped land near Atlanta, Georgia.
Revenues consist of:
             
  For the Year 
  2010  2009  2008 
  (In thousands) 
 
Fiber $6,491  $13,478  $10,987 
Recreational leases and other  1,810   2,081   2,205 
             
Total revenues $8,301  $15,559  $13,192 
       ��     


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Fiber sold consists of:
             
  For the Year
  2010 2009 2008
 
Pulpwood tons sold  392,900   810,100   917,000 
Average pulpwood price per ton $9.93  $8.53  $8.52 
Sawtimber tons sold  144,300   331,300   162,900 
Average sawtimber price per ton $17.94  $19.82  $19.51 
Total tons sold  537,200   1,141,400   1,079,900 
Average price per ton $12.08  $11.81  $10.17 
In 2010, total tons sold decreased due to reduction in harvest volume as a result of selling over 140,000 acres of timberland in 2010 and 2009 and postponing harvest plans on about 55,000 acres classified as held for sale. In 2010 and 2009, total price per ton increased due to sales including a higher proportional mix of sawtimber versus pulpwood. In 2008, average price per ton was lower because we harvested and sold higher levels of pulpwood. The majority of our sales were to Temple-Inland at market prices.
Information about our recreational leases follows:
             
  For the Year
  2010 2009 2008
 
Average recreational acres leased  208,100   249,200   287,200 
Average price per leased acre $8.32  $8.25  $7.44 
BackgroundItems Not Allocated to Segments
 
Prior to December 28, 2007, we wereUnallocated items represent income and expenses managed on a wholly-owned subsidiarycompany-wide basis and include general and administrative expenses, share-based compensation, gain on sale of Temple-Inland Inc. On December 28, 2007, Temple-Inland distributedassets, interest expense and other non-operating income and expense.
General and administrative expenses principally consist 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 2010, general and administrative expenses principally consist of $5,480,000 in employee compensation and benefits, $3,324,000 in professional services, $1,480,000 in depreciation expense, $1,235,000 in insurance, $1,214,000 in facilities expense and $996,000 in director fees.
In 2009, general and administrative expenses principally consist of $5,687,000 in employee compensation and benefits, $6,363,000 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 the issuedsale of 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, $1,143,000 in facilities expense and outstanding shares$1,111,000 in director fees.
In 2008, general and administrative expenses principally consist of $6,846,000 in employee compensation and benefits, $3,896,000 in professional services, $1,445,000 in depreciation expense, $1,542,000 in insurance, $689,000 in facilities expense and $1,100,000 in director fees.
Our share-based compensation expense fluctuates because a significant portion of our awards are cash settled and as a result are affected by changes in the market price of our common stock. In 2009, the increase in share-based compensation was due to our higher stock to its shareholders in a transaction commonly referred to as a spin-off.
Strategy
Our strategy is to maximizeprice and grow long-term shareholder value through:increased number of cash-settled awards.
• 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, weaccordance with our previously announced our near-term strategic initiatives to enhance shareholder value, by generating significant cash flow, principallyin 2010, we recognized gains of $28,607,000 resulting from the sale of about 175,00024,000 acres of highertimber and better use (HBU) timberland. Intimberland in Georgia, Alabama and Texas for $38,778,000, and in 2009, we soldrecognized gains of


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$104,047,000 resulting from the sale of about 95,000 acres of timber and timberland in Georgia and Alabama for $158,603,000$158,603,000.
In 2010, interest expense decreased principally due to lower interest rates as a result of the maturity of our interest rate swap agreement and decreased amortization of prepaid loan fees due to refinancing and extending our senior credit facility. In 2009, interest expense decreased as result of lower debt levels. In 2008, the increase in two transactionsinterest expense was due to Hancock Timber Resource Grouphigher average debt balances and St. Regis Paper Company, LLC generating combined nethigher borrowing costs.
Income Taxes
Our effective tax rate and the benefit attributable to noncontrolling interests was 30 percent and 3 percent in 2010, 37 percent and 1 percent in 2009 and 27 percent and 4 percent in 2008. Our 2010 rate includes significant benefits for percentage depletion and charitable contributions associated with donated conservation easements while our 2009 and 2008 rates 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.
We have not provided a valuation allowance for our deferred tax asset because we believe it is likely it will be recoverable in future periods.
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 $153,851,000,real estate and timber, the cash flow from minerals and income producing 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 were principally usedcan 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 reduce debtoperating needs, the timing of sales of real estate and pay taxes, resultingtimber, 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, income producing properties, 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 $13,551,000 in a combined gain on2010, $142,120,000 in 2009 and ($51,889,000) in 2008.
In 2010, operating cash flow was adversely affected by lower operating income primarily due to difficult conditions in the housing industry and lower proceeds from the sale of assets in accordance with our near-term strategic initiatives. Expenditures for real estate development were slightly less than non-cash cost of $104,047,000.real estate sales due to a reduction in development. In 2010, we sold about 24,000 acres of timber and timberland in Georgia, Alabama and Texas generating net proceeds of $38,040,000, of which $24,392,000 was held by a qualified intermediary under IRC Section 1031. At year-end 2010, we have about $1,347,000 remaining with the qualified intermediary pending reinvestment in qualifying real estate.
 
ResultsIn 2009, the sale of Operationsabout 95,000 acres of timber and timberland in Georgia and Alabama generated net proceeds of $153,851,000. Expenditures for real estate development slightly exceeded non-cash cost of sales due to our capital commitment to the Years Ended 2009, 2008resort at Cibolo Canyons and 2007
Net incomeour development of existing real estate projects, principally in the major markets of Texas. We invested $18,857,000 in Cibolo Canyons, of which $16,235,000 was $59,107,000 or $1.64 per diluted shareinvested in 2009, compared with $11,974,000 or $0.33 per diluted sharethe resort development. We received $24,945,000 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 
             
reimbursements from utility


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Significant aspectsand 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 in 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.
Cash Flows from Investing Activities
Capital contributions to and capital distributions from unconsolidated ventures and business acquisitions 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 2010, net cash (used for) investing activities was ($26,597,000). In fourth quarter 2010, we acquired a 401 unit, Class A multifamily property in Houston, Texas for $49,100,000. We used $23,045,000 of the proceeds held by a qualified intermediary under IRC Section 1031 and $26,500,000 of non-recourse borrowings to fund this acquisition, including closing costs. In addition, we acquired a water resources company in central Texas for $12,000,000.
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.
Cash Flows from Financing Activities
In 2010, net cash (used for) financing activities was ($2,639,000) as we repurchased 1,000,987 shares of our common stock for $15,178,000 and incurred $6,304,000 in bank fees primarily related to our amendment and extension of our senior credit facility, which was partially offset by a net increase in our debt of $18,170,000 which is principally due to $26,500,000 in non-recourse borrowings used to finance a 401��unit, Class A multifamily property acquired on December 29, 2010.
In 2009, net cash (used for) financing activities was ($122,823,000) as 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, net cash provided by financing activities was $69,163,000 as 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.
Non-Cash Financial Information
In 2010, our real estate assets decreased by $11,865,000, debt decreased by $13,207,000 and other liabilities increased by $1,342,000 due to lender foreclosure of a lien on a condominium property in Austin, Texas owned by a consolidated variable interest entity. The limited partnership has no other significant assets. The lien secured debt guaranteed by the unrelated general partner who managed day to day operations of the partnership. At year-end 2010, the limited partnership has total liabilities of $3,083,000. The partnership liabilities will be settled as the partnership is liquidated.


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Liquidity and Contractual Obligations
Liquidity
In third quarter 2010, we entered into an amended and restated senior credit facility effecting the following amendments to: extend the maturity date of the revolving loan to August 6, 2013 (with a one-year extension option to August 6, 2014) and of the term loan to August 6, 2015; reduce the revolving loan commitment to $175 million, subject to the ability to increase the aggregate facility by up to $150 million by securing additional commitments; eliminate any additional required commitment reductions during the term of the facility; reduce the interest coverage ratio from 1.75x to 1.05x; provide that during any period when the minimum interest coverage ratio falls below 1.50x, the interest rate on outstanding loans will increase by two percent and no new acquisitions, discretionary capital expenditures or distributions will be permitted; reduce the minimum value to commitment ratio from 1.75:1.00 to 1.60:1.00; and provide that if the interest coverage ratio does not exceed 3.0x, we may not repurchase our common stock. We incurred fees of about $5,800,000 related to this amendment.
At year-end 2010, our senior credit facility provides for a $125,000,000 term loan and a $175,000,000 revolving line of credit. The term loan includes a prepayment penalty for payments in excess of $25,000,000 prior to February 6, 2012. The revolving line of credit may be prepaid at any time without penalty. At year-end 2010, net unused borrowing capacity under our senior credit facility is calculated as follows:
     
  Senior
 
  Credit Facility 
  (In thousands) 
 
Borrowing base availability $300,000 
Less: borrowings  (125,000)
Less: letters of credit  (3,007)
     
Unused borrowing capacity $171,993 
     
Our unused borrowing capacity during 2010 ranged from a high of $200,902,000 to a low of $149,993,000. This facility is used primarily to fund our operating cash needs, which fluctuate due to timing of residential real estate, undeveloped land sales, mineral lease bonus payments, timber sales, payment of payables and expenses and capital expenditures.
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 2010, 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.
The following table details our compliance with the financial covenants calculated as provided in the senior credit facility:
Financial Covenant
Requirement
Year-End 2010
Interest Coverage Ratio(a)
³ 1.05:1.04.17:1.0
Revenues/Capital Expenditures Ratio(b)
³ 1.00:1.06.26:1.0
Total Leverage Ratio(c)
£ 40%19.6%
Net Worth(d)
> $411 million$503 million
Collateral Value to Loan Commitment Ratio(e)
³ 1.60:1.02.39:1.0
(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 excluding loan fees. 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


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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 by which consolidated total assets exceeds consolidated total liabilities. At year-end 2010, the requirement is $411,323,000, computed as: $409,500,000, 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.
(e)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.
To make additional investments, acquisitions, or distributions, we must maintain available liquidity equal to the lesser of $35,000,000 or 10% of the aggregate commitments in place. At year-end 2010, this requirement was $30,000,000 resulting in approximately $176,586,000 in available liquidity, which represents our unused borrowing capacity under our senior credit facility plus unrestricted cash and cash equivalents. The failure to maintain such minimum liquidity does not constitute a default or event of default of our senior credit facility.
Contractual Obligations
At year-end 2010, contractual obligations consist of:
                     
  Payments Due or Expiring by Year 
  Total  2011  2012-13  2014-15  Thereafter 
  (In thousands) 
 
Debt(a)
 $221,589  $47,506  $16,916  $127,231  $29,936 
Interest payments on debt  51,300   10,993   20,896   16,640   2,771 
Purchase obligations  11,392   11,392   —   —   — 
Operating leases  22,390   2,621   4,828   3,979   10,962 
Venture contributions  1,708   1,708   —   —   — 
                     
Total $308,379  $74,220  $42,640  $147,850   43,669 
                     
(a)Items included in our balance sheet. In 2011, payments due or expiring include about $34,366,000 in consolidated venture borrowings which are non-recourse to us. We believe it is likely that the venture will be able to extend or refinance these borrowings in 2011; however, there is no assurance that this can be done. We do not believe that the ultimate resolution of this matter will have a significant effect on our earnings or financial position.
Our sources of funding are our operating cash flows and borrowings under our senior credit facility. Our contractual obligations due in 2011 will likely be paid from operating cash flows and from borrowings under our senior credit facility.
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 assuming that the outstanding balances and interest rates that existed at year-end 2010 remain constant through maturity.


45

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, equipment and ground water leases. In second quarter 2008, we entered into a10-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 2010, the remaining contractual obligation is $10,207,000. Also included in operating leases is a long-term timber lease of over 16,000 acres that has a remaining lease term of 15 years and a remaining contractual obligation of $8,793,000 and about 17,800 acres of ground water leases with remaining contractual obligations of $940,000.
Venture contributions 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.
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 2010, our off-balance sheet unfunded arrangements, excluding contractual interest payments, purchase obligations, operating lease obligations and venture contributions included in the table of contractual obligations, consist of:
                     
  Payments Due or Expiring by Year 
  Total  2011  2012-13  2014-15  Thereafter 
  (In thousands) 
 
Performance bonds $5,820  $5,325  $475  $20  $— 
Standby letters of credit  3,007   3,000   7   —   — 
Recourse obligations  3,231   751   131   1,057   1,292 
                     
Total $12,058  $9,076  $613  $1,077  $1,292 
                     
Performance bonds, letters of credit and recourse obligations are primarily for our real estate development activities and include $2,476,000 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.
At year-end 2010, we participate in three partnerships that have $72,364,000 of borrowings classified as current maturities. These partnerships have total assets of $55,262,000 and other liabilities of $11,799,000. These partnerships are managed by third parties who intend to extend or refinance these borrowings; however, there is no assurance that this can be done. Although these borrowings may be guaranteed by third parties, we may under certain circumstances elect or be required to provide additional equity to these partnerships. We do not believe that the ultimate resolution of these matters will have a significant effect on our earnings or financial position. Our investment in these partnerships is $3,139,000 at year-end 2010. These three partnerships are variable interest entities.
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 $88,528,000 invested in Cibolo Canyons at year-end 2010.


46

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 has been provided.
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 receipts 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 in January 2010.
In fourth quarter 2010, we received approximately $1,000,000 from the SPID related to our share of hotel occupancy revenues and other resort sales revenues collected as taxes by the SPID in 2010. We accounted for this as a reduction of our investment. At year-end 2010, we have $41,869,000 invested in the resort development.
In fourth quarter 2010, we received payment in full plus interest for the $10,000,000 loan to a third-party equity investor in the resort development which was funded in first quarter 2010.
Mixed-Use Development
The mixed-use development we own consists of 2,100 acres planned to include about 1,400 residential lots and about 220 commercial acres designated for multifamily and retail uses, of which 640 lots and 64 commercial acres have been sold through year-end 2010.
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 2010, we have submitted and received approval for reimbursement of about $57,322,000 of infrastructure costs and have received reimbursements totaling $20,770,000, of which $500,000 was received in 2010 and $20,270,000 was received in 2009. At year-end 2010, we have $36,552,000 in approved and pending reimbursements, excluding interest.
Since the amount of each reimbursement 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 uncertainty as to the amount and timing of reimbursements under this agreement. We expect to recover our investment from lot and tract sales and reimbursement of approved infrastructure costs from the SPID. 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 2010, we have $46,659,000 invested in the mixed-use development.


47

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 1 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 follow:
2009and 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 segment earnings were negatively impacted by impairment charges principally associated with a residential condominium project located in Austin, Texas, two joint ventureowned 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 located in Tampa, Floridathat are not finished, we must estimate future development costs through completion. Differences between our estimates and an equity investment in an unconsolidated venture. Segment earnings were also negatively impacted by environmental remediation charges.actual results will affect future carrying values and operating results.
 
 • Mineral resources segment earnings declined principally dueImpairment of Long-Lived Assets— Measuring assets for impairment requires estimating future fair values based on our intentions as to lower royalty revenuesholding 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 result of lower natural gasdiscounting 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 oil prices, and tothe projected net operating income for a lesser extent, lower lease bonus revenues from decreased leasing activity and increased infrastructure costs associated with developingspecific property will inevitably change our mineral resources organization.estimates.
 
 • Fiber resources segment earnings increased principally dueShare-Based Compensation— We use the Black-Scholes option pricing model to increased volumesdetermine 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 higherprojected 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 relatedof our peers’ common stock for a period corresponding to a higher mixthe expected life of larger pine sawtimber sold from our Texas forest.the options. Pre-vesting forfeitures are estimated based upon the pool of participants and their expected activity and historical trends.
 
 • GeneralIncome 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 administrative expense includes about $3,200,000 paidstate tax laws. We estimate our actual current tax due and assess temporary and permanent 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. In addition, when we believe a tax position is supportable but the outcome uncertain, we include the item in our tax return but do not recognize the related benefit in our provision for taxes. Instead, we record a reserve for unrecognized tax benefits, which represents our expectation of the most likely outcome considering the technical merits and specific facts of the position. Changes to outside advisors regardingliabilities are only made when an evaluation by our Boardevent occurs that changes the most likely outcome, such as settlement with the relevant tax authority, expiration of Directorsstatutes 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.


48

 • Share-based compensation increased principally duelimitations, changes in tax law, or recent court rulings. Adjustments to temporary differences, permanent differences or uncertain tax positions could materially impact our higher stock pricefinancial position, cash flow and increased numberresults 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.operation.
2008
 
 • Real estate segment earnings declined principally due to a continued decrease inOil and Natural Gas Reserves —The estimation of 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.
• Generalreserve is a significant estimate. On an annual basis, our consulting petroleum engineering firm, with our assistance, prepares estimates of crude oil and administrative expenses increased as a resultnatural 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 costs associated with the continued development of corporate functions as well asstart-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,engineering, geological and an increase in the number of participants ingeophysical information. Oil and natural gas prices are volatile and largely affected by worldwide or domestic production and consumption and are outside our plan.
• Interest expense increased as a result of higher debt levels and higher borrowing costs.control.
 
2007Adopted and Pending Accounting Pronouncements
We adopted four new accounting pronouncements in 2010, the adoption of which did not have a significant effect on our earnings or financial position. There are two pending accounting pronouncements that we will be required to adopt in 2011 and adoption is not anticipated to have a significant effect on our earnings or financial position. Please read Note 2 — 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.• Net income decreased as a result of the overall decline in the housing industryQuantitative 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.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 our variable-rate debt, which was $191,658,000 at year-end 2010 and $213,195,000 at year-end 2009. In 2009, our outstanding variable rate debt includes the effect of a $100,000,000 notional amount interest rate swap, which matured on March 1, 2010.
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 2010, with comparative year-end 2009 information. 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
 2010 2009
  (In thousands)
 
+2% $(3,728) $(4,100)
+1%  (1,917)  (2,132)
−1%  1,917   2,132 
−2%  3,833   4,264 


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Current Market ConditionsForeign Currency Risk
 
Current market conditionsWe 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 onpage F-1, and are attached beginning onpage F-1 to this Annual Report onForm 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 inRules 13a-15(e) and15d-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 single-family residential industry continuereports that we file or submit under the Exchange Act and are effective in ensuring that information required to be difficult, characterizeddisclosed by product oversupply, depressed sales volumesus in the reports that we file or submit under the Exchange Act is accumulated and prices, high unemployment ratescommunicated to our management, including our Chief Executive Officer and low consumer confidence. In 2009, most homebuilders continuedChief Financial Officer, as appropriate 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.allow timely decisions regarding required disclosure.
 
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.(b) Internal control over financial reporting
 
Pulpwood demandManagement’s report on internal control over financial reporting is relatively stableincluded in this Annual Report onForm 10-K onpage F-2.
(c) Changes in Internal Control over Financial Reporting
There have not been any changes in our markets. The average price at which we sold fiber productsinternal control over financial reporting (as such term is up principally duedefined inRules 13a-15(f) and15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our harvesting and selling a higher mixinternal control over financial reporting.
Item 9B.Other Information.
None.


