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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2006
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 No. 1-10466
 
The St. Joe Company
(Exact name of registrant as specified in its charter)
 
     
Florida
(State or other jurisdiction of
incorporation or organization)
  59-0432511
(I.R.S. Employer
Identification No.)
245 Riverside Avenue, Suite 500
Jacksonville, Florida
(Address of principal executive offices)
  32202
(Zip Code)
 
Registrant’s telephone number, including area code: (904) 301-4200
 
Securities Registered Pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, no par value   New York Stock Exchange
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES þ     NO o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES o     NO þ
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  YES þ     NO o
 
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):
Large Accelerated filer þ     Accelerated filer o     Non-Accelerated Filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o     NO þ
 
The aggregate market value of the registrant’s Common Stock held by non-affiliates based on the closing price on June 30, 2006, was approximately $3.22 billion.
 
As of February 22, 2007, there were 104,471,012 shares of Common Stock, no par value, issued and 74,370,980 shares outstanding, with 30,100,032 shares of treasury stock.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of our Shareholders to be held on May 15, 2007 (the “proxy statement”) are incorporated by reference in Part III of this Report. Other documents incorporated by reference in this Report are listed in the Exhibit Index.
 


 

 
Table of Contents
 
             
        Page
Item
     
No.
 
l.
  Business   2
      Recent Developments   2
      Land-Use Entitlements   4
      Residential Real Estate   7
      Commercial Real Estate   9
      Rural Land Sales   10
      Forestry   10
      Supplemental Information   10
      Employees   10
      Website Access to Reports   11
      Certifications   11
1A.
  Risk Factors   11
1B.
  Unresolved Staff Comments   17
2.
  Properties   17
3.
  Legal Proceedings   18
4.
  Submission of Matters to a Vote of Security Holders   18
 
5.
  Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities   18
6.
  Selected Consolidated Financial Data   21
7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   22
7A.
  Quantitative and Qualitative Disclosures about Market Risk   45
8.
  Financial Statements and Supplementary Data   46
9.
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   46
9A.
  Controls and Procedures   46
9B.
  Other Information   48
 
10.
  Directors, Executive Officers and Corporate Governance   48
11.
  Executive Compensation   48
12.
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   49
13.
  Certain Relationships and Related Transactions and Director Independence   49
14.
  Principal Accountant Fees and Services   49
 
15.
  Exhibits and Financial Statement Schedule   49
  53
 EX-10.2 First Amendment to Third Amended and Restated Credit Agreement dated February 26, 2007.
 EX-10.23 Second Amendment to The St. Joe Company 1999 Employee Stock Purchase Plan.
 EX-10.24 Third Amendment to The St. Joe Company 1999 Employee Stock Purchase Plan.
 EX-10.25 Fourth Amendment to The St. Joe Company 1999 Employee Stock Purchase Plan.
 EX-21.1 Subsidiaries of The St. Joe Company.
 EX-23.1 Consent of KPMG LLP, independent registered public accounting firm for the registrant.
 EX-31.1 Certification by Chief Executive Officer.
 EX-31.2 Certification by Chief Financial Officer.
 EX-32.1 Certification by Chief Executive Officer.
 EX-32.2 Certification by Chief Financial Officer.
 EX-99.1 - Press Release dated February 28, 2007
 
 
* Portions of the Proxy Statement for the Annual Meeting of our Shareholders to be held on May 15, 2007, are incorporated by reference in Part III of this Form 10-K.


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PART I
 
Item 1.   Business
 
As used throughout this Form 10-K Annual Report, the terms “we,” “JOE,” “Company” and “Registrant” mean The St. Joe Company and its consolidated subsidiaries unless the context indicates otherwise.
 
JOE is one of the largest real estate development companies in Florida. We believe that we are the largest private landowner in the State of Florida. The majority of our land is located in Northwest Florida. We own approximately 805,000 acres, approximately 334,000 acres of which are within ten miles of the coast of the Gulf of Mexico.
 
We are engaged in town and resort development and operations, commercial and industrial development and rural land sales. We also have significant interests in timber. We believe we are one of the few real estate development companies to have assembled the range of real estate, financial, marketing and regulatory expertise necessary to take a large-scale approach to real estate development and services. We believe we have a number of key business strengths and competitive advantages, including one of the largest inventories of private land suitable for development in Florida, as well as a very low cost basis in our land.
 
Our four operating segments are:
 
  •  Residential Real Estate
 
  •  Commercial Real Estate
 
  •  Rural Land Sales
 
  •  Forestry
 
Our mission is to create a family of places in Northwest Florida that inspire people and make the region an even better place to live, work and play. We seek to accomplish our mission and create value by securing higher and better land-use entitlements, facilitating infrastructure improvements, developing community amenities, undertaking strategic and expert land planning and development, parceling our land holdings in creative ways and performing land restoration and enhancement. Over the past ten years, we have created an array of imaginative real estate products ranging from beachfront resorts and suburban, primary neighborhoods to commerce parks and rural recreational properties. Going forward, we will continue to reposition our timberland holdings for higher and better uses in order to optimize the value of our core real estate assets in Northwest Florida.
 
Recent Developments
 
Our business has experienced the following developments since December 31, 2005:
 
  •  We experienced a significant decline in sales in our residential real estate business in 2006, especially in our resort communities. Florida, like many other states across the nation, experienced dramatic slowdowns in its residential real estate markets in 2006, as compared to the record-setting residential real estate activity of the past several years. This real estate slowdown was reflected in our results of operations. We had net income of $51.0 million in 2006, compared to net income of $126.7 million in 2005.
 
  •  Our residential land-use entitlements pipeline increased to approximately 44,300 units as of December 31, 2006. This pipeline is made up of units where entitlements have been obtained, as well as units which are in the entitlements process. These land-use entitlements cover a broad spectrum of potential products, markets and price points. In addition, at year end JOE had approximately 14.5 million square feet of commercial land-use entitlements in hand or in process, plus an additional 627 acres zoned for commercial uses.
 
  •  The Panama City — Bay County Airport and Industrial District is seeking to move the Panama City-Bay County International Airport to a site in western Bay County located on land that we own. In September 2006, the Federal Aviation Administration issued its Record of Decision approving the relocation of the airport to the West Bay site. An appeal of the Record of Decision has been filed by


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  the Natural Resources Defense Council and other petitioners. The Airport Authority has received all state permits necessary to move forward with the relocation of the airport, but the Army Corps of Engineers must issue a Section 404 permit before construction can commence. The relocation of the airport is also dependent on adequate funding. We have agreed to donate 4,000 acres to the Airport Authority for the new airport when relocation funding and all permits are in place.
 
  •  In 2004, the Army Corps of Engineers issued a Regional General Permit which enables us to implement large-scale environmental and development planning for 48,150 acres in Walton and Bay Counties. The National Resources Defense Council and The Florida Sierra Club filed a lawsuit against the Army Corps of Engineers challenging the Regional General Permit in April 2005. At that time, a federal district court issued a preliminary injunction halting development under the permit. In November 2006, the court upheld the permit and lifted the injunction, allowing development to proceed. The plaintiffs have appealed the ruling. This legal action has had a minimal effect to date on our real estate development activity.
 
