The mystery in Forestar’s annual report…

March 4, 2010

A lot of us like a good mystery, but most of us probably prefer the ones in a book to those in an SEC filing.

When we looked at the 10-K that Forestar Group Inc. (FOR) filed yesterday, we noticed an interesting example that illustrates an important point: Shareholders need transparency and full disclosure in SEC filings. And when that’s lacking, they can’t know whether the company’s executives are running the company with everyone’s interests in mind, or just their own.

On page 31, in the 2009 section under the heading —Significant aspects of our results of operations follow, we found the following:

General and administrative expense includes about $3,200,000 paid to outside advisors regarding an evaluation by our Board of Directors of an unsolicited shareholder proposal and $2,213,000 in non-cash impairment charges related to our undivided 15 percent interest in corporate aircraft contributed to us by Temple-Inland at spin-off. Other general and administrative expenses have declined as result of execution of our near-term strategic initiatives to lower costs.

Admittedly, this is not the kind of mystery that involves deep secrets like —Who killed J.R.?—¯ However, we — and therefore perhaps shareholders — found ourselves wondering: —$3.2 million to outside advisors? Who are they? Do these advisors have a connection to anyone at the company? Or, at a minimum, what kind of advisors are they? What is the general nature of this —unsolicited shareholder proposal—?—¯ Was this a lame shareholder proposal, or something that really required a lot of due diligence and time to consider?

Another sentence or two to provide some context could have easily answered these questions.

When we researched the point, we discovered that Forestar actually first disclosed this expense in an 8-K filed last May. But in the handful of documents that refer to the expense which the company has filed since then, it always uses the same phrase, with no further detail.

We understand that companies can—t reveal information that would jeopardize their competitive edge. However, if a matter doesn—t fall into that category — as this one presumably doesn—t, since it was a shareholder proposal — then companies could use their filings as an opportunity to reassure shareholders that they value transparency and are working with their interests in mind.

So, sadly, in this case we can—t tell you Whodunnit. Nor can we tell you why.

Update: a valued footnoted reader, Steven Friedman, gets the coveted —Sam Spade for the Day award for helping us solve the mystery. Thank you for helping us, Steven! He writes:

this was the takeover offer last year. http://uk.reuters.com/article/idUKN2330853720090123

Offer was at $15 and stock is higher now so the defense money was probably good ROI for shareholder. The private jet on the other hand….oh well

Image source: National Geographic

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