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PART III
Item 10.Directors, Executive Officers and Corporate Governance.
Set forth below is certain information about the members of larger pine sawtimber.our Board of Directors:
           
    Year First
  
    Elected to
  
Name
 
Age
 
the Board
 Principal Occupation
 
Kenneth M. Jastrow, II  63   2007  Non-Executive Chairman of Forestar Group Inc.
Louis R. Brill  69   2007  Former Chief Accounting Officer of Temple-Inland Inc.
Kathleen Brown  65   2007  Chairman of Investment Banking for the Midwest Region, Goldman, Sachs & Co.
William G. Currie  63   2007  Chairman of Universal Forest Products, Inc.
James M. DeCosmo  52   2007  President and Chief Executive Officer of Forestar Group Inc.
Michael E. Dougherty  70   2008  Founder and Chairman of Dougherty Financial Group LLC
James A. Johnson  67   2007  Vice Chairman of Perseus LLC
William C. Powers, Jr.   64   2007  President of The University of Texas at Austin
James A. Rubright  64   2007  Chairman and Chief Executive Officer of Rock-Tenn Company
Richard M. Smith  65   2007  President of Pinkerton Foundation
 
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 thisForm 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 is incorporated by reference from our Definitive Proxy Statement.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
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 (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures and net income (loss) attributable to noncontrolling interests. Unallocated items consist of general and administrative expense,expenses, 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 and home builder 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 251,000220,000 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 188,000167,000 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 commercialincome producing properties, primarily a hotel.hotel and a multifamily property.
In addition, on December 29, 2010, we acquired a 401 unit, Class A multifamily property in Houston, Texas for $49,100,000. Results of operations for this acquisition, included in income producing properties, were not significant in 2010. Pro forma real estate segment earnings assuming this acquisition occurred at the beginning of 2009 would not be significantly different than those reported.


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A summary of our real estate results follows:
 
                        
 For the Year  For the Year 
 2009 2008 2007  2010 2009 2008 
 (In thousands)  (In thousands) 
Revenues $94,436  $98,859  $142,729  $68,269  $94,436  $98,859 
Cost of sales  (46,307)  (55,131)  (75,982)  (46,225)  (46,307)  (55,131)
Operating expenses  (34,319)  (35,898)  (25,201)  (28,598)  (34,319)  (35,898)
              
  13,810   7,830   41,546   (6,554)  13,810   7,830 
Equity in (loss) earnings of unconsolidated ventures  (8,161)  3,480   3,732 
Equity in earnings (loss) of unconsolidated ventures  2,629   (8,161)  3,480 
Less: Net income attributable to noncontrolling interests  (2,467)  (2,235)  (5,771)  (709)  (2,467)  (2,235)
              
Segment earnings $3,182  $9,075  $39,507 
Segment (loss) earnings $(4,634) $3,182  $9,075 
              
In 2010, cost of sales includes $9,042,000 in non-cash impairment charges principally associated with residential development projects located near Atlanta, Georgia and Fort Worth, Texas. Operating expenses principally consist of $7,205,000 in property taxes, $6,188,000 in employee compensation and benefits, $4,471,000 in professional services, $2,826,000 in depreciation, $1,716,000 in community maintenance and $1,142,000 in marketing and advertising.
In 2010, equity in earnings (loss) of unconsolidated ventures includes about $4,869,000 in gains that were previously deferred by us due to our continuing involvement with the property. In fourth quarter 2010, the property was sold to a third party. In addition, equity in earnings (loss) of unconsolidated ventures includes $2,229,000 in non-cash impairment charges primarily related to a commercial real estate project located near the Texas gulf coast.
 
In 2009, cost of sales includes $5,718,000 in non-cash 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$3,532,000 in professional services, $2,167,000 in depreciation, $2,054,000 in community maintenance, and $1,195,000$1,212,000 in marketing and advertising.advertising and $3,702,000 related to environmental remediation charges.
 
In 2009, CL Realty, a ventureequity in which we own a 50 percent interest, recognizedearnings (loss) of unconsolidated ventures includes $4,901,000 in non-cash 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 assetnon-cash 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, $2,909,000 in professional services, $2,076,000 in depreciation, $1,342,000 in community maintenance, $2,345,000 in marketing and advertising, and $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.activities. 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  For the Year 
 2009 2008 2007  2010 2009 2008 
 (In thousands)  (In thousands) 
Residential real estate $27,677  $38,110  $56,731  $24,540  $27,677  $38,110 
Commercial real estate  793   9,440   43,220   352   793   9,440 
Undeveloped land  46,580   26,005   17,939   20,111   46,580   26,005 
Commercial operating properties  18,214   21,488   20,383 
Income producing properties  21,225   18,214   21,488 
Other  1,172   3,816   4,456   2,041   1,172   3,816 
              
Total revenues $94,436  $98,859  $142,729  $68,269  $94,436  $98,859 
              


3335

Units sold in our owned and consolidated ventures consist of:
 
                        
 For the Year  For the Year
 2009 2008 2007  2010 2009 2008
Residential real estate:                     
Lots sold  483   812   1,076   442   483   812 
Average price per lot sold $53,469  $45,712  $51,079  $55,076  $53,469  $45,712 
Commercial real estate:                     
Acres sold  2   55   166   2   2   55 
Average price per acre sold $433,406  $172,346  $260,229  $146,047  $433,406  $172,346 
Undeveloped land:                     
Acres sold  18,204   5,577   2,486   5,812   18,204   5,577 
Average price per acre sold $2,550  $4,663  $6,748  $3,460  $2,550  $4,663 
 
Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. In 2010 and 2009, residential real estate revenues continued to declinedeclined principally 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 revenuerevenues in 2010 and 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.
 
In 2010, undeveloped land sales decreased due to current market conditions significantly influenced by limited availability of financing and alternate investment options to buyers in the marketplace. However, average price per acre sold increased principally as a result of selling about 700 acres of land in the entitlement process in Georgia for about $8,200 per acre. As market conditions for residential and commercial real estate sales continuedbegan 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, inIn 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.


3436

Information about our real estate projects and our real estate ventures follows:
 
                
 Year-End  Year-End
 2009 2008  2010 2009
Owned and consolidated ventures:
              
Entitled, developed and under development projects              
Number of projects  54   57   54   54 
Residential lots remaining  20,186   20,561   17,780   20,186 
Commercial acres remaining  1,702   1,624   1,774   1,702 
Undeveloped land and land in the entitlement process              
Number of projects  19   23   18   19 
Acres in entitlement process  30,370   32,640   29,670   30,370 
Acres undeveloped(a)
  198,063   309,232   168,724   198,063 
Ventures accounted for using the equity method:
              
Ventures’ lot sales (for the year)              
Lots sold  159   248   362   159 
Average price per lot sold $60,589  $57,750  $42,602  $60,589 
Ventures’ entitled, developed and under development projects              
Number of projects  21   21   22   21 
Residential lots remaining  8,961   9,348   9,634   8,961 
Commercial acres sold (for the year)  4   65   15   4 
Average price per acre sold $188,144  $280,609  $81,318  $188,144 
Commercial acres remaining  645   648   590   645 
Ventures’ undeveloped land and land in the entitlement process              
Number of projects  2   2   —   2 
Acres in entitlement process  1,080   1,080   —   1,080 
Acres sold (for the year)  1   486   —   1 
Average price per acre sold $10,000  $6,306  $—  $10,000 
Acres undeveloped  5,517   5,641   5,731   5,517 
 
 
(a)Includes 74,00055,000 acres classified as assets held for sale.
 
Mineral Resources
 
We own directly or through ventures about 620,000606,000 net acres of oil and natural gas mineral interests. Our mineral resources segment is focused on maximizing the valuerevenues are principally derived from royalties and other lease revenues from our oil and natural gas mineral interests located principally in Texas, Louisiana, AlabamaGeorgia and Georgia.Alabama. At year-end 2009,2010, we have about 113,00088,000 net acres under lease and about 27,00030,000 net acres held by production.
 
In addition, on December 22, 2010, we acquired a water resources company for $12,000,000. It is focused on providing sustainable volumes of ground water to central Texas and the Interstate-35 growth corridor and its principal assets are approximately 17,800 acres of ground water leases. Results of operations for this acquisition were not significant in 2010. Pro forma mineral resources segment earnings assuming this acquisition had occurred at the beginning of 2009 would not be significantly different from those reported.


37

A summary of our mineral resources results follows:
 
                        
 For the Year  For the Year 
 2009 2008 2007  2010 2009 2008 
 (In thousands)  (In thousands) 
Revenues $36,256  $47,671  $20,818  $24,790  $36,256  $47,671 
Cost of sales  (922)  (1,714)  —   (1,097)  (922)  (1,714)
Operating expenses  (3,354)  (3,043)  (2,237)  (2,982)  (3,354)  (3,043)
              
  31,980   42,914   18,581   20,711   31,980   42,914 
Equity in earnings of unconsolidated ventures  390   1,162   —   2,072   390   1,162 
              
Segment earnings $32,370  $44,076  $18,581  $22,783  $32,370  $44,076 
              


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Cost of sales representrepresents 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, oil2010, operating expenses principally consist of $1,182,000 in employee compensation and natural gas production severancebenefits, $566,000 in professional services, $269,000 in depreciation, $255,000 in property taxes were reflected as a reduction of revenues.and $244,000 in information technology.
 
In 2009, operating expenses principally consist of $1,299,000 in employee compensation and benefits, $792,000$872,000 in contract labor and contractprofessional services, $184,000 in depreciation, $301,000 in property taxes $260,000and $257,000 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.technology.
 
In 2008, operating expenses principally consist of $1,236,000$911,000 in contract laboremployee compensation and contractbenefits, $1,251,000 in professional 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 2010 and 2009, equity in earnings of unconsolidated ventures includes our share of royalty revenue from new wells that began producing from the Barnett Shale natural gas formation. In 2008, 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  For the Year 
 2009 2008 2007  2010 2009 2008 
 (In thousands)  (In thousands) 
Royalties $11,910  $21,639  $13,114  $13,724  $11,910  $21,639 
Other lease revenues  24,346   26,032   7,704   11,066   24,346   26,032 
              
Total revenues $36,256  $47,671  $20,818  $24,790  $36,256  $47,671 
              
 
Additional information aboutIn 2010, royalty revenues increased as a result of higher oil prices and oil production partially offset by decreases in natural gas production in owned and consolidated properties. Increased oil prices contributed $1,873,000 while production increases contributed $466,000. The production increase primarily relates to new oil wells commencing production in late 2009 and early 2010. At year-end 2010, there were 494 active wells owned and operated by others on 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 
leased mineral acres.
 
In 2010, other lease revenues include $7,655,000 in lease bonus payments as a result of leasing about 16,900 net mineral acres for an average of $453 per acre and $2,168,000 related to delay rental payments. In addition, other lease revenues include about $1,126,000 as a result of an option exercised to extend an existing lease on over 3,200 acres.
(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


38

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.acres.
 
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. At year-end 2008, there were 439 active wells owned and operated by others on our leased mineral acres.
 
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 HaynesvilleBossier-Haynesville natural gas formations.
 
In 2007, other lease revenues include $6,719,000 in lease bonus paymentsOil and natural gas produced and average unit prices related to our royalty and non-operating working interests follows:
             
  For the Year
  2010 2009 2008
 
Consolidated entities:
            
Oil production (barrels)  115,400   107,200   87,900 
Average price per barrel $73.09  $56.85  $106.66 
Natural gas production (millions of cubic feet)  1,223.6   1,411.6   1,363.4 
Average price per thousand cubic feet $4.32  $4.12  $8.76 
Our share of ventures accounted for using the equity method:
            
Natural gas production (millions of cubic feet)  572.8   82.1   — 
Average price per thousand cubic feet $4.12  $3.80  $— 
             
Total consolidated and our share of equity method ventures:
            
Oil production (barrels)  115,400   107,200   87,900 
Average price per barrel $73.09  $56.85  $106.66 
Natural gas production (millions of cubic feet)  1,796.4   1,493.7   1,363.4 
Average price per thousand cubic feet $4.26  $4.10  $8.76 
Our share of ventures natural gas production increased as a result of leasing over 30,100 net mineral acres for an average of $222 per acre and $985,00016 wells that began producing from delay rental payments.the Barnett Shale natural gas formation in 2010.


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A summary of our oil and natural gas mineral acres(a) at year-end 20092010 follows:
 
                                
     Held By
        Held By
   
State
 Unleased Leased(b) Production(c) Total(d)  Unleased Leased(b) Production(c) Total(d) 
 (Net acres)  (Net acres) 
Texas  130,000   103,000   20,000   253,000   157,000   70,000   25,000   252,000 
Louisiana  129,000   8,000   7,000   144,000   121,000   18,000   5,000   144,000 
Georgia  180,000   —   —   180,000   168,000   —   —   168,000 
Alabama  40,000   2,000   —   42,000   40,000   —   —   40,000 
California  1,000   —   —   1,000   1,000   —   —   1,000 
Indiana  1,000   —   —   1,000 
                  
  480,000   113,000   27,000   620,000   488,000   88,000   30,000   606,000 
                  
 
 
(a)Includes ventures.
 
(b)Includes leases in primary lease term only.or for which a delayed rental payment has been received.
 
(c)Acres being held by production are producing oil or natural gas in paying quantities.


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(d)Texas, Louisiana, California and CaliforniaIndiana 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 481463 net mineral acres located in Colorado.Colorado including 382 acres leased and 26 acres held by production.
 
WeIn addition, we have water interestinterests in about 1.6 million1,600,000 acres, including a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from approximately 1.4 million1,400,000 acres in Texas, Louisiana, Georgia and Alabama.Alabama and about 17,800 acres of ground water leases in central Texas. We have not received anysignificant income from this interest.these interests.
 
Fiber Resources
 
Our fiber resources segment focuses principally on the management of our timber holdings.holdings and recreational leases. We have about 227,000over 197,000 acres of timber, primarily in Georgia, and about 18,000 acres of timber under lease. We sellOur fiber resources segment revenues are principally derived from the sales of wood fiber from our land and lease landleases for hunting and other recreational uses. We sold about 30,000 acres of undeveloped land in 2010 and over 110,000 acres in 2009 through our retail land sales program and our strategic initiatives. In accordance with our near-term strategic initiatives,addition, we sold 95,000 acresare postponing harvest plans and intend to sell an additional 74,000actively marketing about 55,000 acres classified as held for sale. As a result of the reduced acreage from executing these initiatives,land sales, future segment revenues and earnings are anticipated to be lower.
 
A summary of our fiber resources results follows:
 
                        
 For the Year  For the Year 
 2009 2008 2007  2010 2009 2008 
 (In thousands)  (In thousands) 
Revenues $15,559  $13,192  $14,439  $8,301  $15,559  $13,192 
Cost of sales  (3,396)  (3,357)  (3,672)  (1,640)  (3,396)  (3,357)
Operating expenses  (2,728)  (2,611)  (5,060)  (2,274)  (2,728)  (2,611)
              
  9,435   7,224   5,707   4,387   9,435   7,224 
Other operating income  187   1,672   2,243   671   187   1,672 
              
Segment earnings $9,622  $8,896  $7,950  $5,058  $9,622  $8,896 
              
In 2010, operating expenses principally consist of $1,115,000 in employee compensation and benefits, $424,000 in facility and long-term timber lease costs and $342,000 in professional services.
 
In 2009, operating expenses principally consistedconsist of $1,241,000 in employee compensation and benefits, $533,000$544,000 in facility and long-term timber lease costs and $224,000$471,000 in timber severance taxes.professional services.
 
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, $418,000 in facility and $600,000long-term timber lease costs and $652,000 related to contractprofessional services. In 2007, operating expenses were allocated to us from Temple-Inland.


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In 20082010, 2009 and 2007,2008, other operating income principally reflects a gaingains from partial termination of a timber lease related to land sold from Ironstob LLC, a venture created in 2007.LLC. We have a 58 percent ownership interest in this venture, which controls aboutover 16,000 acres of undeveloped land near Atlanta, Georgia.
 
Revenues consist of:
 
                        
 For the Year  For the Year 
 2009 2008 2007  2010 2009 2008 
 (In thousands)  (In thousands) 
Fiber $13,478  $10,987  $13,722  $6,491  $13,478  $10,987 
Recreational leases and other  2,081   2,205   717   1,810   2,081   2,205 
              
Total revenues $15,559  $13,192  $14,439  $8,301  $15,559  $13,192 
           ��   


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Fiber sold consists of:
 
                        
 For the Year  For the Year
 2009 2008 2007  2010 2009 2008
Tons sold  1,141,400   1,079,900   1,215,500 
Pulpwood tons sold  392,900   810,100   917,000 
Average pulpwood price per ton $9.93  $8.53  $8.52 
Sawtimber tons sold  144,300   331,300   162,900 
Average sawtimber price per ton $17.94  $19.82  $19.51 
Total tons sold  537,200   1,141,400   1,079,900 
Average price per ton $11.81  $10.17  $11.29  $12.08  $11.81  $10.17 
 
In 2010, total tons sold decreased due to reduction in harvest volume as a result of selling over 140,000 acres of timberland in 2010 and 2009 and postponing harvest plans on about 55,000 acres classified as held for sale. In 2010 and 2009, total price per ton increased due to sales including a higher proportional mix of sawtimber versus pulpwood. In 2008, average price per ton decreasedwas lower 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 informationInformation about our fiber soldrecreational leases 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 
             
  For the Year
  2010 2009 2008
 
Average recreational acres leased  208,100   249,200   287,200 
Average price per leased acre $8.32  $8.25  $7.44 
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 expenseexpenses principally consistsconsist 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 2010, general and administrative expenses principally consist of $5,480,000 in employee compensation and benefits, $3,324,000 in professional services, $1,480,000 in depreciation expense, $1,235,000 in insurance, $1,214,000 in facilities expense and $996,000 in director fees.
In 2009, general and administrative expenseexpenses principally consistsconsist of $5,687,000 in employee compensation and benefits, $4,686,000$6,363,000 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 the sale of 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$1,143,000 in facilities expense and $1,111,000 in director fees.
In 2008, the increase in general and administrative expenses was dueprincipally consist of $6,846,000 in employee compensation and benefits, $3,896,000 in professional services, $1,445,000 in depreciation expense, $1,542,000 in insurance, $689,000 in facilities expense and $1,100,000 in director fees.


38

to increased costs associated with implementing corporate functionsOur share-based compensation expense fluctuates because a significant portion of our awards are cash settled and as a stand-alone public company. In 2007, general and administrative expenses were allocated from Temple-Inland.
result are affected by changes in the market price of our common stock. 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 saleaccordance with our previously announced near-term strategic initiatives to enhance shareholder value, in 2010, we recognized gains of assets of $104,047,000 results$28,607,000 resulting from the sale of about 24,000 acres of timber and timberland in Georgia, Alabama and Texas for $38,778,000, and in 2009, we recognized gains of


41

$104,047,000 resulting from the sale of 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.$158,603,000.
 