  •  In September 2006, we announced that we are exiting the homebuilding business in Florida to further focus on our core competencies of land planning and development. We believe that our value creation potential is highest when we use our unique strengths to create inspirational places with value, personality and purpose. We expect that our exit from Florida homebuilding will be completed by mid-2008. The homebuilding exit was made possible by our expanding relationships with national, regional and local homebuilders and their growing interest in the Northwest Florida real estate markets. For example, from April through December 2006, we committed 1,209 lots to two national homebuilders, Beazer Homes and David Weekley Homes. Of these committed units, 426 had been closed as of December 31, 2006. See the table entitled “Residential Real Estate National Homebuilder Summary of Home Site Commitments and Purchases” within our Residential Real Estate Segment section for more information.
 
  •  In August 2006 and January 2007, we implemented a series of operational changes designed to streamline and organize our field operations along regional lines and to advance our rural land sales strategies. These changes were designed to capture operating efficiencies and to promote the coordinated development of groups of projects that integrate various real estate product types. These organizational changes, together with normal employee attrition, have resulted in a workforce reduction of approximately 24% of our full-time employees from the beginning of 2006.
 
  •  In the fourth quarter, JOE closed a transaction with the Florida Department of Transportation (FDOT) for the sale of approximately 4,000 acres in Northwest Florida to be used for rights-of-way for future road and highway construction in the region. We received $46.0 million in cash from this transaction, but, more importantly, the transaction demonstrates our commitment to innovative infrastructure planning and development in Northwest Florida. Accounting gain will be recognized over time as the FDOT completes the design and engineering of individual roadway segments and the land is conveyed to the FDOT, a process that is likely to take many years to complete.
 
  •  Another infrastructure milestone during 2006 was the opening of the realigned portion of Highway 98 at our WindMark Beach community. This represents the culmination of years of effort to potentially create additional value at WindMark Beach by moving 3.6 miles of Highway 98 away from the beachfront area of the development. We next plan to restore the existing dune structure and use the roadbed of the original highway to create one of the longest public beachfront trail systems in Florida.
 
  •  In May 2006, we announced an updated analysis of our land holdings which showed an increase of 46% in total acreage classified for resort, seasonal and primary residential uses. The land analysis also indicated that approximately 200,000 acres previously classified as timberland are now planned for other higher uses. We believe that land classification and analysis is the important first step in our value creation strategy.
 
  •  Our WaterColor Inn and Resort received national honors and recognition during 2006. Among its notable awards were the following: ranked as the 36th best hotel in the world and 7th in North America by readers of Travel + Leisure magazine; ranked as the #1 family hotel in North America by readers of Travel + Leisure Family magazine; designated as an Andrew Harper’s Hideaway Report Grand Award


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  Winner; honored by AAA with Northwest Florida’s only four-diamond ranking; and named to ForbesTraveler.com’s list of the 400 best hotels in the world.
 
  •  In January 2007, we entered into an exclusive listing agreement with Eastdil Secured, LLC, a real estate brokerage firm, for the marketing and potential disposition of our office building portfolio. The portfolio is located in seven markets throughout the Southeast and consists of 17 buildings with approximately 2.3 million net rentable square feet. The likelihood and timing of the possible sale will depend upon market reaction and other variables.
 
  •  In February 2007, we increased the size of our revolving credit facility from $250 million to $500 million.
 
Land-Use Entitlements
 
We have a broad range of land-use entitlements in hand or in various stages of the approval process for residential communities in Northwest Florida and other high-growth regions of the state, as well as commercial entitlements. As of December 31, 2006, we had approximately 44,300 units and 14.5 million commercial square feet in the entitlements pipeline, in addition to 627 acres zoned for commercial uses. The following tables describe our residential and commercial projects with land-use entitlements that are in development, pre-development planning or the entitlements process. These entitlements are on approximately 58,000 acres. Most of the projects are on lands we own and some of the projects are being developed through ventures with unrelated third parties.
 
Summary of Land-Use Entitlements(1)
Active JOE Residential and Mixed-Use Projects in Florida
December 31, 2006
 
                                                                 
                                  Residential
             
                            Residential
    Units
             
                            Units
    Under
    Total
    Remaining
 
                            Closed
    Contract
    Residential
    Commercial
 
                Project
    Project
    Since
    as of
    Units
    Entitlements
 
Project
  Class.(2)    
County
    Acres     Units(3)     Inception     12/31/06(4)     Remaining(4)     (Sq. Ft.)(5)  
 
In Development:(6)
                                                               
Artisan Park(7)
    PR       Osceola       175       616       498       29       89        
Cutter Ridge
    PR       Franklin       10       25                   25        
Hawks Landing
    PR       Bay       88       168       59       2       107        
Landings at Wetappo
    RR       Gulf       113       24       7             17        
Palmetto Trace
    PR       Bay       141       481       460             21        
Paseos(7)
    PR       Palm Beach       175       325       322             3        
RiverCamps on Crooked Creek
    RS       Bay       1,491       408       182             226        
Rivercrest(7)
    PR       Hillsborough       413       1,382       1,365       5       12        
RiverSide at Chipola
    RR       Calhoun       120       10       2             8        
RiverTown
    PR       St. Johns       4,170       4,500                   4,500       500,000  
SevenShores
    RS       Manatee       192       686             9       677       9,000  
SouthWood
    VAR       Leon       3,370       4,770       2,142       19       2,609       4,715,360  
St. Johns Golf & Country Club
    PR       St. Johns       880       799       785       5       9        
SummerCamp
    RS       Franklin       762       499       80       1       418       25,000  
The Hammocks
    PR       Bay       133       457       453             4        
Victoria Park
    PR       Volusia       1,859       4,200       1,294       3       2,903       854,254  
WaterColor
    RS       Walton       499       1,140       870             270       47,600  
WaterSound
    VAR       Walton       2,425       1,432       15             1,417       457,380  
WaterSound Beach
    RS       Walton       256       511       419       3       89       29,000  
WaterSound West Beach
    RS       Walton       62       199       13             186        
WindMark Beach
    RS       Gulf       2,020       1,662       127             1,535       75,000  
                                                                 
Subtotal
                    19,354       24,294       9,093       76       15,125       6,712,594  
                                                                 


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                                  Residential
             
                            Residential
    Units
             
                            Units
    Under
    Total
    Remaining
 
                            Closed
    Contract
    Residential
    Commercial
 
                Project
    Project
    Since
    as of
    Units
    Entitlements
 
Project
  Class.(2)    
County
    Acres     Units(3)     Inception     12/31/06(4)     Remaining(4)     (Sq. Ft.)(5)  
 
In Pre-Development:(6)
                                                               
Avenue A
    PR       Gulf       6       96                   96        
Bayview Estates
    PR       Gulf       31       45                   45        
Bayview Multifamily
    PR       Gulf       20       300                   300        
Beckrich NE
    PR       Bay       15       70                   70        
Boggy Creek
    PR       Bay       630       526                   526        
Bonfire Beach
    RS       Bay       550       750                   750       70,000  
College Station
    PR       Bay       567       800                   800        
East Lake Creek
    PR       Bay       81       313                   313        
East Lake Powell
    RS       Bay       181       360                   360       30,000  
Hills Road
    RS       Bay       30       356                   356        
Howards Creek
    RR       Gulf       8       33                   33        
Laguna Beach West
    PR       Bay       59       382                   382        
Long Avenue
    PR       Gulf       10       30                   30        
Palmetto Bayou
    PR       Bay       58       217                   217       90,000  
ParkSide
    PR       Bay       48       480                   480        
Pier Park NE
    VAR       Bay       57       460                   460       190,000  
Pier Park Timeshare
    RS       Bay       13       125                   125        
PineWood (Park Place)
    PR       Bay       118       264                   264        
Port St. Joe Town Center (Port St. Joe Mill Site Area)
    VAR       Gulf       180       624                   624       500,000  
Powell Adams
    RS       Bay       32       1,425                   1,425        
RiverCamps on Sandy Creek
    RS       Bay       6,500       624                   624        
Sabal Island
    RS       Gulf       45       18                   18        
The Cove
    RR       Gulf       57       81                   81        
Timber Island(8)
    RS       Franklin       49       407                   407       14,500  
Topsail
    VAR       Walton       115       627                   627       300,000  
Wavecrest
    RS       Bay       7       95                   95        
WestBay Corners SE
    VAR       Bay       100       524                   524       50,000  
WestBay Corners SW
    PR       Bay       64       160                   160        
WestBay DSAP
    VAR       Bay       15,089       5,842                   5,842       4,330,000  
WestBay Landing
    VAR       Bay       950       214                   214        
WhiteFence Farms, Red Hills
    RR       Leon       373       61                   61        
                                                                 
Subtotal
                    26,043       16,309                   16,309       5,574,500  
                                                                 
Total
                    45,397       40,603       9,093       76       31,434       12,287,094  
                                                                 
 
 
(1) A project is deemed land-use entitled when all major discretionary governmental land-use approvals have been received. Some of these projects may require additional permits for development and/or build-out; they also may be subject to legal challenge.
 
(2) Current JOE land classifications:
 
  •  PR — Primary residential.
 
  •  RS — Resort and seasonal residential, which includes RiverCamps.
 
  •  RR — Rural residential, which includes WhiteFence Farms, Homesteads and other rural residential products.
 
  •  VAR — Includes multiple classifications. For example, a project may have substantial commercial and residential acres.
 
(3) Project units represent the maximum number of units entitled or currently expected at full build-out. The actual number of units or square feet to be constructed at full build-out may be lower than the number entitled or currently expected.

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(4) Excludes our Mid-Atlantic region that includes activity in North and South Carolina where we are primarily engaged in homebuilding, and not obtaining entitlements. As of December 31, 2006, the Mid-Atlantic region had 1,492 home sites owned or under contract. Of that total, 191 have been sold and 1,301 remain to be sold.
 
(5) Represents the remaining square feet with land-use entitlements as designated in a development order or expected given the existing property land use or zoning and present plans. Commercial entitlements include retail, office and industrial uses. Industrial uses total 6,128,381 square feet including SouthWood, RiverTown and the West Bay DSAP.
 
(6) A project is “in development” when construction on the project has commenced. A project in “pre-development” has land-use entitlements but is still under internal evaluation or requires one or more additional permits prior to the commencement of construction.
 
(7) Artisan Park is 74 percent owned by JOE. Paseos and Rivercrest are each 50 percent owned by JOE.
 
(8) Timber Island entitlements include seven residential units and 400 units for hotel or other transient uses (including units held with fractional ownership such as private residence clubs) and include 480 wet/dry marina slips.
 
Proposed JOE Residential and Mixed-Use Projects
In the Land-Use Entitlement Process in Florida(1)
December 31, 2006
 
                                 
                        Estimated
 
                        Commercial
 
                  Estimated
    Entitlements
 
Project
  Class.(2)  
County
  Project Acres     Project Units(3)     (Sq. Ft.)(3)  
 
Beacon Hill
  RR   Gulf     3       12        
Carrabelle East
  PR   Franklin     200       600        
Country Walk
  RR   Bay     1,300       125        
DeerPoint Cedar Grove
  PR   Bay     599       750        
Panama City Mixed Use
  VAR   Bay     1,414       3,100       635,000  
Port St. Joe Draper, Phase I
  PR   Gulf     639       1,200        
SouthSide
  VAR   Leon     1,625       2,800       1,150,000  
South Walton Multifamily
  PR   Walton     40       212        
Star Avenue North
  VAR   Bay     271       1,248       380,000  
St. James Island McIntyre
  RR   Franklin     1,704       340        
St. James Island RiverCamps
  RS   Franklin     2,500       500        
St. James Island Granite Point
  RS   Franklin     1,000       2,000        
The Cove, Phase 3
  RR   Gulf     7       26        
                                 
Total
            11,302       12,913       2,165,000  
                                 
 
 
(1) A project is deemed to be in the land-use entitlement process when customary steps necessary for the preparation and submittal of an application, such as conducting pre-application meetings or similar discussions with governmental officials, have commenced and/or an application has been filed. All projects listed have significant entitlement steps remaining that could affect their timing, scale and viability. There can be no assurance that these entitlements will ultimately be received.
 
(2) Current JOE land classifications:
 
  •  PR — Primary residential.
 
  •  RS — Resort and seasonal residential, which includes RiverCamps.
 
  •  RR — Rural residential, which includes WhiteFence Farms, Homesteads and other rural residential products.
 
  •  VAR — Includes multiple classifications. For example, a project may have substantial commercial and residential acres.
 
(3) The actual number of units or square feet to be constructed at full build-out may be lower than the number ultimately entitled.


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Summary of Additional Commercial Land-Use Entitlements (1)
(Commercial Projects Not Included in the Tables Above)
December 31, 2006
 
                                         
          Project
    Acres Sold
    Acres Under Contract
    Total Acres
 
Project
  County     Acres     Since Inception     As of 12/31/06     Remaining  
 
Airport Commerce
    Leon       45             5       40  
Airport Road
    Franklin       13                   13  
Alf Coleman Retail
    Bay       25       16       1       8  
Avery St. Retail
    Bay       10       10              
Beach Commerce
    Bay       157       149       2       6  
Beach Commerce II
    Bay       112       11             101  
Beckrich Office Park
    Bay       16       12             4  
Beckrich Retail
    Bay       47       19       2       26  
Cedar Grove Commerce
    Bay       51                   51  
Franklin Industrial
    Franklin       7                   7  
Glades Retail
    Bay       14                   14  
Gulf Boulevard
    Bay       76       21             55  
Hammock Creek Commerce
    Gadsden       165       27             138  
Mill Creek Commerce
    Bay       37                   37  
Nautilus Court
    Bay       11       4             7  
Port St. Joe Commerce II
    Gulf       39       9             30  
Port St. Joe Commerce III
    Gulf       54                   54  
Port St. Joe Medical
    Gulf       19                   19  
Powell Hills Retail
    Bay       44             44        
South Walton Commerce
    Walton       39       18       4       17  
                                         
Total
            981       296       58       627  
                                         
 
 
(1) A project is deemed land-use entitled when all major discretionary governmental land-use approvals have been received. Some of these projects may require additional permits for development and/or build-out; they also may be subject to legal challenge. Includes significant JOE projects that are either operating, under development or in the pre-development stage.
 
Residential Real Estate
 
Our residential real estate segment develops large-scale, mixed-use resort, seasonal and primary residential communities primarily on land we own with very low cost basis. We own large tracts of land in Northwest Florida, including large tracts near Tallahassee and Panama City, and significant Gulf of Mexico beach frontage and other waterfront properties, which we believe are suited for resort, seasonal and primary communities. We believe this large land inventory, with a low cost basis, provides us an advantage over our competitors who must purchase real estate at current market prices before beginning projects. We manage the conceptual design, planning and permitting process for each of our new communities. We then contract for the construction of the infrastructure for the community. Developed home sites are then marketed and sold to individual purchasers or to homebuilders.
 
JOE also owns all of the outstanding stock of Saussy Burbank, a homebuilder located in Charlotte, North Carolina. In 2006, Saussy Burbank closed sales of 637 homes it constructed in North and South Carolina.
 