In 2010, interest expense decreased principally due to lower interest rates as a result of the maturity of our interest rate swap agreement and decreased amortization of prepaid loan fees due to refinancing and extending our senior credit facility. 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 30 percent and 3 percent in 2010, 37 percent and 1 percent in 2009 and 27 percent and 4 percent in 20082008. Our 2010 rate includes significant benefits for percentage depletion and 31 percent and 5 percent in 2007. Ourcharitable contributions associated with donated conservation easements while 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 thathave not provided a valuation allowance for our effectivedeferred tax rate in 2010asset because we believe it is likely it will be about 37 percent of which about 2 percent will be attributable to noncontrolling interests.recoverable in future periods.
 
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 operatingincome producing 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, income producing properties, 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 $13,551,000 in 2010, $142,120,000 in 2009 and ($51,889,000) in 20082008.
In 2010, operating cash flow was adversely affected by lower operating income primarily due to difficult conditions in the housing industry and ($63,981,000)lower proceeds from the sale of assets in 2007.accordance with our near-term strategic initiatives. Expenditures for real estate development were slightly less than non-cash cost of real estate sales due to a reduction in development. In 2009,2010, we sold about 24,000 acres of timber and timberland in Georgia, Alabama and Texas generating net proceeds fromof $38,040,000, of which $24,392,000 was held by a qualified intermediary under IRC Section 1031. At year-end 2010, we have about $1,347,000 remaining with the qualified intermediary pending reinvestment in qualifying real estate.
In 2009, 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.$153,851,000. Expenditures for real estate development slightly exceeded non-cash cost of sales due to our capital 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 reimbursements from utility


3942

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 forin 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 and business acquisitions 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 2010, net cash (used for) investing activities was ($26,597,000). In fourth quarter 2010, we acquired a 401 unit, Class A multifamily property in Houston, Texas for $49,100,000. We used $23,045,000 of the proceeds held by a qualified intermediary under IRC Section 1031 and $26,500,000 of non-recourse borrowings to fund this acquisition, including closing costs. In addition, we acquired a water resources company in central Texas for $12,000,000.
 
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
 
NetIn 2010, net cash (used for) providedfinancing activities was ($2,639,000) as we repurchased 1,000,987 shares of our common stock for $15,178,000 and incurred $6,304,000 in bank fees primarily related to our amendment and extension of our senior credit facility, which was partially offset by a net increase in our debt of $18,170,000 which is principally due to $26,500,000 in non-recourse borrowings used to finance a 401��unit, Class A multifamily property acquired on December 29, 2010.
In 2009, net cash (used for) financing activities was ($122,823,000) in 2009, $69,163,000 in 2008 and $71,979,000 in 2007. In 2009,as 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, net cash provided by financing activities was $69,163,000 as 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.
 
Non-Cash Financial Information
In 2007, the increase in debt funded expenditures for2010, our real estate developmentassets decreased by $11,865,000, debt decreased by $13,207,000 and acquisitions.other liabilities increased by $1,342,000 due to lender foreclosure of a lien on a condominium property in Austin, Texas owned by a consolidated variable interest entity. The limited partnership has no other significant assets. The lien secured debt guaranteed by the unrelated general partner who managed day to day operations of the partnership. At year-end 2010, the limited partnership has total liabilities of $3,083,000. The partnership liabilities will be settled as the partnership is liquidated.


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Liquidity and Contractual Obligations
 
Liquidity
 
In third quarter 2010, we entered into an amended and restated senior credit facility effecting the following amendments to: extend the maturity date of the revolving loan to August 6, 2013 (with a one-year extension option to August 6, 2014) and of the term loan to August 6, 2015; reduce the revolving loan commitment to $175 million, subject to the ability to increase the aggregate facility by up to $150 million by securing additional commitments; eliminate any additional required commitment reductions during the term of the facility; reduce the interest coverage ratio from 1.75x to 1.05x; provide that during any period when the minimum interest coverage ratio falls below 1.50x, the interest rate on outstanding loans will increase by two percent and no new acquisitions, discretionary capital expenditures or distributions will be permitted; reduce the minimum value to commitment ratio from 1.75:1.00 to 1.60:1.00; and provide that if the interest coverage ratio does not exceed 3.0x, we may not repurchase our common stock. We incurred fees of about $5,800,000 related to this amendment.
At year-end 2009,2010, our senior credit facility provides for a $125,000,000 term loan and a $175,000,000 revolving line of credit. The term loan includes a prepayment penalty for payments in excess of $25,000,000 prior to February 6, 2012. The revolving line of credit may be prepaid at any time without penalty. At year-end 2010, net unused borrowing capacity under our senior credit facility is calculated as follows:
 
        
 Senior
  Senior
 
 Credit Facility  Credit Facility 
 (In thousands)  (In thousands) 
Borrowing base availability $359,335  $300,000 
Less: borrowings  (125,000)  (125,000)
Less: letters of credit  (3,071)  (3,007)
Less: minimum liquidity covenant  (28,703)
      
Unused borrowing capacity $202,561  $171,993 
      


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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 forunused borrowing capacity during 2010 ranged from a $125,000,000 term loan and a $257,700,000 revolving linehigh 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$200,902,000 to a 2 percent LIBOR floor) or Prime plus 2.5 percent. All borrowings under the senior creditlow of $149,993,000. This facility are secured by (a) all timberland and high-value timberland, (b) assignmentsis used primarily to fund our operating cash needs, which fluctuate due to timing 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 ofresidential real estate, to be conveyed provided that borrowing base compliance is maintained.
As a resultundeveloped land sales, mineral lease bonus payments, timber sales, payment 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,payables 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, 2010expenses 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.capital expenditures.
 
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 2009,2010, 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 theThe following table details our compliance with the amended financial covenants calculated as provided in the senior credit facility:
 
     
Financial Covenant
 
Requirement
 Year-End 20092010
 
Interest Coverage Ratio(a)
 ³1.50: 1.05:1.0 7.08:4.17:1.0
Revenues/Capital Expenditures Ratio(b)
 ³1.00:1.0 4.20:6.26:1.0
Total Leverage Ratio(c)
 £40% 19.1%19.6%
Minimum LiquidityNet Worth(d)
 > $29$411 million $252 million
Net Worth(e)
> $403 million$518503 million
Collateral Value to Loan Commitment Ratio(f)(e)
 ³1.75: 1.60:1.0 2.23:2.39:1.0


41

 
(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.expense excluding loan fees. 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


44

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 2009,2010, the requirement is $403,000,000,$411,323,000, computed as: $350,000,000,$409,500,000, 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)(e)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.
 
To make additional investments, acquisitions, or distributions, we must maintain available liquidity equal to the lesser of $35,000,000 or 10% of the aggregate commitments in place. At year-end 2010, this requirement was $30,000,000 resulting in approximately $176,586,000 in available liquidity, which represents our unused borrowing capacity under our senior credit facility plus unrestricted cash and cash equivalents. The failure to maintain such minimum liquidity does not constitute a default or event of default of our senior credit facility.
Contractual Obligations
 
At year-end 2009,2010, contractual obligations consist of:
 
                                        
 Payments Due or Expiring by Year  Payments Due or Expiring by Year 
 Total 2010 2011-12 2013-14 Thereafter  Total 2011 2012-13 2014-15 Thereafter 
 (In thousands)  (In thousands) 
Debt(a)
 $216,626  $175,873  $40,753  $—  $—  $221,589  $47,506  $16,916  $127,231  $29,936 
Interest payments on debt  7,849   7,489   360   —   —   51,300   10,993   20,896   16,640   2,771 
Purchase obligations  4,673   4,673   —   —   —   11,392   11,392   —   —   — 
Operating leases  20,806   2,186   4,058   3,396   11,166   22,390   2,621   4,828   3,979   10,962 
Venture contributions  2,566   2,566   —   —   —   1,708   1,708   —   —   — 
Loan commitments  10,000   10,000   —   —   — 
                      
Total $262,520  $202,787  $45,171  $3,396  $11,166  $308,379  $74,220  $42,640  $147,850   43,669 
                      
 
 
(a)Items included in our balance sheet. In 2010,2011, payments due or expiring include $125,000,000 borrowed under our term loan facilityabout $34,366,000 in consolidated venture borrowings which we have an optionare non-recourse to us. We believe it is likely that the venture will be able to extend or refinance these borrowings in 2011; however, there is no assurance that this can be done. We do not believe that the maturity date through June 2012.ultimate resolution of this matter will have a significant effect on our earnings or financial position.
 
Our sources of funding are our operating cash flows and borrowings under our senior credit facility. Our contractual obligations due in 20102011 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

assuming that the outstanding balances and interest rates that existed at year-end 20092010 remain constant through maturity.


45

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, equipment and equipment.ground water leases. In second quarter 2008, we entered into a10-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 2009,2010, the remaining contractual obligation is $11,397,000.$10,207,000. Also included in operating leases is a long-term timber lease of over 16,000 acres that has a remaining lease term of 1615 years and a remaining contractual obligation of $7,574,000.$8,793,000 and about 17,800 acres of ground water leases with remaining contractual obligations of $940,000.
 
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 2009,2010, our off-balance sheet unfunded arrangements, excluding contractual interest payments, purchase obligations, and operating lease obligations and venture contributions included in the table of contractual obligations, consist of:
 
                                        
 Expiring by Year  Payments Due or Expiring by Year 
 Total 2010 2011-12 2013-14 Thereafter  Total 2011 2012-13 2014-15 Thereafter 
 (In thousands)  (In thousands) 
Performance bonds $6,050  $5,394  $626  $30  $—  $5,820  $5,325  $475  $20  $— 
Standby letters of credit  3,071   3,071   —   —   —   3,007   3,000   7   —   — 
Recourse obligations  3,595   380   462   1,079   1,674   3,231   751   131   1,057   1,292 
                      
Total $12,716  $8,845  $1,088  $1,109  $1,674  $12,058  $9,076  $613  $1,077  $1,292 
                      
 
Performance bonds, letters of credit and recourse obligations are primarily for our real estate development activities and include $1,798,000$2,476,000 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, atAt year-end 2009,2010, we participate in four venturesthree partnerships that have about $77,113,000$72,364,000 of principally non-recourse borrowings maturing in 2010.classified as current maturities. These venturespartnerships have total assets of about $77,500,000$55,262,000 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$11,799,000. These partnerships are managed by third parties who intend to extend or refinance the borrowings maturing in 2010;these borrowings; however, there is no assurance that this can be done. We have no obligationAlthough these borrowings may be guaranteed by third parties, we may under certain circumstances elect or be required to make further capital contributionsprovide additional equity to these ventures.partnerships. 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, ourOur investment in these four ventures, whichpartnerships is $3,139,000 at year-end 2010. These three partnerships are accounted for using the equity method, was approximately $5,600,000. Please read Note 7 — Investment in Unconsolidated Ventures for additional information.variable interest entities.


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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$88,528,000 invested in Cibolo Canyons at year-end 2009.2010.


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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 havehas been provided at year-end 2009.provided.
 
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 Districtspecial 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 receipts 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 onin January 22, 2010.
 
In fourth quarter 2010, we received approximately $1,000,000 from the SPID related to our share of hotel occupancy revenues and other resort sales revenues collected as taxes by the SPID in 2010. We accounted for this as a reduction of our investment. At year-end 2009,2010, we have $42,724,000$41,869,000 invested in the resort development.
 
In addition,fourth quarter 2010, we received payment in January 2010, pursuant to a 2009 commitment, we loanedfull plus interest for the $10,000,000 loan 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 agreementdevelopment which was funded in the event of nonpayment.first quarter 2010.
 
Mixed-Use Development
 
The mixed-use development we own consists of 2,100 acres planned to include about 1,7001,400 residential lots and about 145220 commercial acres designated for multifamily and retail uses, of which 590640 lots and 64 commercial acres have been sold through year-end 2009.2010.
 
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 2009,2010, we have submitted and received approval for reimbursement of about $57,332,000$57,322,000 of infrastructure costs. In 2009, wecosts and have received reimbursements totaling $20,270,000.$20,770,000, of which $500,000 was received in 2010 and $20,270,000 was received in 2009. At year-end 2009,2010, we have about $37,062,000$36,552,000 in approved and pending reimbursements, excluding interest.
 
Since the amount we will be reimbursedof each reimbursement 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 ofWe expect to recover our investment infrom lot and tract sales and reimbursement of approved infrastructure costs from the


44

mixed-use development. SPID. 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 2009,2010, we have $45,080,000$46,659,000 invested in the mixed-use development.


47

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 21 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.activity and historical trends.
 
 • 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 and permanent 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 uponassets. In addition, when we believe a tax position is supportable but the outcome uncertain, we include the item in our analysistax return but do not recognize the related benefit in our provision for taxes. Instead, we record a reserve for unrecognized tax benefits, which represents our expectation of the timingmost likely outcome considering the technical merits and reversalspecific facts of the position. Changes to liabilities are only made when an event occurs that changes the most likely outcome, such as settlement with the relevant tax authority, expiration of statutes of


4548

 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, andlimitations, changes in tax laws. To the extent adjustments are required in any given period; we will include the adjustments in thelaw, or recent court rulings. Adjustments to temporary differences, permanent differences or uncertain tax provision in our financial statements. These adjustmentspositions could materially impact our financial position, cash flow and results of operations.operation.
 
 • 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 10four new accounting pronouncements in 2009,2010, the adoption of which did not have a significant effect on our earnings or financial position. There are two newpending accounting pronouncements that we will be required to adopt in 2010,2011 and we are currently evaluating theadoption is not anticipated to have a significant effect if any, on our earnings or financial position. Please read Note 32 — 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 $191,658,000 at year-end 2010 and $213,195,000 at year-end 2009 and $329,030,000 at year-end 2008.2009. In 2009, and 2008, our outstanding variable rate debt includes the effect of a $100,000,000 notional amount interest rate swap, which expires inmatured on March 1, 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 2009,2010, with comparative year-end 20082009 information.


46

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 At Year-End
Change in Interest Rates
 2009 2008 2010 2009
 (In thousands) (In thousands)
+2% $(4,100) $(4,581) $(3,728) $(4,100)
+1%  (2,132)  (2,290)  (1,917)  (2,132)
−1%  2,132   2,290   1,917   2,132 
−2%  4,264   4,581   3,833   4,264 


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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 onpage F-1, and are attached as pagesbeginning onpage F-1 through F-37, to this Annual Report onForm 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 inRules 13a-15(e) and15d-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 onForm 10-K onpage 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 toThere have not been any changes in 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 controlscontrol over financial reporting related to(as such term is defined inRules 13a-15(f) and15d-15(f) under the Exchange Act) during the period covered by this system and determined that the controls are operating


47

effectively. There were no other changes in fourth quarter 2009report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Item 9B.  Other Information.
 
None.


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PART III
 
Item 10.  Directors, Executive Officers and Corporate Governance.
 
Set forth below is certain information about the members of our Board of Directors:
 
              
   Year First
     Year First
  
   Elected to
     Elected to
  
Name
 
Age
 
the Board
 Principal Occupation 
Age
 
the Board
 Principal Occupation
Kenneth M. Jastrow, II 62 2007 Former Chairman and Chief Executive Officer of Temple-Inland Inc. 63 2007 Non-Executive Chairman of Forestar Group Inc.
Louis R. Brill 68 2007 Former Chief Accounting Officer of Temple-Inland Inc. 69 2007 Former Chief Accounting Officer of Temple-Inland Inc.
Kathleen Brown 64 2007 Senior Advisor, Goldman, Sachs & Co. 65 2007 Chairman of Investment Banking for the Midwest Region, Goldman, Sachs & Co.
William G. Currie 62 2007 Executive Chairman of Universal Forest Products, Inc. 63 2007 Chairman of Universal Forest Products, Inc.
James M. DeCosmo 51 2007 President and Chief Executive Officer of Forestar Group Inc. 52 2007 President and Chief Executive Officer of Forestar Group Inc.
Michael E. Dougherty 69 2008 Chairman of Dougherty Financial Group LLC 70 2008 Founder and Chairman of Dougherty Financial Group LLC
James A. Johnson 66 2007 Vice Chairman of Perseus LLC 67 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 64 2007 President of The University of Texas at Austin
James A. Rubright 63 2007 Chairman and Chief Executive Officer of Rock-Tenn Company 64 2007 Chairman and Chief Executive Officer of Rock-Tenn Company
Richard M. Smith 64 2007 Chairman of Newsweek 65 2007 President of Pinkerton Foundation
 
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 thisForm 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 inis incorporated by reference from our Definitive Proxy Statement to be filed in connection with our 2010 annual meeting of stockholders and is incorporated herein by reference.Statement.
 
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
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 2010 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  2,371,547  $21.86   2,830,653 
Equity compensation plans not approved by security holders  None   None   None 
Total  2,371,547  $21.86   2,830,653 


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(1)Includes approximately 1,242,000 issuable to personnel of Temple-Inland and the other spin-off entity resulting from the equitable adjustment of Temple-Inland equity awards in connection with our spin-off.
(2)Includes approximately 96,000 equity-settled restricted stock units, which are excluded from the calculation of weighted-average exercise price.
The remaining information required by this item will be contained inis incorporated by reference from our Definitive Proxy Statement to be filed in connection with our 2010 annual meeting of stockholders and is incorporated herein by reference.Statement.


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Item 13.  Certain Relationships and Related Transactions, and Director Independence.
 
The information required by this item will be contained inis incorporated by reference from our Definitive Proxy Statement to be filed in connection with our 2010 annual meeting of stockholders and is incorporated herein by reference.Statement.
 
Item 14.  Principal Accountant Fees and Services.
 
The information required by this item will be contained inis incorporated by reference from our Definitive Proxy Statement to be filed in connection with our 2010 annual meeting of stockholders and is incorporated herein by reference.Statement.
 
PART IV
 
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 pagesbeginning onpage F-1 through F-37 to this Annual Report onForm 10-K.
 
(2) Financial Statement Schedules
 
Schedule III — Consolidated Real Estate and Accumulated Depreciation is attached as pagesbeginning onpage S-1 throughS-6 to this Annual Report onForm 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 onForm 10-K.
 
(b) Exhibits
 
        
Exhibit
Exhibit
  Exhibit
  
Number
Number
 
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 onForm 8-K filed with the Commission on December 11, 2007).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 onForm 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 onForm 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 onForm 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 onForm 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 onForm 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 onForm 8-K filed with the Commission on February 19, 2008).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 onForm 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 onForm 8-K filed with the Commission on December 11, 2007).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 onForm 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 onForm 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 onForm 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 onForm 8-K filed with the Commission on November 24, 2008).