The following is a description of some of the communities we are developing:
 
WaterColor is situated on approximately 499 acres on the beaches of the Gulf of Mexico in south Walton County. The community is planned to include approximately 1,140 units, including an 11 - unit private residence club with fractional ownership. WaterColor includes the WaterColor Inn and Resort, the recipient of


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many notable awards during 2006. Other amenities include a beach club, spa, tennis center, an award-winning upscale restaurant, retail and commercial space and neighborhood parks.
 
WaterSound Beach is located approximately five miles east of WaterColor. Situated on approximately 256 acres, WaterSound Beach includes over one mile of beachfront on the Gulf of Mexico. This community is currently planned to include approximately 511 units. During 2006, the WaterSound Private Beach Club opened for business and began accepting memberships.
 
WaterSound West Beach is located over one half mile west of WaterSound Beach on the beach side of County Road 30A. This community has been designed for 199 units with private beach access through the adjacent Deer Lake State Park.
 
WaterSound, located on approximately 2,425 acres and planned for a 1,432-unit mixed-use development, is a resort community approximately three miles from WaterSound Beach north of U.S. 98 in Walton County. WaterSound will include approximately 450,000 square feet of commercial space. This seasonal town is planned to include a golf course, pools, parks and other amenities. Sales at WaterSound began in 2006.
 
Palmetto Trace is a primary home community in Panama City Beach planned for 481 units on 141 acres. From its inception through December 31, 2006, contracts for 460 units were accepted and closed. David Weekley Homes, LLP, a national homebuilder, is building out the last phase of Palmetto Trace.
 
RiverCamps on Crooked Creek, situated on approximately 1,491 acres in western Bay County and bounded by West Bay, the Intracoastal Waterway and Crooked Creek, is planned for 408 high-quality finished cabins in a low-density, rustic setting with access to various outdoor activities such as fishing, boating and hiking. In 2006, we substantially completed the River House, an amenity designed to provide RiverCamps owners with a waterfront recreational facility.
 
Hawks Landing is a primary home community on approximately 88 acres located in Lynn Haven in Bay County. We plan to develop 168 home sites at Hawks Landing to local and national home builders. From its inception through December 31, 2006, contracts for 61 units were accepted or closed.
 
WindMark Beach is situated on approximately 2,020 acres in Gulf County near the town of Port St. Joe and includes approximately 15,000 feet of beachfront. This beachfront resort destination is planned to include approximately 1,662 units at full build-out, together with 75,000 square feet of commercial space. Construction to realign approximately four miles of U.S. Highway 98 away from the beachfront was completed in 2006. Sales in the second phase of WindMark Beach began in 2006.
 
SummerCamp, in Franklin County, is situated on the Gulf of Mexico on approximately 762 acres. Plans include approximately 499 units, a beach club, a community dock and nature trails.
 
SouthWood is situated on approximately 3,370 acres in southeast Tallahassee. Planned to include approximately 4,770 residential units, SouthWood includes an 18-hole golf course and club, and a traditional town center with restaurants, recreational facilities, retail shops and offices. Over 35% of the land in this community is designated for greenspaces, including a 123-acre central park. We own significant commercial acreage adjacent to SouthWood. In late 2006, we closed a commercial transaction with a shopping center developer that plans to build a 430,000 square foot retail center adjacent to SouthWood.
 
WhiteFence Farms, Red Hills is being designed with 61 rural home sites on approximately 373 acres near Tallahassee. This community will allow owners to enjoy an active or passive outdoors and farm-oriented lifestyle with modern conveniences and proximity to an urban center. The home sites will range in size from three to 15 acres and will feature cleared acreage, fencing, trails and entry features.
 
RiverTown is situated on approximately 4,170 acres located in St. Johns County south of Jacksonville along the St. Johns River. With parks and public meeting places, RiverTown is being planned for 4,500 housing units and 500,000 square feet of commercial space. RiverTown will have seven unique neighborhoods interwoven with community and retail areas by a series of bike paths and walkways, with all roads leading to the community’s centerpiece, the St. John’s River. RiverTown will offer homebuyers a wide variety of price


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points and lifestyles, appealing to several different target markets, including primary and second-home buyers. Construction at RiverTown started in 2006 and sales are expected to begin in 2007.
 
St. Johns Golf and Country Club is a primary residential community situated on approximately 880 acres we acquired in St. Johns County in 2001. The community includes an 18-hole golf course and club house facility. Of the 799 units planned, 790 had been sold or were under contract at the end of 2006.
 
Victoria Park is situated on approximately 1,859 acres in Volusia County near Interstate 4 in the historic college town of Deland between Daytona Beach and Orlando. Plans for Victoria Park include approximately 4,200 single and multi-family units built among parks, lakes and conservation areas. Victoria Park includes an award-winning 18-hole golf course.
 
Artisan Park, located in Celebration, near Orlando, is being developed through a joint venture in which we own 74%. Artisan Park is situated on approximately 175 acres which we acquired in 2002. Artisan Park is planned to include approximately 267 single-family units, 47 townhomes, and 302 condominiums as well as parks, trails and a community clubhouse with a pool and educational and recreational programming. At the end of 2006, 89 units remained for sale at Artisan Park.
 
Infrastructure construction has started on SevenShores, located in the City of Bradenton in Manatee County. SevenShores is entitled for 686 condominium units on 192 acres, with a club house, related amenities, and access to a marina. Vertical construction will not commence at SevenShores until internally set presale requirements are satisfied.
 
Several of our planned developments are in the midst of the entitlement process or are in the planning stage. We cannot assure you that:
 
  •  the necessary entitlements for development will be secured;
 
  •  any of our projects can be successfully developed, if at all; or
 
  •  our projects can be developed in a timely manner.
 
It is not feasible to estimate project development costs until entitlements have been obtained. Large-scale development projects can require significant infrastructure development costs and may raise environmental issues that require mitigation.
 
Commercial Real Estate
 
Our commercial real estate segment develops and sells real estate for commercial purposes. We also own a portfolio of office properties located throughout the southeastern United States.
 
Development and Sales.  We focus on commercial development in Northwest Florida because of our large land holdings along roadways and near or within business districts in the region. We also develop parcels within or near existing residential development projects. For each new development, we direct the conceptual design, planning and permitting process and then contract for the construction of the horizontal infrastructure and any vertical building.
 
We focus on developing and selling the following products:
 
  •  Retail properties
 
  •  Multi-family parcels
 
  •  Office parks
 
  •  Commerce parks
 
Investment Property Portfolio.  Our commercial development operations, combined with our tax deferral strategy of reinvesting qualifying asset sale proceeds into like-kind properties, have enabled us to create a portfolio of 17 office buildings totaling 2.3 million square feet. Our portfolio of investment properties was 85% leased, based on net rentable square feet, as of December 31, 2006. In January 2007, we engaged a real


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estate brokerage firm to market the office building portfolio for sale. The likelihood and timing of a possible transaction is subject to market reaction and other variables.
 
Rural Land Sales
 
Our rural land sales segment markets parcels for a variety of rural residential and recreational uses on a portion of our long-held timberlands in Northwest Florida. The pricing of these parcels varies significantly based on size, location, terrain, timber quality and other local factors. Some parcels include the benefits of limited development activity including improved roads, ponds, fencing, gates and common use areas. In 2006, this segment sold 34,335 acres of rural land at an average price of $2,621 per acre.
 
The vast majority of the holdings marketed by our rural land sales segment will continue to be managed as timberland until sold. The revenues and income from our timberland operations are reflected in the results of our forestry segment.
 