4952

        
Exhibit
Exhibit
  Exhibit
  
Number
Number
 
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).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 onForm 10-K filed with the Commission on March 5, 2009)
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 onForm 8-K filed with the Commission on December 11, 2007).3.6 Certificate of Ownership and Merger, dated November 21, 2008 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report onForm 8-K filed with the Commission on November 24, 2008).
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 onForm 8-K filed with the Commission on December 11, 2007).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 onForm 8-K filed with the Commission on November 24, 2008).
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 onForm 8-K filed with the Commission on December 11, 2007).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).
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 onForm 8-K filed with the Commission on December 11, 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 onForm 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).10.1 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 onForm 8-K filed with the Commission on December 11, 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).10.2 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 onForm 8-K filed with the Commission on December 11, 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).10.3 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 onForm 8-K filed with the Commission on December 11, 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).10.4 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).
10.8 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 onForm 8-K filed with the Commission on December 17, 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).
10.9† 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).10.6† 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).
10.10† 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).10.7† 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).
10.11† 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).10.8† 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).
10.12† Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.12 of the Company’s Annual Report onForm 10-K filed with the Commission on March 5, 2009).10.9† 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).
10.13† Form of Restricted Stock Agreement (Tier 1) (incorporated by reference to Exhibit 10.13 of the Company’s Annual Report onForm 10-K filed with the Commission on March 5, 2009).10.10† 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).
10.14† Form of Restricted Stock Units Agreement for senior executives (incorporated by reference to Exhibit 10.2 of the Company’s Current Report onForm 8-K filed with the Commission on February 12, 2009).10.11† Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.12 of the Company’s Annual Report onForm 10-K filed with the Commission on March 5, 2009).
10.15† Form of Stock Appreciation Rights Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed with the Commission on February 12, 2009).10.12† Form of Restricted Stock Agreement (Tier 1) (incorporated by reference to Exhibit 10.13 of the Company’s Annual Report onForm 10-K filed with the Commission on March 5, 2009).
10.13† Form of Restricted Stock Units Agreement for senior executives (incorporated by reference to Exhibit 10.2 of the Company’s Current Report onForm 8-K filed with the Commission on February 12, 2009).

5053

        
Exhibit
Exhibit
  Exhibit
  
Number
Number
 
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 onForm 10-K filed with the Commission on March 5, 2009).10.14† Form of Stock Appreciation Rights Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed with the Commission on February 12, 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 onForm 8-K filed with the Commission on May 13, 2009).10.15† First Amendment to Forestar Group Inc. Director’s Fee Deferral Plan (incorporated by reference to Exhibit 10.16 of the Company’s Annual Report onForm 10-K filed with the Commission on March 5, 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 onForm 10-Q filed with the Commission on August 6, 2009).10.16† 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 onForm 8-K filed with the Commission on May 13, 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 onForm 8-K filed with the Commission on July 17, 2009).10.17 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 onForm 10-Q filed with the Commission on August 6, 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 onForm 10-Q filed with the Commission on August 6, 2009).10.18 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 onForm 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 onForm 10-Q filed with the Commission on August 6, 2009).10.19† Second Amendment to the Forestar Group Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report onForm 10-K filed with the Commission on March 3, 2010).
10.22†* Second Amendment to the Forestar Group Inc. 2007 Stock Incentive Plan.10.20 Amended and Restated Revolving and Term Credit Agreement, dated as of August 6, 2010, 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 August 6, 2010).
21.1* List of Subsidiaries of the Company.10.21 Supplement dated February 23, 2011 to the Amended and Restated Revolving and Term Credit Agreement, by and between Forestar (USA) Real Estate Group Inc., KeyBank National Association, and JP Morgan Chase Bank, National Association (incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed with the Commission on February 24, 2011).
23.1* Consent of Ernst & Young LLP.10.22†* Severance Agreement dated October 12, 2009, by and between the Company and Phillip J. Weber.
23.2* Consent of Netherland, Sewell & Associates, Inc.10.23†* First Amendment to Employment Agreement, dated as of November 10, 2010, by and between the Company and James M. DeCosmo.
31.1* Certification of Chief Executive Officer pursuant to Exchange Actrule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.10.24† Form of Market-Leveraged Stock Unit Award Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on February 9, 2011).
31.2* Certification of Chief Financial Officer pursuant to Exchange Actrule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.21.1* List of Subsidiaries of the Company.
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 2002.23.1* Consent of Ernst & Young LLP.
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 2002.23.2* Consent of Netherland, Sewell & Associates, Inc.
99.1* Reserve audit report of Netherland, Sewell & Associates, Inc., dated February 25, 2010.31.1* Certification of Chief Executive Officer pursuant to Exchange Actrule 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 Actrule 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 report of Netherland, Sewell & Associates, Inc., dated February 25, 2011.
 
 
*Filed herewith.
 
†Management contract or compensatory plan or arrangement.

5154

 
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, 20102, 2011
 
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

James M. DeCosmo		 Director, President and Chief Executive Officer (Principal Executive Officer) March 3, 20102, 2011
     
/s/  Christopher L. Nines

Christopher L. Nines		 Chief Financial Officer
(Principal Financial Officer)		 March 3, 20102, 2011
     
/s/  Charles D. Jehl

Charles D. Jehl		 Chief Accounting Officer
(Principal Accounting Officer)		 March 3, 20102, 2011
     
/s/  Kenneth M. Jastrow, II

Kenneth M. Jastrow, II		 Non-Executive
Chairman of the Board		 March 3, 20102, 2011
     
/s/  Louis R. Brill

Louis R. Brill		 Director March 3, 20102, 2011
     
/s/  Kathleen Brown

Kathleen Brown		 Director March 3, 20102, 2011
     
/s/  William G. Currie

William G. Currie		 Director March 3, 20102, 2011
     
/s/  Michael E. Dougherty

Michael E. Dougherty		 Director March 3, 20102, 2011
     
/s/  James A. Johnson

James A. Johnson		 Director March 3, 2010
/s/  Thomas H. McAuley

Thomas H. McAuley		DirectorMarch 3, 20102, 2011
     
/s/  William C. Powers, Jr.

William C. Powers, Jr.		 Director March 3, 20102, 2011
     
/s/  James A. Rubright

James A. Rubright		 Director March 3, 20102, 2011
     
/s/  Richard M. Smith

Richard M. Smith		 Director March 3, 20102, 2011


5255

 

Index to Financial Statements
     
  Page
 
Management’s Annual Report on Internal Control over Financial Reporting
  F-2 
Report of Independent Registered Public Accounting Firm
  F-3 
Report of Independent Registered Public Accounting Firm
  F-4 
Audited Financial Statements    
Consolidated Balance Sheets
  F-5 
Consolidated Statements of Income
  F-6 
Consolidated Statements of Shareholders’/Parent’s Equity
  F-7 
Consolidated Statements of Cash Flows
  F-8 
Notes to the Consolidated Financial Statements
  F-9 
Financial Statement Schedule    
Schedule III — Consolidated Real Estate and Accumulated Depreciation
  S-1 


F-1

 
MANAGEMENT’S ANNUAL REPORT
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) ofRule 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 theInternal 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.year-end. Based upon this assessment, management believes that our internal control over financial reporting is effective as of year-end 2009.2010.
 
Ernst & Young LLP, the independent registered public accounting firm that audited our financial statements included in thisForm 10-K, has also audited our internal control over financial reporting. Their attestation report follows this report of management.


F-2

 
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, 20092010 based on criteria established inInternal Control — Integrated Frameworkissued 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 Overover 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, 2009,2010, 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, 20092010 and December 31, 20082009 and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years ended December 31, 20092010 and our report dated March 3, 20102, 2011 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young LLP
 
Austin, Texas
March 3, 20102, 2011


F-3

 
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, 20092010 and December 31, 2008,2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years ended December 31, 2009.2010. 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, 20092010 and December 31, 2008,2009, and the consolidated results of their operations and their cash flows for each of the three years ended December 31, 2009,2010, 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, 2009,2010, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 20102, 2011 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young LLP
 
Austin, Texas
March 3, 20102, 2011


F-4

FORESTAR GROUP INC.

CONSOLIDATED BALANCE SHEETS
 
                
 At Year-End  At Year-End 
 2009 2008  2010 2009 
 (In thousands, except share data)  (In thousands, except share data) 
ASSETS
        
ASSETS
Cash and cash equivalents $21,051  $8,127  $5,366  $21,051 
Real estate  542,812   610,586   562,192   542,812 
Assets held for sale  31,226   —   21,122   31,226 
Investment in unconsolidated ventures  109,597   117,554   101,166   109,597 
Timber  19,845   50,989   17,959   19,845 
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 
Receivables, net of allowance for bad debts of $144 in 2010 and 2009  2,875   1,841 
Prepaid expenses  2,038   2,587 
Property and equipment, net of accumulated depreciation of $4,405 in 2010 and $3,629 in 2009  5,895   5,234 
Deferred tax asset  40,751   17,184   47,141   40,751 
Goodwill and other intangible assets  6,527   — 
Other assets  9,790   17,238   17,043   9,790 
          
TOTAL ASSETS
 $784,734  $834,576  $789,324  $784,734 
          
 
LIABILITIES AND SHAREHOLDERS’ EQUITY        LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable $4,573  $7,438  $4,214  $4,573 
Accrued employee compensation and benefits  4,025   3,389   994   4,025 
Accrued property taxes  4,302   6,808   3,662   4,302 
Accrued interest  546   1,199   1,061   871 
Income taxes payable  2,809   —   3,293   2,809 
Other accrued expenses  8,269   11,448   8,168   8,269 
Other liabilities  25,249   12,940   32,064   24,924 
Debt  216,626   337,402   221,589   216,626 
          
TOTAL LIABILITIES
  266,399   380,624   275,045   266,399 
  
COMMITMENTS AND CONTINGENCIES
                
  
EQUITY
        
SHAREHOLDERS’ 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 
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 36,667,210 issued at December 31, 2010 and 36,255,336 issued at December 31, 2009  36,667   36,255 
Additional paid-in capital  384,795   377,810   391,352   384,795 
Retained earnings  95,876   36,769   101,001   95,876 
Accumulated other comprehensive loss  (256)  (1,260)  —   (256)
Treasury stock, at cost, 209,544 shares at December 31, 2009 and 90,819 at December 31, 2008  (4,214)  (1,866)
Treasury stock, at cost, 1,216,647 shares at December 31, 2010 and 209,544 shares at December 31, 2009  (19,456)  (4,214)
          
Total Forestar Group Inc. shareholders’ equity  512,456   447,292   509,564   512,456 
Noncontrolling interests  5,879   6,660   4,715   5,879 
          
TOTAL EQUITY
  518,335   453,952 
TOTAL SHAREHOLDERS’ EQUITY
  514,279   518,335 
          
TOTAL LIABILITIES AND EQUITY
 $784,734  $834,576 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 $789,324  $784,734 
          
 
Please read the notes to the consolidated financial statements.


F-5

FORESTAR GROUP INC.

CONSOLIDATED STATEMENTS OF INCOME
 
                        
 For the Year  For the Year 
 2009 2008 2007  2010 2009 2008 
 (In thousands, except per share amounts)  (In thousands, except per share amounts) 
REVENUES
                        
Real estate sales $75,050  $73,555  $117,890  $45,003  $75,050  $73,555 
Commercial operating properties and other  19,386   25,304   24,839 
Income producing properties and other  23,266   19,386   25,304 
              
Real estate  94,436   98,859   142,729   68,269   94,436   98,859 
Mineral resources  36,256   47,671   20,818   24,790   36,256   47,671 
Fiber resources and other  15,559   13,192   14,439   8,301   15,559   13,192 
              
  146,251   159,722   177,986   101,360   146,251   159,722 
EXPENSES
                        
Cost of real estate sales  (30,463)  (38,395)  (58,046)  (27,488)  (30,463)  (38,395)
Cost of commercial operating properties and other  (15,844)  (16,736)  (17,936)
Cost of income producing properties and other  (18,737)  (15,844)  (16,736)
Cost of mineral resources  (922)  (1,714)  —   (1,097)  (922)  (1,714)
Cost of fiber resources  (3,396)  (3,357)  (3,672)  (1,640)  (3,396)  (3,357)
Other operating  (44,685)  (41,486)  (30,441)  (39,539)  (44,685)  (41,486)
General and administrative  (29,926)  (22,228)  (18,624)  (22,581)  (29,926)  (22,228)
Gain on sale of assets  104,047   —   —   28,607   104,047   — 
              
  (21,189)  (123,916)  (128,719)  (82,475)  (21,189)  (123,916)
              
OPERATING INCOME
  125,062   35,806   49,267   18,885   125,062   35,806 
Equity in (loss) earnings of unconsolidated ventures  (7,771)  4,642   3,732 
Equity in earnings (loss) of unconsolidated ventures  4,701   (7,771)  4,642 
Interest expense  (20,459)  (21,283)  (9,229)  (16,446)  (20,459)  (21,283)
Other non-operating income  375   279   705   1,164   375   279 
              
INCOME BEFORE TAXES
  97,207   19,444   44,475   8,304   97,207   19,444 
Income tax expense  (35,633)  (5,235)  (13,909)  (2,470)  (35,633)  (5,235)
              
CONSOLIDATED NET INCOME
  61,574   14,209   30,566   5,834   61,574   14,209 
Less: Net income attributable to noncontrolling interests  (2,467)  (2,235)  (5,771)  (709)  (2,467)  (2,235)
              
NET INCOME ATTRIBUTABLE TO FORESTAR GROUP INC.
 $59,107  $11,974  $24,795  $5,125  $59,107  $11,974 
              
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
                        
Basic  35,805   35,455   35,380   35,815   35,805   35,455 
Diluted  36,102   35,892   35,380   36,377   36,102   35,892 
NET INCOME PER COMMON SHARE
                        
Basic $1.65  $0.34  $0.70  $0.14  $1.65  $0.34 
Diluted $1.64  $0.33  $0.70  $0.14  $1.64  $0.33 
 
Please read the notes to the consolidated financial statements.


F-6

FORESTAR GROUP INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’/PARENT’S EQUITY
 
                                                                            
   Forestar Group Inc. Shareholders      Forestar Group Inc. Shareholders   
             Accumulated
                    Accumulated
     
       Additional
     Other
              Additional
     Other
     
   Common Stock Paid-in
 Treasury Stock Comprehensive
 Retained
 Parent’s
 Noncontrolling
    Common Stock Paid-in
 Treasury Stock Comprehensive
 Retained
 Noncontrolling
 
 Total Shares Amount Capital Shares Amount Income Earnings Equity Interest  Total Shares Amount Capital Shares Amount Income Earnings Interest 
         (In thousands, except share data)        (In thousands, except share data) 
 
Balances at December 30, 2006
 $425,798   —  $—  $—   —  $—  $—  $—  $418,052  $7,746 
 
Balances at December 29, 2007
 $441,830   35,380,385  $35,380  $373,026   (53) $—  $—  $24,795  $8,629 
Net income  30,566   —   —   —   —   —   —   24,795   —   5,771   14,209   —   —   —   —   —   —   11,974   2,235 
 
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)  —   —   —   (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
 $12,949                                      $62,578                                 
 
Distributions to noncontrolling interest  (4,441)  —   —   —   —   —   —   —   —   (4,441)  (3,501)  —   —   —   —   —   —   —   (3,501)
 
Contributions from noncontrolling interest  237   —   —   —   —   —   —   —   —   237   253   —   —   —   —   —   —   —   253 
 
Issuances of common stock  —   182,976   183   (183)  —   —   —   —   —   —   —   4,870   5   (5)  —   —   —   —   — 
 
Issuances of restricted stock  —   214,426   214   (214)  —   —   —   —   —   —   —   125,275   125   (125)  —   —   —   —   — 
 
Issuances from exercises of stock options  897   61,603   62   835   —   —   —   —   —   —   3,547   285,801   286   3,261   —   —   —   —   — 
 
Shares withheld for payroll taxes  (1,194)  —   —   —   (52,482)  (1,194)  —   —   —   —   (467)  —   —   —   (24,170)  (467)  —   —   — 
 
Shares exchanged for options exercised  (646)  —   —   —   (27,394)  (646)  —   —   —   —   (1,880)  —   —   —   (93,255)  (1,880)  —   —   — 
 
Forfeitures of restricted stock  (19)  —   —   7   (10,890)  (26)  —   —   —   —   —   —   —   1   (1,300)  (1)  —   —   — 
 
Share-based compensation  4,254   —   —   4,254   —   —   —   —   —   —   3,824   —   —   3,824   —   —   —   —   — 
 
Tax benefit from exercise of restricted stock units and stock options and vested restricted stock  85   —   —   85   —   —   —   —   —   —   29   —   —   29   —   —   —   —   — 
                                        
 
Balances at December 31, 2008
 $453,952   35,839,390  $35,839  $377,810   (90,819) $(1,866) $(1,260) $36,769  $—  $6,660 
 
Balances at December 31, 2009
 $518,335   36,255,336  $36,255  $384,795   (209,544) $(4,214) $(256) $95,876  $5,879 
Net income  61,574   —   —   —   —   —   —   59,107   —   2,467   5,834   —   —   —   —   —   —   5,125   709 
 
Unrealized gain on interest rate swap, net of taxes of ($542)  1,004   —   —   —   —   —   1,004   —   —   — 
   
Unrealized gain on interest rate swap, net of taxes of ($137)  256   —   —   —   —   —   256   —   — 
    
Comprehensive income
 $62,578                                      $6,090                                 
 
Distributions to noncontrolling interest  (3,501)  —   —   —   —   —   —   —   —   (3,501)  (2,690)  —   —   —   —   —   —   —   (2,690)
 
Contributions from noncontrolling interest  253   —   —   —   —   —   —   —   —   253   817   —   —   —   —   —   —   —   817 
 
Issuances of common stock  —   4,870   5   (5)  —   —   —   —   —   —   —   2,585   3   (3)  —   —   —   —   — 
 
Issuances of restricted stock  —   125,275   125   (125)  —   —   —   —   —   —   —   308,697   309   (309)  —   —   —   —   — 
 
Issuances from exercises of stock options  3,547   285,801   286   3,261   —   —   —   —   —   —   1,199   91,078   91   1,108   —   —   —   —   — 
 
Issuances from restricted stock units  165   9,514   9   156   —   —   —   —   — 
Shares withheld for payroll taxes  (467)  —   —   —   (24,170)  (467)  —   —   —   —   (7)  —   —   —   (389)  (7)  —   —   — 
 
Shares exchanged for options exercised  (1,880)  —   —   —   (93,255)  (1,880)  —   —   —   —   (54)  —   —   —   (2,858)  (54)  —   —   — 
 
Shares repurchased  (15,178)  —   —   —   (1,000,987)  (15,178)  —   —   — 
Forfeitures of restricted stock  —   —   —   1   (1,300)  (1)  —   —   —   —   —   —   —   3   (2,869)  (3)  —   —   — 
 
Share-based compensation  3,824   —   —   3,824   —   —   —   —   —   —   5,572   —   —   5,572   —   —   —   —   — 
 
Tax benefit from exercise of restricted stock units and stock options and vested restricted stock  29   —   —   29   —   —   —   —   —   —   30   —   —   30   —   —   —   —   — 
                                        
Balances at December 31, 2010
 $514,279   36,667,210  $36,667  $391,352   (1,216,647) $(19,456) $—  $101,001  $4,715 
                    
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

FORESTAR GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                        
 For the Year  For the Year 
 2009 2008 2007  2010 2009 2008 
   (In thousands)    (In thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES:
                        