Forestry
 
Our forestry segment focuses on the management and harvesting of our extensive timber holdings. We grow, harvest and sell timber and wood fiber. Our principal forestry product is softwood pulpwood. We also grow and sell softwood and hardwood sawtimber. In addition, we own and operate a cypress sawmill and mulch plant, Sunshine State Cypress, which converts cypress logs into wood products and mulch.
 
On December 31, 2006, our standing pine inventory totaled approximately 23.9 million tons and our hardwood inventory totaled approximately 8.7 million tons. Our timberlands are harvested by local independent contractors under agreements that are generally renewed annually. Our timberlands are located near key transportation links, including roads, waterways and railroads.
 
Our strategy is to actively manage, with the best available silviculture practices, portions of our timberlands that produce adequate amounts of timber to meet our pulpwood supply agreement obligation with Smurfit-Stone Container Corporation, which expires June 30, 2012. We also harvest and sell additional timber to regional sawmills that produce products other than pulpwood. In addition, our forestry operation is focused on selective harvesting, thinning and site preparation of timberlands that may later be sold or developed by other JOE divisions.
 
Competition
 
The real estate development business is highly competitive and fragmented. We compete with numerous developers of varying sizes, ranging from local to regional in scope, some of which have greater financial resources than we have. Sales of existing homes and home sites also provide competition for homesite purchases in our new residential developments. In our residential real estate segment, we compete primarily on the basis of community design, quality, uniqueness, amenities and developer reputation. We believe that our financial stability, relative to most others in our industry, has also become an increasingly favorable competitive factor.
 
Supplemental Information
 
Information regarding the revenues, earnings and total assets of each of our operating segments can be found in Note 14 to our Consolidated Financial Statements included in this Report. Subtantially all of our revenues are generated from domestic customers. All of our assets are located in the United States.
 
Employees
 
During 2006 and early 2007, we streamlined our operations and reduced employee headcount in connection with a series of organizational changes. As of February 1, 2007, we had 938 full-time employees


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and 145 part-time employees. This represents an approximately 24% reduction in the number of full-time employees from the beginning of 2006. Our employees work in the following segments:
 
                         
    Full-Time     Part-Time     Total  
 
Residential real estate development
    426       15       441  
Residential clubs and resorts
    312       127       439  
Commercial real estate
    12             12  
Rural land sales
    13             13  
Forestry
    28       1       29  
Other — including corporate
    147       2       149  
                         
Total
    938       145       1,083  
                         
 
Website Access to Reports
 
We will make available, free of charge, access to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC, through our internet home page at www.JOE.com.
 
Certifications
 
In 2006, we submitted to the New York Stock Exchange (NYSE) the Certification of our Chief Executive Officer required by Section 303A.12(a) of the NYSE Listed Company Manual, relating to our compliance with the NYSE’s corporate governance lising standards. There were no qualifications to the certification. We have also filed as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K the Chief Executive Officer and Chief Financial Officer certifications required to be filed with the Securities and Exchange Commission pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Item 1A.   Risk Factors
 
Our business faces numerous risks, including those set forth below. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations.
 
A downturn in national or regional economic conditions, especially in Florida, could adversely impact our business.
 
Our real estate sales, revenues, financial condition and results of operations could decline due to a deterioration of the national or certain regional economies. Our sales and revenues would be especially affected by a downturn in economic conditions in Florida, where most of our developments are located. In addition, we generate a disproportionate amount of our resort and seasonal sales in our Northwest Florida communities from customers in the Southeast region of the United States, which sales would be impacted by a deterioration of economic conditions in that region. In addition, a significant percentage of our planned residential units are resort and seasonal products, purchases of which are particularly sensitive to the state of the economy.
 
A continued downturn in the demand for real estate, especially residential real estate products, could adversely impact our business.
 
The majority of our revenues are generated from the sale of residential real estate products. Our ability to generate revenues in our residential real estate segment is directly related to demand for these products. As described above, a deterioration of economic conditions, whether national or regional, can adversely affect demand for real estate. The real estate industry, however, is cyclical and can experience downturns based on


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consumer perceptions of real estate markets and other cyclical factors wholly unrelated to general economic conditions. Since late 2005, the United States, and Florida in particular, has experienced a significant downturn in certain residential real estate markets while economic conditions have generally remained healthy. As investors who have increasingly utilized real estate as an investment over the last several years seek to liquidate their real estate investments, resale inventories of existing homes and lots have risen dramatically, especially in our resort markets. If these trends continue, the demand for our residential real estate products could further decline, negatively impacting our net income and potentially further impacting selling prices and/or absorption rates.
 
The occurrence of hurricanes and other natural disasters in Florida could adversely affect our business.
 
Because of its location between the Gulf of Mexico and the Atlantic Ocean, Florida is particularly susceptible to the occurrence of hurricanes. Depending on where any particular hurricane makes landfall, our developments in Florida, especially our coastal properties in Northwest Florida, could experience significant, if not catastrophic, damage. Such damage could materially delay sales in affected communities or could lessen demand for products in those communities. Importantly, regardless of actual destruction in a development, the occurrence of hurricanes in Florida and the southeastern United States could negatively impact demand for our real estate products because of consumer perceptions of hurricane risks. For example, the southeastern United States experienced a record-setting hurricane season in 2005. In particular, Hurricane Katrina, which struck New Orleans and the Mississippi Gulf Coast, caused severe devastation to those areas and received prolonged national media attention. Although our properties were not significantly impacted, we believe that the 2005 hurricane season had an immediate negative impact on sales of our resort residential products. Another severe hurricane or hurricane season in the future could have a similar negative effect on our real estate sales.
 
In addition to hurricanes, the occurrence of other natural disasters in Florida, such as tornadoes, floods, fires, unusually heavy or prolonged rain and droughts, could have a material adverse effect on our ability to develop and sell properties or realize income from our projects. The occurrence of natural disasters could also have a long-term negative effect on the attractiveness of Florida as a location for resort, seasonal and/or primary residences.
 
Increases in real estate property taxes and/or insurance premiums could reduce customer demand for lots and homes in our developments.
 
Property insurance companies doing business in Florida have reacted to recent hurricanes by increasing premiums, requiring higher deductibles, reducing limits, restricting coverages, imposing exclusions, refusing to insure certain property owners, and in some instances, ceasing insurance operations in the state. These actions have been most dramatically applied to coastal communities. A significant number of our developments are located in such coastal communities. This trend of rising insurance rates could continue if there are severe hurricanes in the future.
 
Florida has recently experienced dramatic increases in property values due to the record-setting real estate activity in the first half of this decade. As a result, local governments have been, and may continue, aggressively re-assessing the value of homes and real estate for property tax purposes. These larger assessments increase the total real estate property taxes due from property owners annually.
 
Increases in real estate insurance premiums and/or property taxes could influence potential customers who may consider those annual costs in making housing choices to decide not to purchase a lot or home in one of our developments, which could have a material adverse effect on our financial condition and results of operations.
 
Our business is concentrated in Florida, primarily Northwest Florida. As a result, our financial results are dependent on the economic growth and health of Florida, particularly Northwest Florida.
 
The economic growth and health of Florida, particularly Northwest Florida where the majority of our land is located, are important factors in sustaining demand for our products and services. As a result, any adverse


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change to the economic growth and health of Florida, particularly Northwest Florida, could materially adversely affect our financial results. The future economic growth in certain portions of Northwest Florida may be adversely affected if its infrastructure, such as roads, airports, medical facilities and schools, are not improved to meet increased demand. There can be no assurance that these improvements will occur.
 