Consolidated net income $61,574  $14,209  $30,566  $5,834  $61,574  $14,209 
Adjustments:                        
Depreciation and amortization  9,786   7,673   2,915   9,014   9,786   7,673 
Deferred income taxes  (22,734)  (11,399)  (19,544)  (6,527)  (22,734)  (11,399)
Tax benefits not recognized for book purposes  6,162   —   —   133   6,162   — 
Equity in loss (earnings) of unconsolidated ventures  7,771   (4,642)  (3,732)
Equity in (earnings) loss of unconsolidated ventures  (4,701)  7,771   (4,642)
Distributions of earnings of unconsolidated ventures  259   1,053   2,863   1,609   259   1,053 
Distributions of earnings to noncontrolling interests  (3,325)  (4,427)  (11,042)  (1,881)  (3,325)  (4,427)
Share-based compensation  11,998   4,516   1,397   11,596   11,998   4,516 
Non-cash real estate cost of sales  25,858   34,766   46,975   18,261   25,858   34,766 
Non-cash cost of assets sold  49,804   —   —   9,503   49,804   — 
Proceeds reinvested through qualified intermediary under IRC Section 1031  (23,045)  —   — 
Real estate development and acquisition expenditures  (33,787)  (99,189)  (140,013)  (16,660)  (33,787)  (99,189)
Reimbursements from utility and improvement districts  24,945   674   10,628   4,752   24,945   674 
Other changes in real estate  384   (522)  (1,364)  179   384   (522)
Gain on termination of timber lease  (195)  (1,627)  (2,243)  (671)  (195)  (1,627)
Cost of timber cut  3,104   2,968   4,060   1,544   3,104   2,968 
Deferred income  (2,673)  681   —   1,307   (2,673)  681 
Asset impairments  7,931   3,000   6,518   9,042   7,931   3,000 
Loss on sale of assets held for sale  277   —   — 
Other  528   (538)  (65)  (16)  528   (538)
Changes in:                        
Receivables  (747)  22   659   104   (747)  22 
Proceeds due from qualified intermediary under IRC Section 1031  (1,347)  ��   — 
Prepaid expenses and other  1,259   2,188   (66)  1,154   1,259   2,188 
Accounts payable and other accrued liabilities  (8,490)  (165)  7,507   (6,394)  (8,490)  (165)
Income taxes payable (receivable)  2,708   (1,130)  — 
Income taxes  484   2,708   (1,130)
              
Net cash provided by (used for) operating activities  142,120   (51,889)  (63,981)  13,551   142,120   (51,889)
CASH FLOWS FROM INVESTING ACTIVITIES:
                        
Property, equipment, software and reforestation  (7,295)  (5,197)  (3,198)  (2,702)  (7,295)  (5,197)
Investment in unconsolidated ventures  (2,875)  (17,845)  (14,492)  (3,291)  (2,875)  (17,845)
Return of investment in unconsolidated ventures  3,797   6,168   3,239   14,849   3,797   6,168 
Notes receivable sold or collected  —   —   491 
Business acquisitions, net of cash acquired  (38,055)  —   — 
Proceeds from sale of property and equipment  —   52   166   —   —   52 
Proceeds from sale of assets held for sale  2,602   —   — 
Proceeds from termination of timber lease  —   155   2,966   —   —   155 
              
Net cash (used for) investing activities  (6,373)  (16,667)  (10,828)  (26,597)  (6,373)  (16,667)
CASH FLOWS FROM FINANCING ACTIVITIES:
                        
Payments of debt  (164,612)  (80,165)  (22,534)  (63,420)  (164,612)  (80,165)
Additions to debt  43,836   151,552   226,446   81,590   43,836   151,552 
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)  (6,304)  (3,209)  (1,619)
Return of investment to noncontrolling interest  (176)  (14)  (906)  (809)  (176)  (14)
Exercise of stock options  3,547   897   —   1,199   3,547   897 
Repurchases of common stock  (15,178)  —   — 
Payroll taxes on restricted stock and stock options  (2,347)  (1,858)  —   (61)  (2,347)  (1,858)
Tax benefit from share-based compensation  29   85   —   30   29   85 
Other  109   285   1,147   314   109   285 
              
Net cash (used for) provided by financing activities  (122,823)  69,163   71,979   (2,639)  (122,823)  69,163 
              
Net increase (decrease) in cash and cash equivalents  12,924   607   (2,830)
Net (decrease) increase in cash and cash equivalents  (15,685)  12,924   607 
Cash and cash equivalents at beginning of year  8,127   7,520   10,350   21,051   8,127   7,520 
              
Cash and cash equivalents at year-end $21,051  $8,127  $7,520  $5,366  $21,051  $8,127 
              
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                        
Cash paid during the year for:  ��                     
Interest $16,951  $21,006  $12,030  $11,889  $16,951  $21,006 
Income taxes $48,299  $18,414  $33,428  $8,423  $48,299  $18,414 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:
                        
Capitalized interest $1,021  $3,628  $3,351  $75  $1,021  $3,628 
Lessor construction allowances $—  $1,296  $—  $—  $—  $1,296 
SUPPLEMENTAL DISCLOSURE OF BUSINESS ACQUISITIONS INFORMATION:
            
Proceeds reinvested through qualified intermediary under IRC Section 1031 $23,045  $—  $— 
Proceeds provided by financing activities  38,055   —   — 
       
Total business acquisitions $61,100  $—  $— 
       
 
Please read the notes to the consolidated financial statements.


F-8

FORESTAR GROUP INC.
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
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, restrictedRestricted cash included in cash and cash equivalents was $574,000.


F-9

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)$773,000 at year-end 2010 and $574,000 at year-end 2009.
 
Cash Flows
 
Expenditures for the acquisition and development of real estate are classified as operating activities. Expenditures for the acquisition of commercial operatingincome producing properties and business acquisitions 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 and notes receivables, other current assets, long-term debt, accounts payable and other current


F-9

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
liabilities. With the exception of long-term notes receivable and debt, the carrying amounts of these financial instruments approximate their fair values due to their short-term nature or variable interest rates.
Goodwill and Other Intangible Assets
We record goodwill when the purchase price of a business acquisition exceeds the estimated fair value of net identified tangible and intangible assets acquired. We do not amortize goodwill or other indefinite lived intangible assets. Instead, we measure these assets for impairment based on the estimated fair values at least annually or more frequently if impairment indicators exist. We perform the annual impairment measurement as of the beginning of the fourth quarter of each year. Intangible assets with finite useful lives are amortized over their estimated useful lives.
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 $2,823,000 at year-end 2010 and $2,859,000 at year-end 2009 and is included in other assets. The amortization of these capitalized costs was $1,206,000 in 2010, $1,012,000 in 2009 and $784,000 in 2008 and is included in general and administrative and operating expenses.
 
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 non-cash real estate asset impairments of $9,042,000 in 2010, $5,718,000 in 2009 and $3,000,000 in 2008 and $6,518,000 in 2007. Impairment2008. Non-cash impairment charges related to our owned and consolidated real estate assets are included in cost of real estate sales.


F-10

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.
When we believe a tax position is supportable but the outcome uncertain, we include the item in our tax return but do not recognize the related benefit in our provision for taxes. Instead, we record a reserve for unrecognized tax benefits, which represents our expectation of the most likely outcome considering the technical merits and specific facts of the position. Changes to liabilities are only made when an event occurs that changes the most likely outcome, such as settlement with the relevant tax authority, expiration of statutes of limitations, changes in tax law, or recent court rulings.
 
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


F-10

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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-capitalizedpreviously capitalized acquisition costs and did not capitalize any costs in 2010, 2009 2008 or 2007.2008.
 
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. We amortize our capitalized non-operating working interests based on the units of production depletion method.
 
Operating Leases
 
We occupy office space in various locations under operating leases. The lease agreements may contain rent escalation clauses, construction allowancesand/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 minimumbase 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

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
    Carrying
 
 Estimated
 Year-End
  Estimated
 Value Year-End 
 Useful Lives 2009  Useful Lives 2010 2009 
   (In thousands)    (In thousands) 
Buildings and building improvements  10 to 40 years  $4,402   10 to 40 years  $4,417  $4,402 
Property and equipment  2 to 10 years   4,461   2 to 10 years   5,883   4,461 
        
      8,863       10,300   8,863 
Less: accumulated depreciation      (3,629)      (4,405)  (3,629)
        
     $5,234      $5,895  $5,234 
        
 
Depreciation expense of property and equipment was $890,000 in 2010, $1,022,000 in 2009 and $650,000 in 2008 and $392,000 in 2007.2008.
 
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


F-11

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
 
CommercialIncome producing properties are carried at cost less accumulated depreciation computed using the straight-line method over their estimated useful lives (three to 39 years).lives.
 
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

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 recognize revenue from our multifamily properties when payments are due from residents, generally on a monthly basis.
 
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.


F-12

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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

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 32 —New and Pending Accounting Pronouncements
 
Accounting Standards Adopted in 20092010
 
The FASBIn 2010, we adopted Accounting Standards CodificationTMUpdate (ASU)2009-17 —(ASC) and the Hierarchy of Generally Accepted Accounting Principles(Codified within ASC 105,Generally Accepted Accounting Principles) — EstablishesThe FASB Accounting Standards CodificationTM as the single source of authoritative accounting principlesImprovements to be appliedFinancial Reporting by nongovernmental entities in the preparation of financial statements in conformityEnterprises Involved 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,Variable Interest Entities, ASU2010-06 —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 andImproving Disclosures— Delayed the effective date of Statement of Financial Accounting Standard (SFAS) No. 157, about Fair Value Measurements, ASU2010-09 —Amendments to Certain Recognition and Disclosure Requirementsand ASU2010-20 —Disclosures about the Credit Quality of Financing Receivables and the Allowance for certain nonfinancial assets and nonfinancial liabilities.Credit Losses. 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 standardthese pronouncements did not have a significant effect on our earnings or financial position but does affect our disclosures regarding subsequent events.did result in certain additional disclosures.
 
In addition, we adopted ASC 260,Earnings Per SharePending Accounting Standards; ASC 805,
ASU2010-28 —When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amountsand ASU2010-29 —Disclosure of Supplementary Pro Forma Information for Business Combinations; ASC 815,Derivatives and Hedging; ASC 825,Financial Instruments; and ASU2009-05,Measuring Liabilities at Fair Value.will be effective first quarter 2011. Adoption of these new standards didis not anticipated to have a significant effect on our earnings or financial position.
 
Pending Accounting Standards
Note 3 — Strategic Initiatives and Assets Held for Sale
 
ASU2009-17,ImprovementsIn 2009, we announced our near-term strategic initiatives to Financial Reportingenhance shareholder value by: generating significant cash flow, principally from the sale of about 175,000 acres of higher and better use timberland; reducing debt by Enterprises Involved with Variable Interest Entities— Amends certain requirementsapproximately $150,000,000; and repurchasing up to 20 percent of ASC 810,Consolidationto 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.
ASU2010-06,Improving Disclosures about Fair Value Measurements— Amends ASC 820,Fair Value Measurements and Disclosuresto provide more robust disclosures. Portions of this ASU are effective firstcommon stock.


F-14F-13

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 in two transactions generating combined net cash proceeds of $153,851,000, which were principally used to reduce debt and pay taxes, resultingtaxes. These transactions resulted in combined gain on sale of assets of $104,047,000.
 
In 2010, we sold about 24,000 acres of timber and timberland in Georgia, Alabama and Texas for $38,778,000 in seven transactions generating combined net proceeds of $38,040,000, of which $24,392,000, including interest, was held by a qualified intermediary to be used to reinvest in qualifying real estate under Internal Revenue Code (IRC) Section 1031. These transactions resulted in a combined gain on sale of assets of $28,607,000. In addition, in third quarter 2010, we repurchased 1,000,987 shares of our common stock at a cost of $15,178,000. The repurchased shares are classified as treasury stock. In first quarter 2010, we sold our undivided interest in corporate aircraft resulting in net proceeds of $2,602,000 and loss on sale of assets of $277,000.
At year-end 2009,2010, assets held for sale includes about 74,00055,000 acres of undeveloped land with a carrying value of $18,138,000$14,513,000 and related timber with a carrying value of $10,209,000. These$6,609,000. We continue to actively market this land in accordance with these initiatives.
Note 4 — Business Acquisitions
On December 29, 2010, we acquired a 401 unit, Class A multifamily property in Houston, Texas for $49,100,000. We used $23,045,000 of the proceeds held by a qualified intermediary under IRC Section 1031 and $26,500,000 of non-recourse borrowings to fund this acquisition, including closing costs. The purchase price was allocated to tangible and identifiable intangible assets based on their estimated fair value. Tangible assets include $48,024,000 related to land, building, improvements, furniture, fixtures and equipment and are included in real estate. Identifiable intangible assets include $1,076,000 which represents the fair value of the existing leases in place at the time of acquisition and will be amortized over the average lease term. The assets and operating results of this acquisition are included in income producing properties within our real estate segment. Operating results for 2010 were not significant.
On December 22, 2010, we acquired a water resources company for $12,000,000. It is focused on providing sustainable volumes of ground water to central Texas and the Interstate-35 growth corridor and its principal assets are actively being marketed. Alsoapproximately 17,800 acres of ground water leases. The purchase price was allocated between tangible and identifiable intangible assets based on estimated fair value. The assets include $6,000,000 in contingent consideration paid to the seller to accomplish future milestones, all of which is subject to reimbursement if the milestones are not accomplished by July 2014. The contingent consideration is included in other assets and will be amortized ratably over the performance period assuming the milestones are accomplished. In addition, tangible assets include $549,000 related to a test water well which is our undivided 15 percent interestincluded in corporate aircraft contributed to us by Temple-Inland at spin-offproperty, plant and equipment. Identifiable intangible assets include indefinite lived ground water leases with a carryingestimated fair value of $2,879,000. Our interest is being disposed$1,577,000. We recorded goodwill of pursuant to$3,874,000 which represents the termsexcess of an aircraft joint ownership agreement, which expired December 28, 2009.the purchase price over the fair value of the tangible and identifiable intangible assets acquired. The assets and operating results are included within our mineral resources segment. Operating results for 2010 were not significant.
Pro forma consolidated operating income (loss) assuming these acquisitions had occurred at the beginning of 2009 would not be significantly different than those reported.


F-14

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 5 —Real Estate
 
Real estate consists of:
 
                
 At Year-End  At Year-End 
 2009 2008  2010 2009 
 (In thousands)  (In thousands) 
Entitled, developed and under development projects $427,047  $445,394  $403,059  $424,447 
Undeveloped land  91,011   143,749   86,608   91,011 
Commercial operating properties  49,171   43,987 
Income producing properties  95,963   51,771 
          
  567,229   633,130   585,630   567,229 
Accumulated depreciation  (24,417)  (22,544)  (23,438)  (24,417)
          
 $542,812  $610,586  $562,192  $542,812 
          
 
Included in entitled, developed and under development projects are the estimated costs of assets we expect to convey to utility and improvement districts of $59,079,000 in 2010 and $60,863,000 in 2009, including about $36,552,000 at year-end 2010 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 reviewapproval and approval.reimbursement. We billed these districts $3,316,000 in 2010 and $11,824,000 in 20092009. We collected $4,752,000 from these districts in 2010, of which $1,500,000 related to our Cibolo Canyons project and $27,581,000was accounted for as a reduction of our investment in 2008.the mixed-use and resort development. 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.
 
In first quarter 2010, entitled, developed and under development projects decreased by $11,865,000 due to lender foreclosure of a lien on a condominium property in Austin, Texas, owned by a consolidated variable interest entity. Please read Note 19 for additional information.
We recognized non-cash asset impairment charges of $9,042,000 in 2010 principally associated with a residential development project located near Atlanta, Georgia and a residential development with golf course and country club property located near Fort Worth, Texas. We recognized non-cash asset impairment charges of $5,718,000 in 2009 principally related to a condominium project in Austin, Texas. We recognized non-cash asset impairments of $3,000,000 in 2008 and $6,518,000 in 2007 related to residential projects principally in Texas.
 
Income producing properties principally include a 401 unit, Class A multifamily property in Houston, Texas acquired on December 29, 2010 and a 414 room hotel located in Austin, Texas.
Depreciation expense, primarily related to commercial operatingincome producing properties, was $2,680,000 in 2010, $1,873,000 in 2009 and $1,770,000 in 2008 and $2,014,000 in 2007 and is included in other operating expense. Depreciation expense increased in 2010 primarily as a result of improvements to an income producing property in 2009.
 
Please read Schedule III for additional information.
Note 6 — Timber
We have over 197,000 acres of timber, primarily in Georgia. We capitalized reforestation expenditures of $3,000 in 2010, $120,000 in 2009 and $282,000 in 2008. The cost of timber cut and sold was $1,544,000 in 2010, $3,104,000 in 2009 and $2,968,000 in 2008.


F-15

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 2009,2010, 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 20092010 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 2009,2010, the venture had 1514 residential and mixed-use communities, of which 10 are in Texas, 3 are in Florida and 2 are1 is in Georgia, representing about 7,2705,350 planned residential lots and 560300 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 2009,2010, 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 5,5005,700 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 ofAt year-end 2010, the project was completed in fourth quarter 2008 and isbuildings are approximately 7197 percent leased at year-end 2009.leased. Our remaining commitment for investment in this venture as of year-end 20092010 is $2,566,000.$1,708,000. Effective fourth quarter 2008, we entered into a10-year operating lease for approximately 32,000 square feet that we occupy as our corporate headquarters. In 2010, rents paid under this operating lease were $1,190,000 and are included in general and administrative expenses. 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  Year-End 2010 Year-End 2009 
     Palisades
 Other
       Palisades
 Other
    CL
   Palisades
 Other
   CL
   Palisades
 Other
   
 CL Realty Temco West Ventures Total CL Realty Temco West Ventures Total  Realty Temco West Ventures Total Realty Temco West Ventures Total 
 (In thousands)          (In thousands)         
Real estate $113,169  $60,402  $122,566  $89,507  $385,644  $124,418  $60,791  $120,953  $94,093  $400,255  $85,436  $60,454  $124,696  $69,612  $340,198  $113,169  $60,402  $122,566  $89,507  $385,644 
Total assets  114,598   60,751   125,396   96,711   397,456   126,728   61,832   123,290   102,928   414,778   86,657   60,609   129,378   78,060   354,704   114,598   60,751   125,396   96,711   397,456 
Borrowings, principally non-recourse(a)
  3,568   3,061   —   77,113   83,742   4,901   3,198   —   75,638   83,737 
Borrowings(a)
  2,664   2,929   —   74,605   80,198   3,568   3,061   —   77,113   83,742 
Total liabilities  5,414   3,268   51,158(b)  88,273   148,113   8,684   3,570   50,548(b)  89,579   152,381   4,124   3,133   48,612(b)  87,145   143,014   5,414   3,268   51,158(b)  88,273   148,113 
Equity  109,184   57,483   74,238   8,438   249,343   118,044   58,262   72,742   13,349   262,397   82,533   57,476   80,766   (9,085)  211,690   109,184   57,483   74,238   8,438   249,343 
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   41,267   28,738   20,191   14,075   104,271   54,592   28,742   18,559   15,673   117,566 
Unrecognized deferred gain(d)
  (7,059)  —   —   (910)  (7,969)  (7,059)  —   —   (614)  (7,673)  (2,190)  —   —   (915)  (3,105)  (7,059)  —   —   (910)  (7,969)
                                          
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  $39,077  $28,738  $20,191  $13,160  $101,166  $47,533  $28,742  $18,559  $14,763  $109,597 
                                          


F-16

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  For the Year 
 2009 2008 2007  2010 2009 2008 
 (In thousands)    (In thousands)   
Revenues:                        
CL Realty $2,698  $8,065  $7,393  $28,013  $2,698  $8,065 
Temco  1,419   6,426   8,305   2,180   1,419   6,426 
Palisades West  12,496   1,421   267   13,588   12,496   1,421 
Other ventures  7,659   12,865   14,494   12,074   7,659   12,865 
              
Total $24,272  $28,777  $30,459  $55,855  $24,272  $28,777 
              
(Loss) Earnings:            
CL Realty $(8,500) $6,780  $3,400 
Temco  (2,729)  940   258 
Earnings (loss):            
CL Realty(e)
 $226  $(8,500) $6,780 
Temco(f)  210   (2,729)  940 
Palisades West  4,626   1,218   230   4,668   4,626   1,218 
Other ventures  (2,628)  (2,488)  (406)
Other ventures(g)
  (17,421)  (2,628)  (2,488)
              
Total $(9,231) $6,450  $3,482  $(12,317) $(9,231) $6,450 
              
Our equity in their (loss) earnings:            
CL Realty(e)
 $(4,250) $3,377  $1,700 
Temco(f)
  (1,365)  469   129 
Our equity in their earnings (loss):            
CL Realty $113  $(4,250) $3,377 
Temco  105   (1,365)  469 
Palisades West  1,156   304   58   1,167   1,156   304 
Other ventures(c)
  (3,312)  482   1,499   (1,553)  (3,312)  482 
Recognition of deferred gain(d)
  —   10   346   4,869   —   10 
              
Total $(7,771) $4,642  $3,732  $4,701  $(7,771) $4,642 
              
 
 
(a)Total includes current maturities of $75,121,000 at year-end 2010, of which $43,166,000 is non-recourse to us, and $80,625,000 at year-end 2009, and $21,150,000 at year-end 2008.of which $46,936,000 is non-recourse to us.
 
(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 contributedRepresents deferred gains on real estate with a $13,800,000 carrying valuecontributed by us to CL Realty in exchange for $13,800,000 cash and a 50 percent interest inventures. We recognize the partnership. We deferred the $14,587,000 gain on the sale and are recognizing itgains as the partnership sells the real estate is sold to third parties. The deferred gain isgains are reflected as an offseta reduction to our investment in unconsolidated ventures. In 2010, we recognized about $4,869,000 in gains previously deferred by us as CL Realty sold about 625 acres in fourth quarter 2010 to a third party for $20,250,000.
 
(e)In 2010, CL Realty’s earnings include impairment charges of $4,458,000 principally related to a commercial real estate project located near the Texas Gulf Coast. 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

FORESTAR GROUP INC.
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
$14,492,000
(g)In 2010, other ventures loss includes a $13,061,000 loss on sale of a golf course and country club property in Denton, Texas. This loss did not impact our equity in the earnings (loss) of this venture as we exclude losses that exceed our investment where we are not obligated to provide additional equity.
In 2010, we invested $3,291,000 in these ventures and received $6,102,000$16,458,000 in distributions; in 2009, we invested $2,875,000 in these ventures and received $4,056,000 in distributions; and in 2008, we invested $17,845,000 in these ventures and received $7,221,000 in distributions. Distributions include both return of investments and distributions of earnings.
At year-end 2010, we participate in three partnerships that have $72,364,000 of borrowings classified as current maturities. These partnerships have total assets of $55,262,000 and other liabilities of $11,799,000. These partnerships are managed by third parties who intend to extend or refinance these borrowings; however, there is no assurance that this can be done. Although these borrowings may be guaranteed by third parties, we may under certain circumstances elect or be required to provide additional equity to these partnerships. We do not believe that the ultimate resolution of these matters will have a significant effect on our earnings or financial position. Our investment in these partnerships is $3,139,000 at year-end 2010. These three partnerships are variable interest entities. Please read Note 19 for additional information.
 
We provide development services for some of these ventures for which we receive a fee. Fees for these services were $1,091,000 in 2010, $45,000 in 2009 and $120,000 in 2008 and $344,000 in 2007 and are included in real estate revenues. In 2010, we received fees of $1,013,000 related to the sale of approximately 625 acres by CL Realty for marketing the property and closing the transaction on behalf of the venture.
 
Note 8 —Receivables
 
Receivables consist of:
 
                   
 At Year-End  At Year-End 
 2009   2008  2010 2009 
 (In thousands)  (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 
Seller financing notes receivable, average interest rate of 7.93% at year-end 2010 and 5.76% at year-end 2009 $383  $1,112 
Note receivable, average interest rate of 7.75% at year-end 2010  674   — 
Due from qualified intermediary (see Note 3 for additional information)  1,347   — 
Accrued interest and other  873       2,742   615   873 
          
 $1,985      $4,488   3,019   1,985 
Allowance for bad debts  (144)      (226)  (144)  (144)
          
 $1,841      $4,262  $2,875  $1,841 
          
 
Seller financing notes receivable generally are generally secured by a deed of trust with a minimum 10 percent down payment and are generally due within three years.
 
NotesNote receivable are funds advancedrepresents our participation in a loan to potentialan equity method venture partnersin which we have ownership. The loan participation is secured principally by interests in the property and were satisfied in 2009 by assignment to usrights of the venture partner’s profit participation interest in the real estate.to any utility or improvement district reimbursements.
 
OtherAccrued interest and other receivables areprincipally include miscellaneous operating receivables arising in the normal course of business. We expect to collect $718,000 in 2010.


F-18

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 9 —Debt
 
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 
         
         
  At Year-End 
  2010  2009 
  (In thousands) 
 
Term loan facility — average interest rate of 6.50% at year-end 2010 and 5.54% at year-end 2009 $125,000  $125,000 
Secured promissory notes — average interest rates of 4.51% at year-end 2010 and 2.73% at year-end 2009  41,716   16,716 
Other indebtedness due through 2011 at variable interest rates based on prime (3.75% at year-end 2010 and 3.25% at year-end 2009) and fixed interest rate of 8.00%  54,873   74,910 
         
  $221,589  $216,626 
         
 
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 2009,2010, we had compliedwere in compliance with the terms, conditions and financial covenants of these agreements.
 
In 2009,third quarter 2010, we reduced ourentered into an amended and restated senior credit facility effecting the following additional principal amendments to: extend the maturity date of the revolving loan to August 6, 2013 (with a one-year extension option to August 6, 2014) and of the term loan to August 6, 2015; reduce the revolving loan commitment to $175 million, subject to the ability to increase the aggregate facility by $50,000,000up to $150 million by securing additional commitments; eliminate any additional required commitment reductions during the term of the facility; reduce the interest coverage ratio from 1.75x to 1.05x; provide that during any period when the minimum interest coverage ratio falls below 1.50x, the interest rate on outstanding loans will increase by 2 percent and repaidno new acquisitions, discretionary capital expenditures or distributions will be permitted; reduce the minimum value to commitment ratio from 1.75:1.00 to 1.60:1.00; and provide that if the interest coverage ratio does not exceed 3.0x, we may not repurchase our revolving linecommon stock. We incurred fees 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.$5,800,000 related to this amendment.
 
At year-end 2009,2010, our senior credit facility provides for a $125,000,000 term loan and a $257,700,000$175,000,000 revolving line of credit. The term loan andincludes a prepayment penalty for payments in excess of $25,000,000 prior to February 6, 2012. The 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

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 $100,000,000 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$3,007,000 is outstanding at year-end 2009.2010. 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.formula. At year-end 2009,2010, we had $202,561,000$171,993,000 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 two2 percent LIBOR floor) or Primeprime plus 2.5 percent. All borrowingsBorrowings under the senior credit facility are secured by (a) all timberland and high-value timberland,minerals, (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.
 
WeAt year-end 2010, we have incurred origination and other$7,389,000 in unamortized deferred fees related to our senior credit facility of $13,755,000, of which $5,068,000 is unamortized at year-end 2009 and isare included in other assets. Amortization of deferred financing fees was $4,106,000 in connection with our senior credit facility was $5,042,0002010, $5,205,000 in 2009 $3,506,000and $3,575,000 in 2008 and $139,000 in 2007 and is included in interest expense.
 
At year-end 2009, commercial operating2010, income producing properties having a book value of $24,484,000 were$70,708,000 are subject to liens in connection with $16,716,000$41,716,000 of principally non-recourse 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.


F-19

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At year-end 2009,2010, entitled, developed and under development projects having a book value of $141,694,000 was$127,131,000 are subject to liens in connection with $74,910,000$54,873,000 of principally non-recourse debt. Please read Schedule III for additional information.
 
MaturitiesIn first quarter 2010, other indebtedness decreased by $13,207,000 due to lender foreclosure of our debta lien on a condominium property in Austin, Texas owned by a consolidated variable interest entity. Please read Note 19 for additional information.
Debt maturities during the next five years are: 2010 — $175,873,000; 2011 — $40,753,000;$47,506,000; 2012 — $0;$850,000; 2013 — $0;$16,066,000; 2014 — $0$850,000; 2015 — $126,381,000 and thereafter — $0.$29,936,000.
 
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 thea $100,000,000 notional amount interest rate swap agreement wasthat matured in first quarter 2010. We recognized an after-tax gain of $256,000 in other comprehensive income related to this agreement in 2010. We have no financial liabilities measured at fair value on a recurring basis at year-end 2010.
Non-financial assets measured at fair value on a non-recurring basis principally include real estate assets and assets held for sale, which are measured for impairment. In 2010, certain real estate assets were remeasured and reported at fair value due to events or circumstances that indicated the carrying value may not be recoverable. We determined using quoted prices for similar instrumentsestimated fair value based on the present value of future probability weighted cash flows expected from the sale of the long-lived asset. As a result, we recognized non-cash asset impairments of $9,042,000 in active markets (Level 2). 2010. The carrying value of these assets may have subsequently increased or decreased from the fair value reflected due to activity that has occurred since the measurement date.
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. The fair value of the interest rate swap agreement was determined using quoted prices for similar instruments in active markets (Level 2).
 
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 non-financial 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

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
 Year-End 2010 Year-End 2009 
 Level 1 Level 2 Level 3 2009 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 
 (In thousands) (In thousands) 
Financial Assets and Liabilities:
                                            
Interest rate swap agreement $—  $(393) $—  $(393) $—  $—  $—  $—  $—  $(393) $—  $(393)
Non-Financial Assets and Liabilities:
                                            
Real estate $—  $—  $12,297  $12,297  $—  $—  $10,386  $10,386  $—  $—  $12,297  $12,297 
Assets held for sale $—  $—  $2,879  $2,879  $—  $—  $—  $—  $—  $—  $2,879  $2,879 
 
We elected not to use the fair value option for cash and cash equivalents, accounts receivable, other current assets, long-termvariable 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.


F-20

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Information about our fixed rate debt that isfinancial instruments 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 
                     
  Year-End 2010 Year-End 2009  
  Carrying
 Fair
 Carrying
 Fair
 Valuation
  Amount Value Amount Value Technique
  (In thousands)
 
Fixed rate debt $(29,931) $(30,164) $(3,431) $(3,505)  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, ourIn 2008, we entered into a $100,000,000 notional amount interest rate swap agreement, which maturesmatured in March 2010, requires that2010. Under this swap agreement, we paypaid a fixed interest rate of 6.57 percent and receivereceived a floating interest rate of one month LIBOR plus 4 percent (4.24 percent at year-end 2009).
In At year-end 2009, and 2008, there was no hedge ineffectiveness.


F-20

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 
interest rate swap agreement was a $393,000 liability that is included in other liabilities.
 
The change in fair value of our interest rate swap recognized in other comprehensive income was a gain of $256,000 in 2010 and a gain of $1,004,000 in 2009 and a loss of $1,260,000 in 2008.2009. No amounts were reclassified from other comprehensive income into income in 2009 or 2008.and there was no hedge ineffectiveness over the term of the agreement.
 
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 1920 — 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

FORESTAR GROUP INC.
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
As a result of the 2007 spin-offs from Temple-Inland, at year-end 2010, personnel of Temple-Inland and the other spin-off entity held 20,000 awards that will be settled in shares of our common stock and options to purchase 1,242,000 shares of our common stock. Information about these stock options follows:
                 
      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  1,242  $20.61   4  $3,429 
Exercisable  1,201  $20.27   4  $3,429 
 
Note 13 —Other Comprehensive Income
 
Other comprehensive income consists of:
 
                        
 For the Year  For the Year 
 2009 2008 2007  2010 2009 2008 
 (In thousands)    (In thousands)   
Consolidated net income $61,574  $14,209  $30,566  $5,834  $61,574  $14,209 
Change in fair value of interest rate swap agreement  1,546   (1,939)  —   393   1,546   (1,939)
Income tax effect of change in fair value  (542)  679   —   (137)  (542)  679 
              
Other comprehensive income  62,578   12,949   30,566   6,090   62,578   12,949 
Less: Comprehensive income attributable to noncontrolling interests  (2,467)  (2,235)  (5,771)  (709)  (2,467)  (2,235)
              
Other comprehensive income attributable to Forestar Group Inc.  $60,111  $10,714  $24,795  $5,381  $60,111  $10,714 
              
 
Note 14 —Net Income per Share
 
Our basicEarnings available to common shareholders and diluted weighted average common shares outstanding used to compute net incomeearnings per share are as follows:were:
 
                        
 For the Year  For the Year 
 2009 2008 2007  2010 2009 2008 
 (In thousands)    (In thousands)   
Earnings available to common shareholders:            
Consolidated net income $5,834  $61,574  $14,209 
Less: Net income attributable to noncontrolling interest  (709)  (2,467)  (2,235)
       
Net income attributable to Forestar Group Inc.  $5,125  $59,107  $11,974 
       
Weighted average common shares outstanding — basic  35,805   35,455   35,380   35,815   35,805   35,455 
Dilutive effect of stock options  94   305   —   196   94   305 
Dilutive effect of restrict stock and restricted stock units  203   132   — 
Dilutive effect of restricted stock and restricted stock units  366   203   132 
              
Weighted average common shares outstanding — diluted  36,102   35,892   35,380   36,377   36,102   35,892 
              
 
At year-end 2010, 2009 and 2008, the effect of 1,574,000, 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

FORESTAR GROUP INC.
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 15 —Income Taxes
 
Income tax expense consists of:
 
                        
 For the Year  For the Year 
 2009 2008 2007  2010 2009 2008 
 (In thousands)    (In thousands)   
Current tax provision:                        
U.S. Federal $(51,210) $(14,954) $(28,782) $(7,582) $(51,210) $(14,954)
State and other  (7,031)  (1,680)  (3,133)  (1,252)  (7,031)  (1,680)
              
  (58,241)  (16,634)  (31,915)  (8,834)  (58,241)  (16,634)
Deferred tax provision:                        
U.S. Federal  21,639   11,124   16,509   6,084   21,639   11,124 
State and other  969   275   1,497   280   969   275 
              
  22,608   11,399   18,006   6,364   22,608   11,399 
              
Income tax expense $(35,633) $(5,235) $(13,909) $(2,470) $(35,633) $(5,235)
              
 
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  For the Year 
 2009 2008 2007  2010 2009 2008 
Federal statutory rate  35%  35%  35%  35%  35%  35%
State, net of federal benefit  4   5   3   8   4   5 
Finalization of deferred tax balance transferred at spin-off  —   2   —   —   —   2 
Noncontrolling interests  (1)  (4)  (5)  (3)  (1)  (4)
Charitable contributions  (5)  —   (2)
Compensation  3   —   — 
Percentage depletion  —   (6)  (2)  (10)  —   (6)
Qualified timber gains  (1)  (4)  —   —   (1)  (4)
Other  —   (1)  —   2   —   1 
              
Effective tax rate  37%  27%  31%  30%  37%  27%
              
Significant components of deferred taxes are:
         
  At Year-End 
  2010  2009 
  (In thousands) 
 
Deferred Tax Assets:
        
Real estate $57,419  $50,699 
Income producing properties  —   1,893 
Employee benefits  10,686   8,528 
Accruals not deductible until paid  1,013   141 
Other  —   140 
         
Gross deferred tax assets  69,118   61,401 
Deferred Tax Liabilities:
        
Undeveloped land  (14,174)  (16,150)
Income producing properties  (5,069)  — 
Timber  (2,734)  (3,708)
Other  —   (792)
         
Gross deferred tax liabilities  (21,977)  (20,650)
         
Net Deferred Tax Asset
 $47,141  $40,751 
         


F-23

FORESTAR GROUP INC.
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Significant componentsIn 2010, the increase in deferred tax liabilities associated with income producing properties is principally due to the deferral for tax purposes under IRC Section 1031 of about $20,700,000 in gains from the sale of timber and timberland. We used $23,045,000 of the proceeds held by a qualified intermediary and $26,500,000 of non-recourse borrowings to fund the acquisition of a 401 unit, Class A multifamily property on December 29, 2010. These transactions resulted in a 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 
         
tax liability of $7,448,000.
 
Subsequent to our spin-off, weWe 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 2009,2010, 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 2009,2010, 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  At Year-End 
 2009 2008  2010 2009 
 (In thousands)  (In thousands) 
Balance at beginning of year $—  $—  $7,441  $— 
Additions based on tax positions related to the current year  7,441   —   —   7,441 
Additions for tax positions of prior years  —   —   —   — 
Reductions for tax positions of prior years  —   —   (47)  — 
Settlements  —   —   —   — 
          
Balance at end of year $7,441  $—  $7,394  $7,441 
          
 
Of the $7,441,000At year-end 2010 and 2009, there were $6,019,000 and $6,066,000 of tax benefits not recognized for book purposes at year-end 2009, $6,066,000that would affect the annual effective tax rate, if recognized.
 
The Company recognizesWe recognize interest accrued related to unrecognized tax benefits in income tax expense. In 2010 and 2009, we recognized approximately $133,000 and $96,000 in interest. Unrecognized tax benefits includeAt year-end 2010 and 2009, we have $229,000 and $96,000 of accrued interest and no penalties related to tax years 2006 through 2009.


F-24

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
penalties.
 
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;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,$2,500,000, which is included in other accrued expenses and will likely be paid in 2010 and 2011.2011 or 2012. Our estimate requires us to make assumptions regarding the scope of required remediation, the effectiveness of planned remediation activities,


F-24

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 $289,000 in 2010, $366,000 in 2009 and $346,000 in 2008 and $428,000 in 2007.2008. Rent expense on facilities and equipment was $2,048,000 in 2010, $1,982,000 in 2009 and $1,789,000 in 2008 and $536,000 in 2007.2008. 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;$2,308,000; 2012 — $1,957,000;$2,193,000; 2013 — $1,753,000;$2,008,000; 2014 — $1,643,000;$2,003,000; 2015 — $1,976,000 and thereafter — $11,166,000.$10,962,000.
 
We have 1615 years remaining on a65-year timber lease of over 16,000 acres. At year-end 2009,2010, 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.$8,793,000.
 
In 2008, we entered into a10-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.$10,207,000.
 
In connection with our unconsolidated venture operations, we have provided performance bonds and letters of credit aggregating $1,798,000$2,476,000 at year-end 2009.2010. 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$1,708,000 at year-end 2009.2010.
 