The most significant infrastructure improvement currently being considered in Northwest Florida is the proposed relocation of the Panama City-Bay County International Airport to a site in western Bay County located on land that we own. In September 2006, the Federal Aviation Administration issued its Record of Decision approving the relocation of the airport to the West Bay site. An appeal of the Record of Decision has been filed by the Natural Resources Defense Council and other petitioners. The Airport Authority has received all state permits necessary to move forward with the relocation of the airport, but the Army Corps of Engineers must issue a Section 404 permit before construction can commence. The relocation of the airport is also dependent on adequate funding. We have agreed to donate 4,000 acres to the Airport Authority when relocation funding and all permits are in place. We believe that the relocation of the airport is important to the overall economic development of Northwest Florida. If the relocation of the airport does not occur, our business prospects could be materially affected.
 
Changes in the demographics affecting projected population growth in Florida, particularly Northwest Florida, including a decrease in the migration of Baby Boomers, could adversely affect our business.
 
Florida has experienced strong recent population growth, including the migration of Baby Boomers to the state. We believe that Baby Boomers seeking retirement or vacation homes in Florida will be important target customers for our real estate products in the future, and we intend to continue to plan and market products to them. In addition, the success of our primary communities will be dependent on strong in-migration population expansion in our regions of development, primarily Northwest Florida. If persons considering moving to Florida do not view Northwest Florida as an attractive primary, second home or retirement destination, our business could be adversely affected.
 
Florida’s population growth is expected to continue into the foreseeable future, although population growth in 2007 is expected to be less than the growth experienced in 2006. Florida’s population growth could be negatively affected in the future by factors such as the occurrence of hurricanes, the high cost of real estate and increasing insurance costs. In addition, other states such as Georgia, North and South Carolina and Tennessee have implemented marketing initiatives designed to attract retiring Baby Boomers and the workforce population who may have otherwise considered moving to Florida. Any significant decrease in the demographic trend of increasing population in Florida, including the migration of Baby Boomers, could adversely affect our business.
 
Increases in interest rates could reduce demand for our products.
 
Many purchasers of our real estate products obtain mortgage loans to finance a substantial portion of the purchase price, including the construction price of a home that may be constructed on the property. Further, our homebuilder customers depend on purchasers who rely on mortgage financing. In general, housing demand is adversely affected by increases in interest rates and by decreases in the availability of mortgage financing. In addition, changes in the federal income tax laws which would remove or limit the deduction for home mortgage interest could have an adverse impact on demand for our residential products. In addition to residential real estate, increased interest rates could also negatively impact our commercial properties or other land we develop or sell. If interest rates increase and the ability or willingness of prospective buyers to finance real estate purchases is adversely affected, our sales, revenues, financial condition and results of operations may be negatively affected.
 
Our real estate operations are cyclical.
 
Our business is affected by demographic and economic trends and the supply and rate of absorption of lot sales and new construction. As a result, our real estate operations are cyclical, which may cause our quarterly revenues and operating results to fluctuate significantly from quarter to quarter and to differ from the


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expectations of public market analysts and investors. If this occurs, our stock’s trading price could also fluctuate significantly.
 
We are exposed to risks associated with real estate sales and development.
 
Our real estate development activities entail risks that include:
 
  •  construction delays or cost overruns, which may increase project development costs;
 
  •  compliance with building codes and other local regulations;
 
  •  an inability to obtain required governmental permits and authorizations;
 
  •  an inability to secure tenants or anchors necessary to support commercial projects; and
 
  •  failure to achieve anticipated occupancy levels or rents.
 
If we are not able to raise sufficient cash to enhance and maintain our operations and to develop our real estate holdings, our revenues, financial condition and results of operations could be negatively impacted.
 
We operate in a capital intensive industry and require significant capital expenditures to maintain our competitive position. We obtain funds for our capital expenditures through cash flow from operations, property sales and financings. Failure to secure needed additional financing, if and when needed, may limit our development activities which could reduce our revenues and results of operations. We expect to make significant capital expenditures in the future to enhance and maintain the operations of our properties and to develop our real estate holdings. In the event that our plans or assumptions change or prove to be inaccurate, or if our cash flow proves to be insufficient, due to unanticipated expenses or otherwise, we may seek to minimize cash expenditures and/or obtain additional financing in order to support our plan of operations. Additional funding, whether obtained through public or private debt or equity financing, or from strategic alliances, may not be available when needed or may not be available on terms acceptable to us, if at all.
 
We rely on a senior revolving credit facility with adjustable interest rates to provide cash for operations and/or capital expenditures. Increases in interest rates can make it more expensive for us to obtain the funds we need to operate our business.
 
Our credit facility, as well as our outstanding senior notes, contain financial covenants that we must meet on a quarterly basis. These restrictive covenants require, among other things, that we generate cash in excess of our fixed charges and that we not exceed certain debt levels. If we are not able to generate sufficient cash from operations to satisfy these covenants, we could have an event of default under our credit facility, senior notes and certain other debt. Such a default could cause these lenders to immediately accelerate amounts due under our credit facility, senior notes and certain other debt. They could also seek to negotiate additional or more severe restrictive covenants or increased pricing. Any of these events could have a material adverse effect on our financial condition and results of operations.
 
Our business is subject to extensive regulation which makes it difficult and expensive for us to conduct our operations.
 
Development of real estate entails a lengthy, uncertain and costly entitlements process.
 
Approval to develop real property in Florida entails an extensive entitlements process involving multiple and overlapping regulatory jurisdictions and often requiring discretionary action by local government. This process is often political, uncertain and may require significant exactions in order to secure approvals. Real estate projects must generally comply with the provisions of the Local Government Comprehensive Planning and Land Development Regulation Act (the “Growth Management Act”) and local land development regulations. In addition, development projects that exceed certain specified regulatory thresholds require approval of a comprehensive Development of Regional Impact, or DRI, application. Compliance with the Growth Management Act, local land development regulations and the DRI process is usually lengthy and costly and can be expected to materially affect our real estate development activities.


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The Growth Management Act requires local governments to adopt comprehensive plans guiding and controlling future real property development in their respective jurisdictions and to evaluate, assess and keep those plans current. Included in all comprehensive plans is a future land use map which sets forth allowable land use development rights. Since most of our land has an “agricultural” land use, we are required to seek an amendment to the future land use map to develop residential, commercial and mixed use projects. Approval of these comprehensive plan map amendments is highly discretionary.
 
All development orders and development permits must be consistent with the plan. Each plan must address such topics as future land use and capital improvements and make adequate provision for a multitude of public services including transportation, schools, solid waste disposal, sanitation, sewerage, potable water supply, drainage, affordable housing, open space and parks. The local governments’ comprehensive plans must also establish “levels of service” with respect to certain specified public facilities, including roads and schools, and services to residents. In many areas, infrastructure funding has not kept pace with growth, causing facilities to operate below established levels of service. Local governments are prohibited from issuing development orders or permits if the development will reduce the level of service for public facilities below the level of service established in the local government’s comprehensive plan, unless the developer either sufficiently improves the services up front to meet the required level or provides financial assurances that the additional services will be provided as the project progresses. In addition, local governments that fail to keep their plans current may be prohibited by law from amending their plans to allow for new development.
 
The DRI review process includes an evaluation of a project’s impact on the environment, infrastructure and government services, and requires the involvement of numerous state and local environmental, zoning and community development agencies. Local government approval of any DRI is subject to appeal to the Governor and Cabinet by the Florida Department of Community Affairs, and adverse decisions by the Governor or Cabinet are subject to judicial appeal. The DRI approval process is usually lengthy and costly, and conditions, standards or requirements may be imposed on a developer with respect to a particular project, which may materially increase the cost of the project.
 