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

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 18 —Segment Information
 
In 2008, we changedWe manage 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 operatethrough 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 operatingincome producing properties. Mineral resources includesmanages 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 (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures and net income (loss) 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 one2010, no single customer of our mineral resources segment exceededaccounted for more than 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-26F-25

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)
             
                     
        Items Not
  
  Real
 Mineral
 Fiber
 Allocated to
  
  Estate Resources Resources Segments Total
  (In thousands)
 
For the year or at year-end 2010:
                    
Revenues $68,269  $24,790  $8,301  $—  $101,360 
Depreciation and amortization  3,089   333   39   5,553   9,014 
Equity in earnings of unconsolidated ventures  2,629   2,072   —   —   4,701 
(Loss) income before taxes  (4,634)  22,783   5,058   (15,612)(a)  7,595 
Total assets  668,689   13,399   18,258   88,978   789,324 
Investment in unconsolidated ventures  101,166   —   —   —   101,166 
Capital expenditures(b)
  2,392   49   3   258   2,702 
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 
(a)Items not allocated to segments consist of:
             
  For the Year 
  2010  2009  2008 
     (In thousands)    
 
General and administrative $(17,341) $(22,399) $(19,318)
Share-based compensation  (11,596)  (11,998)  (4,516)
Gain on sale of assets  28,607   104,047   — 
Interest expense  (16,446)  (20,459)  (21,283)
Other non-operating income  1,164   375   279 
             
  $(15,612) $49,566  $(44,838)
             
 
(b)Consists of expenditures for property and equipment and reforestation.
 
In 2010, gain on sale of assets represents the sale of over 24,000 acres of timber and timberland in Georgia, Alabama and Texas for $38,778,000.
In 2010, interest expense decreased principally due to lower interest rates as a result of the maturity of our interest rate swap agreement and decreased amortization of prepaid loan fees.

F-26

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In 2009, general and administrative expense includesexpenses include 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 sellingthe sale of about 75,00095,000 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.$158,603,000.
 
Note 19 —Variable Interest Entities
We participate in real estate ventures for the purpose of acquiring and developing residential and mixed-use communities in which we may or may not have a controlling financial interest. Generally accepted accounting principles require consolidation of variable interest entities (VIE) in which an enterprise has a controlling financial interest and is the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance and (b) the obligation to absorb the VIE losses and right to receive benefits that are significant to the VIE. We examine specific criteria and use judgment when determining whether we are the primary beneficiary and must consolidate a VIE. We perform this review initially at the time we enter into venture agreements and subsequently when reconsideration events occur.
At year-end 2010, we are the primary beneficiary of two VIEs that we consolidate. We have provided the majority of equity to these VIEs, which absent our contributions or advances do not have sufficient equity to fund their operations. We have the authority to approve project budgets and the issuance of additional debt. At year-end 2010, our consolidated balance sheet includes $14,737,000 in assets, principally real estate, and $7,224,000 in liabilities, principally debt, related to these two VIEs. In 2010, we contributed or advanced $1,553,000 to these VIEs. In first quarter 2010, real estate assets decreased by $11,865,000, debt decreased by $13,207,000 and other liabilities increased by $1,342,000 due to lender foreclosure of a lien on property owned by one of these VIEs. We have a nominal general partner interest in this VIE and could be held responsible for its liabilities.
Also at year-end 2010, we are not the primary beneficiary of three VIEs that we account for using the equity method. Unrelated managing partners overseeday-to-day operations and guarantee some debt of the VIEs while we have authority to approve project budgets and the issuance of additional debt. Although some debt is guaranteed by the managing partners, we may under certain circumstances elect or be required to provide additional funds to these VIEs. At year-end 2010, these three VIEs have total assets of $55,262,000, substantially all of which represent developed and undeveloped real estate and total liabilities of $84,162,000, which includes $72,364,000 of borrowings classified as current maturities. These amounts are included in other ventures in the combined summarized balance sheet information for ventures accounted for using the equity method in Note 7. At year-end 2010, our investment in these three VIEs is $3,139,000 and is included in investment in unconsolidated ventures. We did not make any contributions or advances to these ventures in 2010. Our maximum exposure to loss related to these VIEs is estimated at $37,347,000, which exceeds our investment as we have a nominal general partner interest in two of these VIEs and could be held responsible for their liabilities. The maximum exposure to loss represents the maximum loss that we could be required to recognize assuming all the ventures’ assets (principally real estate) are worthless, without consideration of the probability of a loss or of any actions we may take to mitigate any such loss.
Note 20 — Share-Based Compensation
Post-Spin Awards
 
A summary of the awards granted under our 2007 Stock Incentive Plan follows.


F-27

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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 restricted stock unit 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

 
FORESTAR GROUP INC.
The following table summarizes the activity of cash-settled restricted stock unit awards granted in 2010:
 
         
     Weighted
 
     Average
 
     Grant Date
 
  Equivalent Units  Fair Value 
  (In thousands)  (Per unit) 
 
Non-vested at beginning of period  268  $9.43 
Granted  197   17.78 
Vested  (83)  18.00 
Forfeited  (6)  10.55 
         
Non-vested at end of period  376  $11.88 
         
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table summarizes the activity of cash-settled awardsstock appreciation rights granted in 2009:2010:
 
         
     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 
         
                 
           Aggregate
 
        Weighted
  Intrinsic
 
     Weighted
  Average
  Value
 
     Average
  Remaining
  (Current
 
  Rights
  Exercise
  Contractual
  Value Less
 
  Outstanding  Price  Term  Exercise Price) 
  (In thousands)  (Per share)  (In years)  (In thousands) 
 
Balance at beginning of period  737  $9.29   9  $9,346 
Granted  212   17.80         
Exercised  (31)  9.29         
Forfeited  (9)  9.29         
                 
Balance at end of period  909  $11.28   8  $7,289 
Exercisable at end of period  159  $9.29   8  $1,596 
 
To settle vestedThe fair value of awards settled in cash awards, we paidwas $751,000 in 2010 and $23,000 in 2009. At year-end 2010, the fair value of vested cash-settled awards is $13,453,000 and is included in other liabilities. The aggregate current value of non-vested awards was $15,242,000is $12,943,000 at year-end 2009.2010 based on a year-end stock price of $19.30.
 
Equity-settled awards
 
There were no equity-settled awards in the form of restricted stock units granted in 2009,2010, and there were no unvested equity-settled restricted stock unit awards at year-end 2009.2010.


F-28

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Restricted stock
 
Restricted stock awards vest either ratably over or after three years, and generally require achievement ofif we achieve 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 2009:2010:
 
                
   Weighted
    Weighted
 
   Average
    Average
 
   Grant Date
  Restricted
 Grant Date
 
 Restricted Shares Fair Value  Shares Fair Value 
 (In thousands) (Per share)  (In thousands) (Per share) 
Non-vested at beginning of year  207  $21.89 
Non-vested at beginning of period  331  $17.43 
Granted  125   10.20   308   17.80 
Vested  —   —   —   — 
Forfeited  (1)  28.85   (3)  28.20 
          
Non-vested at end of year  331  $17.43 
Non-vested at end of period  636  $17.56 
          
 
The aggregate current value of non-vested awards was $7,264,000is $12,281,000 at year-end 2009.2010 based on a year-end stock price of $19.30.
 
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

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 2009:2010:
 
                            
     Weighted
        Aggregate
 
   Weighted
 Average
      Weighted
 Intrinsic
 
   Average
 Remaining
    Weighted
 Average
 Value
 
 Options
 Exercise
 Contractual
    Average
 Remaining
 (Current
 
 Outstanding Price Term  Options
 Exercise
 Contractual
 Value Less
 
 (In thousands) (Per share) (In years)  Outstanding Price Term Exercise Price) 
 (In thousands) (Per share) (In years) (In thousands) 
Balance at beginning of year  622  $28.85   9 
Balance at beginning of period  780  $24.80   8  $2,052 
Granted  161   9.29       181   17.80         
Exercised  —   —       —   —         
Forfeited  (3)  28.85       (4)  28.85         
            
Balance at end of year  780  $24.80   8 
       
Exercisable at end of year  183  $28.85   8 
Balance at end of period  957  $23.45   8  $1,890 
Exercisable at end of period  395  $26.85   7  $405 
 
The aggregate intrinsicWe estimate the fair 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 uponusing the Black-Scholes option pricing model. Awards granted were valued based uponmodel and the following assumptions:
 
                    
 For the Year  For the Year 
 2009 2008  2010 2009 2008 
Expected dividend yield  0.0%  0.0%  0.0%  0.0%  0.0%
Expected stock price volatility  41.8%  31.0%  51.0%  41.8%  31.0%
Risk-free interest rate  1.8%  2.7%  2.3%  1.8%  2.7%
Expected life of options (years)  6   6   6   6   6 
Weighted average estimated fair value of options granted $3.94  $10.22  $8.98  $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


F-29

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.activity and historical trends.
 
Pre-Spin Awards
 
Prior to the spin-off, weCertain of our employees participated in Temple-Inland’s share-based compensation plans, and as a result, certainplans. In conjunction with the 2007 spin-off, these awards were equitably adjusted into separate awards 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 outstandingof 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

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash-settled awardsspin-off entities.
 
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 $1,904,000 in 2010 and $394,000 in 2009 and $166,000 in 2008.
Restricted stock
All outstanding restricted stock awards at2009. At year-end 2007 vested in first quarter 2008.
Stock options2010, there are no remaining cash-settled awards.
 
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,2010 follows:
 
                                
       Aggregate
        Aggregate
 
     Weighted
 Intrinsic
      Weighted
 Intrinsic
 
     Average
 Value
      Average
 Value
 
   Weighted
 Remaining
 (Current
    Weighted
 Remaining
 (Current
 
   Average
 Contractual
 Value Less
  Options
 Average
 Contractual
 Value Less
 
 Shares Exercise Price Term Exercise Price)  Outstanding Exercise Price Term Exercise Price) 
 (In thousands) (Per share) (In years) (In thousands)  (In thousands) (Per share) (In years) (In thousands) 
Outstanding on Forestar stock  81  $21.53   5  $316   77  $22.08   4  $184 
Outstanding on Guaranty stock  86   13.55   5   — 
Outstanding on Temple-Inland stock  218   18.01   5   904   171   20.07   5   414 
      
             $1,220              $598 
      
Exercisable on Forestar stock  66  $19.73   5  $316   72  $21.47   4  $184 
Exercisable on Guaranty stock  70   12.41   5   — 
Exercisable on Temple-Inland stock  172   16.59   5   904   155   19.65   5   414 
      
             $1,220              $598 
      


F-30

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The intrinsic value of options exercised was $578,000 in 2010 and $287,000 in 2009.
 
Share-Based Compensation Expense
 
Share-based compensation expense for post-spin and pre-spin awards consists of:
 
                        
 For the Year  For the Year 
 2009 2008 2007  2010 2009 2008 
 (In thousands)  (In thousands) 
Cash-settled awards $8,174  $(488) $763  $6,023  $8,174  $(488)
Equity-settled awards  —   750   —   —   —   750 
Restricted stock  1,741   1,264   142   3,461   1,741   1,264 
Stock options  2,083   2,990   492   2,112   2,083   2,990 
              
Pre-tax share-based compensation expense  11,998   4,516   1,397  $11,596  $11,998  $4,516 
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 $286,000 in 2010, $183,000 in 2009 and $1,321,000 in 2008.


F-30

FORESTAR GROUP INC.
 
Pre-tax share-basedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Share-based compensation expense is included in:
 
                        
 For the Year  For the Year 
 2009 2008 2007  2010 2009 2008 
 (In thousands)  (In thousands) 
General and administrative $7,527  $2,910  $1,211  $5,240  $7,527  $2,910 
Other operating  4,471   1,606   186   6,356   4,471   1,606 
              
 $11,998  $4,516  $1,397  $11,596  $11,998  $4,516 
              
 
We did not capitalize any share-based compensation in 2010, 2009 2008 or 2007.2008.
 
Unrecognized share-based compensation for post-spin awards not vested was $5,392,000non-vested restricted stock and stock options is $6,557,000 at year-end 2009.2010. 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 0.62 years.
 
In 2009,2010, we withheld 118,7253,247 shares having a value of $2,347,000$61,000 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 2021 —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 $679,000 in 2010, $717,000 in 2009 and $1,134,000 in 2008. The unfunded liability for our supplemental plan was $305,000 at year-end 2010 and $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

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 2010, 2009 and 2008. These estimates were based on the economic and operating


F-32

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
conditions existing at year-end 2010, 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 593,000over 576,000 undeveloped mineral acres because we are solely royalty and non-operating working interest owners soand as a result 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.


F-31

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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 averagebeginning-of-month price (which we refer to as the average 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 resultFor 2010, oil prices are based on an average price of these changes, for$75.96 per barrel of West Texas Intermediate Crude and natural gas prices are based on an average price of $4.38 per MMBTU per the Henry Hub spot market. For 2009, oil prices are based on a twelve monthan average price of $57.65 per barrel of West Texas Intermediate Crude and natural gas prices are based on a twelve monthan average pricesprice 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.


F-32

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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  Net Reserves 
 Oil
 Natural Gas
  Oil
 Natural Gas
 
 (Barrels) (Mcf)  (Barrels) (Mcf) 
 (In thousands)  (In thousands) 
Consolidated entities:                
Year-end 2008  457   7,538   457   7,538 
Revisions of previous estimates  171   (402)  171   (484)
Extensions and discoveries  59   1,018   59   1,018 
Production  (107)  (1,494)  (107)  (1,412)
     
Year-end 2009  580   6,660   580   6,660 
Our share of ventures accounted for using the equity method        
Revisions of previous estimates  123   709 
Extensions and discoveries  21   514 
Production  (115)  (1,224)
     
Year-end 2010  609   6,659 
Our share of ventures accounted for using the equity method:        
Year-end 2008  —   125   —   125 
Revisions of previous estimates  —   2   —   2 
Extensions and discoveries  —   2,463   —   2,463 
Production  —   (82)  —   (82)
     
Year-end 2009  —   2,508   —   2,508 
Revisions of previous estimates  —   1,041 
Extensions and discoveries  —   895 
Production  —   (573)
          
Total consolidated and our share of equity method ventures at year-end 2009  580   9,168 
     
Year-end 2010  —   3,871 
Total consolidated and our share of equity method ventures:        
Year-end 2008  457   7,663 
Year-end 2009  580   9,168 
Year-end 2010  609   10,530 
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.
In 2010, increases in oil and natural gas prices accounted for about 27,000 barrels and about 475,000 Mcf of upward revisions in reserves for our consolidated entities. The remaining upward revisions to oil reserves were attributable to improved performance of natural water drive reservoirs, response from a lease steam injection program, a work-over and installation of gas lift valves on a high volume and high royalty interest well, improved performance from a well that came online in late 2009 and the associated natural gas liquids, reactivation of two abandoned oil wells, two recompletions, and generally from improved production performances as a result of more efficient operations driven by higher oil prices. The balance of the upward revisions to natural gas reserves is attributable to the associated gas from the upward revisions in oil reserves. For ventures accounted for by the equity method, increases in gas prices accounted for about 46,000 Mcf and the remaining upward revisions are from better than expected performance from nine Barnett Shale wells that were classified as proved developed non-producing at year-end 2009. These long-lateral horizontal wells began production in first quarter 2010.
In 2010 and 2009, reserve additions from new wells drilled and completed during the year are shown for both reporting entities under extensions and discoveries. There were 22 new well additions in 2010 and 30 new well additions in 2009.


F-33

FORESTAR GROUP INC.
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
TheIn 2009, 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 RelatedRelating to Oil and Natural Gas-ProducingGas Producing Activities
 
Capitalized cost related to our oil and natural gas producing activities are as follows:
 
                
 At Year End  At Year-End 
 2009 2008  2010 2009 2008 
 (In thousands)  (In thousands) 
Consolidated entities:                    
Proved oil and gas properties $450  $131  $451  $450  $131 
Accumulated depreciation, depletion and amortization  (69)  —   (133)  (69)  — 
            
Net Capitalized Costs $381  $131 
Net capitalized costs $318  $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, accumulatedAccumulated depreciation, depletion and amortization 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 acquisition, exploration and development activities, whether capitalized or expensed, follows:
 
               
 For the Year  For the Year
 2009 2008  2010 2009 2008
 (In thousands)  (In thousands)
Consolidated entities:                 
Acquisition of properties $—  $—  $—  $—  $— 
Exploration costs  209   95  $—  $209  $95 
Development costs  215   36  $1  $215  $36 
Our share in ventures accounted for using the equity method:        
Acquisition of properties $—  $— 
Exploration costs  —   — 
Development costs  —   — 
We have not incurred any costs for our share in ventures accounted for using the equity method.
 
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

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  At Year-End 
 2009 2008  2010 2009 2008 
 (In thousands)  (In thousands) 
Consolidated entities:                    
Future cash inflows $57,416  $58,904  $74,264  $57,416  $58,904 
Future production and development costs  (8,379)  (6,450)  (9,003)  (8,379)  (6,450)
Future income tax expenses  (15,362)  (16,575)  (20,570)  (15,362)  (16,575)
            
Future net cash flows  33,675   35,879   44,691   33,675   35,879 
10% annual discount for estimated timing of cash flows  (12,537)  (13,994)  (17,881)  (12,537)  (13,994)
            
Standardized measure of discounted future net cash flows $21,138  $21,885  $26,810  $21,138  $21,885 
     
Our share in ventures accounted for using the equity method:                    
Future cash inflows  8,265   633  $15,748  $8,265  $633 
Future production and development costs  (886)  (68)  (3,545)  (886)  (68)
Future income tax expenses  (2,333)  (179)  (3,542)  (2,333)  (179)
            
Future net cash flows  5,046   386   8,661   5,046   386 
10% annual discount for estimated timing of cash flows  (2,374)  (198)  (4,334)  (2,374)  (198)
       
Standardized measure of discounted future net cash flows  2,672   188  $4,327  $2,672  $188 
            
Total consolidated and our share of equity method ventures standardized measure of discounted future net cash flows $23,810  $22,073 
Total consolidated and our share of equity method ventures $31,137  $23,810  $22,073 
            
 
Future net cash flows were computed using prices used in estimating proved developed oil 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.


F-35

FORESTAR GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Changes in the standardized measure of discounted future net cash flow follow:
 
                        
 For the Year 2009  For the Year 
   Our Share of Equity
      Our Share of Equity
   
 Consolidated Method Ventures Total  Consolidated Method Ventures Total 
   (In thousands)    (In thousands) 
Beginning of year $21,885  $188  $22,073 
Year-end 2008 $21,885  $188  $22,073 
Changes resulting from:                        
Net change in sales prices and production costs  (3,043)  (97)  (3,140)  (3,043)  (97)  (3,140)
Sales of oil and natural gas, net of production costs  (11,157)  (299)  (11,456)  (11,157)  (299)  (11,456)
Net change due to extensions and discoveries  4,139   3,844   7,983   4,139   3,844   7,983 
Net change due to revisions of quantity estimates  5,693   1,169   6,862   5,693   1,169   6,862 
Accretion of discount  2,408   21   2,429   2,408   21   2,429 
Net change in income taxes  1,213   (2,154)  (941)  1,213   (2,154)  (941)
              
Aggregate change for the year $(747) $2,484  $1,737  $(747) $2,484  $1,737 
              
End of year $21,138  $2,672  $23,810 
Year-end 2009 $21,138  $2,672  $23,810 
Changes resulting from:            
Net change in sales prices and production costs  9,929   939   10,868 
Sales of oil and natural gas, net of production costs  (12,690)  (2,104)  (14,794)
Net change due to extensions and discoveries  2,148   1,526   3,674 
Net change due to revisions of quantity estimates  9,153   2,224   11,377 
Accretion of discount  2,340   279   2,619 
Net change in income taxes  (5,208)  (1,209)  (6,417)
              
Aggregate change for the year $5,672  $1,655  $7,327 
       
Year-end 2010 $26,810  $4,327  $31,137 
       
 
Results of Operations for Oil and Natural Gas Producing Activities
 
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, including the cost of development and production.


F-35F-36

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  For the Year 
 2009 2008 2007  2010 2009 2008 
   (In thousands)    (In thousands) 
Consolidated entities:                        
Royalty revenues $11,910  $21,639  $13,114  $13,724  $11,910  $21,639 
Production costs  (753)  (1,714)  —   (1,034)  (753)  (1,714)
Exploration expenses  (100)  —   —   —   (100)  — 
Depreciation, depletion, amortization  (253)  —   —   (334)  (253)  — 
Administrative expenses  (3,546)  (3,121)  (2,237)
Oil and natural gas administrative expenses  (3,295)  (3,546)  (3,121)
Income tax expenses  (2,200)  (5,152)  (3,327)  (2,637)  (2,200)  (5,152)
              
Results of operations $5,058  $11,652  $7,550  $6,424  $5,058  $11,652 
Our share in ventures accounted for using the equity method(a):
                        
Royalty revenues $312  $—  $—  $2,359  $312  $— 
Production costs  (13)  —   —   (255)  (13)  — 
Exploration expenses  —   —   —   —   —   — 
Depreciation, depletion, amortization  —   —   —   —   —   — 
Administrative expenses  (18)  —   — 
Oil and natural gas administrative expenses  (70)  (18)  — 
Income tax expenses  (84)  —   —   (605)  (84)  — 
              
Results of operations $197  $—  $—  $1,429  $197  $— 
              
Total results of operations $5,255  $11,652  $7,550  $7,853  $5,255  $11,652 
      ��       
 
 
(a)Producing wells in ventures accounted for using the equity method began generating royalties in 2009.
 
In 2009 and 2008, productionProduction costs represent our share of oil and natural gas production severance taxes. In 2007, oiltaxes and natural gas production severance taxes were reflected as a reduction of royalty revenues and were allocated to us by Temple-Inland.lease operating expenses.
 
Oil and natural gas produced and average unit prices related to our royalty and non-operating working interests follows(a) :follows:
 
                        
 For the Year For the Year
 2009 2008 2007 2010 2009 2008
Consolidated entities:         
Oil production (barrels)  107,200   87,900   94,900   115,400   107,200   87,900 
Average price per barrel $56.86  $106.66  $65.24  $73.09  $56.85  $106.66 
Natural gas production (millions of cubic feet)  1,575.8   1,363.4   967.3   1,223.6   1,411.6   1,363.4 
Average price per thousand cubic feet $4.09  $8.76  $6.69  $4.32  $4.12  $8.76 
Our share of ventures accounted for using the equity method:         
Natural gas production (millions of cubic feet)  572.8   82.1   — 
Average price per thousand cubic feet $4.12  $3.80  $— 
Total consolidated and our share of equity method ventures:
         
Oil production (barrels)  115,400   107,200   87,900 
Average price per barrel $73.09  $56.85  $106.66 
Natural gas production (millions of cubic feet)  1,796.4   1,493.7   1,363.4 
Average price per thousand cubic feet $4.26  $4.10  $8.76 
(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-36F-37

FORESTAR GROUP INC.
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 23 —Summary of Quarterly Results of Operations (Unaudited)
 
Summarized quarterly financial results for 20092010 and 20082009 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 
                 
  First
 Second
 Third
 Fourth
  Quarter Quarter Quarter Quarter
  (In thousands, except per share amounts)
 
2010
                
Total revenues $26,358  $28,137  $24,013  $22,852 
Gross profit  15,016   15,833   15,050   6,499 
Operating (loss) income  (571)  684   15,531   3,241 
Equity in earnings of unconsolidated ventures  371   287   82   3,961 
(Loss) income before taxes  (4,548)  (2,886)  11,946   3,792 
Net (loss) income attributable to Forestar Group Inc.   (2,972)  (3,273)  8,922   2,448 
Net (loss) income per share — basic  (0.08)  (0.09)  0.25   0.07 
Net (loss) income per share — diluted  (0.08)  (0.09)  0.25   0.07 
2009
                
Total revenues $29,077  $40,466  $45,307  $31,401 
Gross profit  19,339   27,605   31,843   16,839 
Operating income (loss)  323   91,283   38,753   (5,297)
Equity in (loss) earnings of unconsolidated ventures  (572)  (4,048)  (2,443)  (708)
(Loss) income before taxes  (5,364)  82,232   31,157   (10,818)
Net (loss) income attributable to Forestar Group Inc.   (3,892)  50,917   19,476   (7,394)
Net (loss) income per share — basic  (0.11)  1.42   0.54   (0.21)
Net (loss) income per share — diluted  (0.11)  1.41   0.54   (0.21)
 
Note 24 —Subsequent EventsEvent
 
We have evaluatedOn February 23, 2011, we supplemented our amended and restated senior credit facility by adding a subsequent events through March 3, 2010,lender to the daterevolving loan and to the term loan, with an aggregate commitment of issuance of these financial statements.$30,000,000, increasing the total commitment under the revolver from $175,000,000 to $200,000,000 and under the term loan from $125,000,000 to $130,000,000.


F-37F-38

 
Forestar Group Inc.
 
 
Schedule III — Consolidated Real Estate and Accumulated Depreciation
 
 
Year-End 20092010
(In thousands)
 
                                                                                        
       Costs Capitalized
                    Costs Capitalized
             
       Subsequent to Acquisition                    Subsequent to Acquisition             
   Initial Cost to Company Improvements
   Gross Amount Carried at End of Period        Initial Cost to Company Improvements
   Gross Amount Carried at End of Period     
     Buildings &
 Less Cost of
 Carrying
 Land & Land
 Buildings &
   Accumulated
 Date of
 Date
      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  Encumbrances Land Improvements Sales and Other Costs(a) Improvements Improvements Total Depreciation Construction Acquired 
Entitled, Developed, and Under Development Projects:
Entitled, Developed, and Under Development Projects:
                                    
Entitled, Developed, and Under Development Projects:
                                    
 
CALIFORNIA
                                                                                        
Contra Costa County
                                                                                        
San Joaquin River     $12,225      $(3,430)     $8,795      $8,795                  $12,225      $(3,430)     $8,795      $8,795             
COLORADO
                                                                                        
Douglas County
                                                                                        
Pinery West      7,308       1,826       9,134       9,134       2006   2006       7,308       2,022       9,330       9,330       2006   2006 
Weld County
                                                                                        
Buffalo Highlands      3,001       615       3,616       3,616       2006   2005       3,001       580       3,581       3,581       2006   2005 
Johnstown Farms      2,749       9,028  $188   11,965       11,965       2002   2002       2,749       9,123  $188   12,060       12,060       2002   2002 
Stonebraker      3,878       1,388       5,266       5,266       2005   2005       3,878       1,411       5,289       5,289       2005   2005 
GEORGIA
                                                                                        
Bartow County
                                                                                        
Towne West      936       923       1,859       1,859       2007           936       923       1,859       1,859       2007     
Coweta County
                                                                                        
Cedar Creek Preserve      852       244       1,096       1,096                   852       244       1,096       1,096             
Corinth Landing      607       585       1,192       1,192                   607       585       1,192       1,192             
Coweta South Industrial Park      532       477       1,009       1,009                   532       477       1,009       1,009             
Fox Hall      166       5,832       5,998       5,998       2007           166       2,233       2,399       2,399       2007     
Genesee      480       1,167       1,647       1,647                   480       1,170       1,650       1,650             
TEXAS
                                                                                        
Bastrop County
                                                                                        
Hunter’s Crossing      3,613       7,396   311   11,320       11,320       2001   2001       3,613       7,562   317   11,492       11,492       2001   2001 
The Colony      8,726       13,511   161   22,398       22,398       1999   1999       8,726       14,095   161   22,982       22,982       1999   1999 
Bexar County
                                                                                        
Cibolo Canyons      25,568       61,308   928   87,804       87,804       2004   1986       25,568       62,000   960   88,528       88,528       2004   1986 
Calhoun County
                                                                                        
Caracol $9,500   8,603       8,336   2,047   18,986       18,986       2006   2006  $8,217   8,603       8,865   2,047   19,515       19,515       2006   2006 
Harbor Mist      2,822       1,047       3,869       3,869           2007       2,822       1,164       3,986       3,986           2007 
Collin County
                                                                                        
Light Farms  33,533   30,101       20,902       51,003       51,003       2007   2007   34,366   30,101       21,237       51,338       51,338       2007   2007 
Maxwell Creek      9,904       (1,499)  418   8,823       8,823       2000   2000       9,904       (2,031)  418   8,291       8,291       2000   2000 
The Gables at North Hill      2,160       (589)  63   1,634       1,634       2004   2001       2,160       (692)  63   1,531       1,531       2004   2001 
Timber Creek  3,431   7,282       2,593       9,875       9,875       2007   2007   3,431   7,282       2,929       10,211       10,211       2007   2007 


S-1

Forestar Group Inc.
 
Schedule III — Consolidated Real Estate and Accumulated Depreciation — (Continued)
 
                                                                                        
       Costs Capitalized
                    Costs Capitalized
             
       Subsequent to Acquisition                    Subsequent to Acquisition             
   Initial Cost to Company Improvements
   Gross Amount Carried at End of Period        Initial Cost to Company Improvements
   Gross Amount Carried at End of Period     
     Buildings &
 Less Cost of
 Carrying
 Land & Land
 Buildings &
   Accumulated
 Date of
 Date
      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  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       1,921       3,083   175   5,179       5,179       2006   2005 
Dallas County
                                                                                        
Stoney Creek  5,297   12,822       3,446       16,268       16,268       2007   2007   2,187   12,822       1,830       14,652       14,652       2007   2007 
Denton County
                                                                                        
Lantana  9,942   31,451       2,308       33,759       33,759       2000   1999   6,672   31,451       133       31,584       31,584       2000   1999 
The Preserve at Pecan Creek      5,855       (387)  313   5,781       5,781       2006   2005       5,855       (1,417)  313   4,751       4,751       2006   2005 
Harris County
                                                                                        
City Park      3,946       (2,530)  1,641   3,057       3,057       2002   2001       3,946       (2,468)  1,641   3,119       3,119       2002   2001 
Hays County
                                                                                        
Arrowhead Ranch      12,856       1,560       14,416       14,416           2007       12,856       1,739       14,595       14,595           2007 
Hood County
                                                                                        
Harbor Lakes      3,514       5,080   312   8,906       8,906  $(635)  2000   1998       3,514       411   312   4,237       4,237       2000   1998 
Nueces County
                                                                                        
Tortuga Dunes      12,080       10,530       22,610       22,610       2008   2006       12,080       10,813       22,893       22,893       2008   2006 
Rockwall County
                                                                                        
Caruth Lakes      1,624       3,278   100   5,002       5,002       1997   1996       1,624       2,279   100   4,003       4,003       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       23,751       (19,301)  51   4,501       4,501       2006   2006 
Williamson County
                                                                                        
Westside at Buttercup Creek      13,149       (6,058)  449   7,540       7,540       1993   1993       13,149       (7,319)  449   6,279       6,279       1993   1993 
Chandler Road Properties      3,552       (2,826)      726       726       2004   2004       3,552       (2,822)      730       730       2004   2004 
La Conterra      4,024       2,026   265   6,315       6,315       2008   2006       4,024       2,960   292   7,276       7,276       2008   2006 
MISSOURI
                                                                                        
Clay County
                                                                                        
Somerbrook      3,061       (219)  13   2,855       2,855       2003   2001       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                   18,528       (9,047)  790   10,271       10,271             
                                      
Total Entitled, Developed, and Under Development Projects $74,910  $290,920  $—  $127,059  $9,068  $427,047  $—  $427,047  $(635)         $54,873  $283,647  $—  $111,122  $8,290  $403,059  $—  $403,059  $—         
                                      


S-2

 
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             
                                             
           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     $724      $16      $740      $740             
Cleburne County
                                            
Undeveloped Land      334       51       385       385             
CALIFORNIA
                                            
Los Angeles County
                                            
Land In Entitlement Process      3,969       9,244       13,213       13,213           1997 
GEORGIA
                                            
Banks County
                                            
Undeveloped Land      325       3       328       328             
Land In Entitlement Process      504       48       552       552             
Bartow County
                                            
Undeveloped Land      5,778       93       5,871       5,871             
Carroll County
                                            
Undeveloped Land      7,574       145       7,719       7,719             
Land In Entitlement Process      9,308       2,326       11,634       11,634             
Chattooga County
                                            
Undeveloped Land      618       —       618       618             
Cherokee County
                                            
Undeveloped Land      3,673       96       3,769       3,769             
Land In Entitlement Process      2,446       563       3,009       3,009             
Coweta County
                                            
Undeveloped Land      485       9       494       494             
Land In Entitlement Process      2,793       561       3,354       3,354             


S-3

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             
                                             
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 
 
Dawson County
                                            
Undeveloped Land      2,375       9       2,384       2,384             
Land In Entitlement Process      702       913       1,615       1,615             
Elbert County
                                            
Undeveloped Land      376       14       390       390             
Floyd County
                                            
Undeveloped Land      1,305       78       1,383       1,383             
Gilmer County
                                            
Undeveloped Land      2,989       22       3,011       3,011             
Gordon County
                                            
Undeveloped Land      1,749       15       1,764       1,764             
Hall County
                                            
Undeveloped Land      600       48       648       648             
Haralson County
                                            
Undeveloped Land      1,285       83       1,368       1,368             
Land In Entitlement Process      506       89       595       595             
Heard County
                                            
Undeveloped Land      1,408       216       1,624       1,624             
Jackson County
                                            
Undeveloped Land      970       62       1,032       1,032             
Lumpkin County
                                            
Undeveloped Land      3,120       5       3,125       3,125             
Paulding County
                                            
Undeveloped Land      1,406       217       1,623       1,623             
Pickens County
                                            
Undeveloped Land      3,378       43       3,421       3,421             
Polk County
                                            
Undeveloped Land      433       18       451       451             
TEXAS
                                            
Angelina County
                                            
Undeveloped Land      1,024       19       1,043       1,043             


S-4

Forestar Group Inc.
Schedule III — Consolidated Real Estate and Accumulated Depreciation — (Continued)
                                                                                        
Forestar Group Inc.
Forestar Group Inc.
 

Schedule III — Consolidated Real Estate and Accumulated Depreciation — (Continued)

Schedule III — Consolidated Real Estate and Accumulated Depreciation — (Continued)
 
       Costs Capitalized
                    Costs Capitalized
             
       Subsequent to Acquisition                    Subsequent to Acquisition             
   Initial Cost to Company Improvements
   Gross Amount Carried at End of Period        Initial Cost to Company Improvements
   Gross Amount Carried at End of Period     
     Buildings &
 Less Cost of
 Carrying
 Land & Land
 Buildings &
   Accumulated
 Date of
 Date
      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  Encumbrances Land Improvements Sales and Other Costs(a) Improvements Improvements Total Depreciation Construction Acquired 
Hardin County
                                                                                        
Undeveloped Land      871       2       873       873                   863       2       865       865             
Harris County
                                                                                        
Land in Entitlement Process      685       853       1,538       1,538                   685       883       1,568       1,568             
Liberty County
                                                                                        
Undeveloped Land      662       25       687       687                   662       25       687       687             
Montgomery County
                                                                                        
Land in Entitlement Process      2,675       152       2,827       2,827           2007       2,675       (1,475)      1,200       1,200           2007 
San Augustine County
                                                                                        
Undeveloped Land      1,085               1,085       1,085                   1,630               1,630       1,630             
Other
                                                                                        
Undeveloped Land      2,309       208       2,517       2,517                   1,902       1,593       3,495       3,495             
                                      
Total Undeveloped Land
 $—  $75,028  $—  $15,983  $—  $91,011  $—  $91,011  $—          $—  $70,574  $—  $16,034  $—  $86,608  $—  $86,608  $—         
                                      
Commercial Operating Properties:
                
 
Income Producing Properties:
                                            
TEXAS
                                                                                        
Harris County
                                            
Broadstone Memorial $26,500  $4,701  $43,323          $4,701  $43,323  $48,024           2010 
Travis County                                                                                        
Radisson Hotel & Suites $16,716      $16,316  $31,586          $47,902  $47,902  $(23,417)          15,216       16,316  $28,676           44,992   44,992  $(22,308)        
Hood County                                                                                        
Harbor Lakes Golf Club          1,269               1,269   1,269   (365)  2000   1998           1,447   1,500           2,947   2,947   (1,130)  2000   1998 
                                      
Total Commercial Operating Properties $16,716  $—  $17,585  $31,586  $—  $—  $49,171  $49,171  $(23,782)        
Total Income Producing Properties
 $41,716  $4,701  $61,086  $30,176  $—  $4,701  $91,262  $95,963  $(23,438)        
                                      
Total
 $91,626  $365,948  $17,585  $174,628  $9,068  $518,058  $49,171  $567,229  $(24,417)         $96,589  $358,922  $61,086  $157,332  $8,290  $494,368  $91,262  $585,630  $(23,438)        
                                      
 
 
(a)We do not capitalize carrying costs until development begins.


S-5

Forestar Group Inc.
 
Schedule III — Consolidated Real Estate and Accumulated Depreciation
 
Reconciliation of real estate:
 
                        
 2009 2008 2007  2010 2009 2008 
   (In thousands)    (In thousands) 
Balance at beginning of year $633,130  $572,984  $468,724  $567,229  $633,130  $572,984 
Amounts capitalized  38,971   100,639   181,430   65,564   38,971   100,639 
Amounts retired or adjusted  (104,872)  (40,493)  (77,170)  (47,163)  (104,872)  (40,493)
              
Balance at close of period $567,229  $633,130  $572,984  $585,630  $567,229  $633,130 
              
 
Reconciliation of accumulated depreciation:
 
                        
 2009 2008 2007  2010 2009 2008 
   (In thousands)    (In thousands) 
Balance at beginning of year $(22,544) $(20,774) $(20,907) $(24,417) $(22,544) $(20,774)
Depreciation expense  (1,873)  (1,770)  (2,014)  (2,582)  (1,873)  (1,770)
Amounts retired or adjusted  —   —   2,147   3,561   —   — 
              
Balance at close of period $(24,417) $(22,544) $(20,774) $(23,438) $(24,417) $(22,544)
              


S-6