Changes in the Growth Management Act or the DRI review process or the interpretation thereof, new enforcement of these laws, the enactment of new laws regarding the development of real property or the identification of new facts could lead to new or greater liabilities that could materially adversely affect our business, profitability or financial condition.
 
Environmental and other regulations may have an adverse effect on our business.
 
Our properties are subject to federal, state and local environmental regulations and restrictions that may impose significant limitations on our development ability. In most cases, approval to develop requires multiple permits which involve a long, uncertain and costly regulatory process. Most of our land holdings contain jurisdictional wetlands, some of which may be unsuitable for development or prohibited from development by law. Development approval most often requires mitigation for impacts that require land to be conserved at a disproportionate ratio versus the land approved for development. Much of our property is undeveloped land located in areas where development may have to avoid, minimize or mitigate for impacts to the natural habitats of various protected wildlife or plant species. Much of our property is in coastal areas that usually have a more restrictive permitting burden and must address issues such as coastal high hazard, hurricane evacuation, floodplains and dune protection.
 
In addition, our current or past ownership, operation and leasing of real property, and our current or past transportation and other operations are subject to extensive and evolving federal, state and local environmental laws and other regulations. The provisions and enforcement of these environmental laws and regulations may become more stringent in the future. Violations of these laws and regulations can result in:
 
• civil penalties;
 
• remediation expenses;
 
• natural resource damages;


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• personal injury damages;
 
• potential injunctions;
 
• cease and desist orders; and
 
• criminal penalties.
 
In addition, some of these environmental laws impose strict liability, which means that we may be held liable for any environmental damages on our property regardless of fault.
 
Some of our past and present real property, particularly properties used in connection with our previous transportation and papermill operations, were involved in the storage, use or disposal of hazardous substances that have contaminated and may in the future contaminate the environment. We may bear liability for this contamination and for the costs of cleaning up a site at which we have disposed of or to which we have transported hazardous substances. The presence of hazardous substances on a property may also adversely affect our ability to sell or develop the property or to borrow funds using the property as collateral.
 
Changes in laws or the interpretation thereof, new enforcement of laws, the identification of new facts or the failure of other parties to perform remediation at our current or former facilities could lead to new or greater liabilities that could materially adversely affect our business, profitability or financial condition.
 
We are increasingly 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.
 
With our exit from the homebuilding business in Florida, we are now highly dependent upon our relationships with national, regional and local homebuilders to provide construction services at our residential developments. If homebuilders do not view our developments as desirable locations for homebuilding operations, our business will be adversely affected.
 
We may also be involved in other strategic alliances or joint venture relationships as part of our overall strategy for particular developments or regions. These joint venture partners may bring development experience, industry expertise, financing capabilities, brand recognition and credibility or other competitive assets. Strategic partners, however, may have economic or business interests or goals that are inconsistent with ours or that are influenced by factors unrelated to our business. For example, a national homebuilder could decide to delay purchases of lots in one of our developments due to adverse real estate conditions in its areas of operations wholly unrelated to our region. We may also be subject to adverse business consequences if the market reputation of a strategic partner deteriorates.
 
A formal partnership with a joint venture partner may also involve special risks such as:
 
  •  we may not have voting control over the joint 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 joint venture to liabilities greater than those contemplated by the joint venture agreement or have other adverse consequences.
 
Changes in our income tax estimates could affect our profitability.
 
In preparing our consolidated financial statements, significant management judgment is required to estimate our income taxes. Our estimates are based on our interpretation of federal and state tax laws. We estimate our actual current tax due and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. The temporary differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. Adjustments may be required by a change in assessment of our deferred tax assets and liabilities, changes due to audit adjustments by federal and state tax authorities, and changes in tax laws. To the extent adjustments are required in any given period, we will include the


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adjustments in the tax provision in our financial statements. These adjustments could materially impact our financial position, cash flow and results of operations.
 
Significant competition could have an adverse effect on our business.
 
The real estate industry is generally characterized by significant competition.
 
A number of residential and commercial developers, some with greater financial and other resources, compete with us in seeking resources for development and prospective purchasers and tenants. Competition from other real estate developers and real estate services companies may adversely affect our ability to:
 
  •  sell homes and home sites;
 
  •  attract purchasers;
 
  •  attract and retain tenants;
 
  •  sell undeveloped rural land;
 
  •  attract and retain experienced real estate development personnel; and
 
  •  obtain construction materials and labor.
 
The forest products industry is highly competitive.
 
Many of our competitors in the forest products industry are fully integrated companies with substantially greater financial and operating resources. Our forest products are also subject to increasing competition from a variety of non-wood and engineered wood products. In addition, we are subject to competition from lumber products and logs imported from foreign sources. Any significant increase in competitive pressures from substitute products or other domestic or foreign suppliers could have a material adverse effect on our forestry operations.
 
If we are unable to attract or retain experienced real estate development personnel, our business may be adversely affected.
 
Our future success largely depends on our ability to attract and retain experienced real estate development personnel. The market for these employees is highly competitive. If we cannot continue to attract and retain quality personnel, our ability to effectively operate our business may be significantly limited. In addition, we are highly dependent upon the strategic vision and operating experience of Peter Rummell, our Chairman and Chief Executive Officer. Mr. Rummell’s existing employment agreement with the Company expires in August 2008. We do not have key-person life insurance on Mr. Rummell.
 
Decline in rental income could adversely affect our financial results.
 
We own a 2.3 million square foot portfolio of commercial real estate rental properties. Our profitability could be adversely affected if:
 
  •  a significant number of our tenants are unable to meet their obligations to us;
 
  •  we are unable to lease space at our properties when the space becomes available; and
 
  •  the rental rates upon a renewal or a new lease are significantly lower than expected.
 
Item 1B.   Unresolved Staff Comments
 
We have no unresolved comments from the Securities and Exchange Commission regarding our periodic or current reports.
 
Item 2.   Properties
 
We own our principal executive offices located in Jacksonville, Florida.


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We own approximately 805,000 acres, the majority of which are located in Northwest Florida, including over 200 miles of gulf, lake and riverfront acreage. Most of our raw land assets are managed as timberlands until designated for development. At December 31, 2006, approximately 332,000 acres were encumbered under a wood fiber supply agreement with Smurfit-Stone Container Corporation which expires on June 30, 2012. For more information on our real estate assets, see Item 1. Business.
 
Item 3.   Legal Proceedings
 
We are involved in litigation on a number of matters and are subject to certain claims which arise in the normal course of business, none of which, in the opinion of management, is expected to have a material adverse effect on our consolidated financial position, results of operations or liquidity. However, the aggregate amount being sought by the claimants in these matters is presently estimated to be several million dollars.
 
We are subject to costs arising out of environmental laws and regulations, which include obligations to remove or limit the effects on the environment of the disposal or release of certain wastes or substances at various sites, including sites which have been previously sold. It is our policy to accrue and charge against earnings environmental cleanup costs when it is probable that a liability has been incurred and an amount can be reasonably estimated. As assessments and cleanups proceed, these accruals are reviewed and adjusted, if necessary, as additional information becomes available.
 
Pursuant to the terms of various agreements by which we disposed of our sugar assets in 1999, we are obligated to complete certain defined environmental remediation. Approximately $6.7 million was placed in escrow pending the completion of the remediation. We have separately funded the costs of remediation. Remediation was substantially completed in 2003. Completion of remediation on one of the subject parcels occurred during the third quarter of 2006, resulting in the release of approximately $2.9 million of the escrowed funds to us on August 1, 2006. We expect the remaining $3.8 million held in escrow to be released to the Company in early 2007. The release of escrow funds will not have any effect on our earnings.
 
Our former paper mill site in Gulf County and certain adjacent property are subject to various Consent Agreements and Brownfield Site Rehabilitation Agreements with the Florida Department of Environmental Protection. The paper mill site has been assessed and rehabilitated by Smurfit-Stone Container Corporation in accordance with these agreements. We are in the process of rehabilitating the adjacent property in accordance with these agreements. Management does not believe the liability for any remaining required rehabilitation on these properties will be material.
 
Other proceedings involving environmental matters are pending against us. It is not possible to quantify future environmental costs because many issues relate to actions by third parties or changes in environmental regulation. However, management believes that the ultimate disposition of currently known matters will not have a material effect on our consolidated financial position, results of operations or liquidity.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
None.
 
PART II
 
Item 5.   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
We had approximately 72,000 beneficial owners of our common stock as of February 21, 2007. Our common stock is quoted on the New York Stock Exchange (“NYSE”) Composite Transactions Tape under the symbol “JOE.”


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The range of high and low prices for our common stock as reported on the NYSE Composite Transactions Tape and the dividends declared for the periods indicated is set forth below:
 
                         
    Common
       
    Stock Price     Dividends
 
    High     Low     Declared  
 
2006
                       
First Quarter
  $ 68.41     $ 56.50     $ 0.16  
Second Quarter
    62.75       40.93       0.16  
Third Quarter
    58.36       42.40       0.16  
Fourth Quarter
    58.24       51.05       0.16  
2005
                       
First Quarter
  $ 75.90     $ 60.21     $ 0.14  
Second Quarter
    83.52       64.31       0.14  
Third Quarter
    85.25       59.79       0.16  
Fourth Quarter
    70.85       58.50       0.16  
 
On February 22, 2007, the closing price of our common stock on the NYSE was $55.56.
 
The following table describes the Company’s purchases of its common stock during the fourth quarter of 2006.
 
                                 
                (c)
    (d)
 
                Total Number of
    Maximum Dollar
 
    (a)
    (b)
    Shares Purchased as
    Amount that May
 
    Total Number
    Average
    Part of Publicly
    Yet Be Purchased
 
    of Shares
    Price Paid
    Announced Plans or
    Under the Plans or
 
Period
  Purchased(1)     per Share     Programs(2)     Programs  
                      (In thousands)  
 
Month Ended October 31, 2006
        $           $ 103,793  
Month Ended November 30, 2006
        $           $ 103,793  
Month Ended December 31, 2006
    73,816     $ 53.28           $ 103,793  
 
 
(1) Includes shares surrendered to the Company by executives as payment for the strike prices and taxes due on exercised stock options and/or taxes due on vested restricted stock equal in the aggregate to 73,816 shares in December 2006.
 
(2) For additional information regarding our Stock Repurchase Program, see Note 2 to the consolidated financial statements under the heading, “Summary of Significant Accounting Policies — Earnings Per Share.”


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The following performance graph compares the Company’s cumulative shareholder returns for the period December 31, 2001, through December 31, 2006, assuming $100 was invested on December 31, 2001, in the Company’s common stock, in the Russell 1000 Index and in the Wilshire Real Estate Securities Index. The total return assumes dividends are reinvested. The stock price performance shown on the graph below is not necessarily indicative of future price performance.
 
(PERFORMANCE GRAPH)
 
                                                             
      12/31/01     12/31/02     12/31/03     12/31/04     12/31/05     12/31/06
The St. Joe Company
    $ 100       $ 108       $ 136       $ 237       $ 250       $ 202  
Russell 1000 Index
      100         78         102         113         121         139  
Wilshire Real Estate
      100         97         124         159         174         227  
                                                             
 
Sources: Bloomberg L.P.
The St. Joe Company


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Item 6.   Selected Consolidated Financial Data
 
The selected consolidated financial data set forth below are qualified in their entirety by and should be read in conjunction with the consolidated financial statements and the related notes included elsewhere herein. The statement of income data with respect to the years ended December 31, 2006, 2005 and 2004 and the balance sheet data as of December 31, 2006 and 2005 have been derived from the consolidated financial statements of the Company included herein, which have been audited by KPMG LLP. The statement of income data with respect to the years ended December 31, 2003 and 2002 and the balance sheet data as of December 31, 2004, 2003 and 2002 have been derived from the financial statements of the Company previously filed with the SEC, which also have been audited by KPMG LLP. Historical results are not necessarily indicative of the results to be expected in the future.
 
                                         
    Year Ended December 31,  
    2006     2005     2004     2003     2002  
    (In thousands, except per share amounts)  
 
Statement of Income Data:
                                       
Total revenues(1)
  $ 748,192     $ 932,124     $ 838,002     $ 675,401     $ 556,148  
Total expenses
    669,965       753,108       699,904       536,402       452,254  
                                         
Operating profit
    78,227       179,016       138,098       138,999       103,894  
Other income (expense)
    (15,954 )     (6,391 )     (5,227 )     (3,426 )     125,591  
                                         
Income from continuing operations before equity in income (loss) of unconsolidated affiliates, income taxes, and minority interest
    62,273       172,625       132,871       135,573       229,485  
Equity in income (loss) of unconsolidated affiliates
    9,307       13,016       5,600       (2,168 )     10,940  
Income tax expense
    25,157       64,153       52,334       48,270       88,929  
                                         
Income from continuing operations before minority interest
    46,423       121,488       86,137       85,135       151,496  
Minority interest
    6,137       7,820       2,594       553       1,366  
                                         
Income from continuing operations
    40,286       113,668       83,543       84,582       150,130  
Income (loss) from discontinued operations(2)
    366       (332 )     1,333       (8,667 )     3,346  
Gain on sale of discontinued operations(2)
    10,368       13,322       5,224             20,887  
                                         
Net income
  $ 51,020     $ 126,658     $ 90,100     $ 75,915     $ 174,363  
                                         
Per Share Data:
                                       
Basic
                                       
Income from continuing operations
  $ 0.54     $ 1.52     $ 1.11     $ 1.11     $ 1.91  
Income (loss) from discontinued operations(2)
          (0.01 )     0.01       (0.11 )     0.04  
Gain on the sale of discontinued operations(2)
    0.15       0.18       0.07             0.27  
                                         
Net income
    0.69     $ 1.69     $ 1.19     $ 1.00     $ 2.22  
                                         
Diluted
                                       
Income from continuing operations
  $ 0.54     $ 1.49     $ 1.09     $ 1.09     $ 1.84  
Income (loss) from discontinued operations
          (0.01 )     0.01       (0.11 )     0.04  
Gain on the sale of discontinued operations
    0.15       0.18       0.07             0.26  
                                         
Net income
  $ 0.69     $ 1.66     $ 1.17     $ 0.98     $ 2.14  
                                         
Dividends declared and paid
  $ 0.64     $ 0.60     $ 0.52     $ 0.32     $ 0.08  
 


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    December 31,  
    2006     2005     2004     2003     2002  
 
Balance Sheet Data:
                                       
Investment in real estate
  $ 1,213,562     $ 1,036,174     $ 942,630     $ 886,076     $ 806,701  
Cash and investments(3)
    36,935       202,605       94,816       57,403       73,273  
Property, plant and equipment, net
    44,593       40,176       33,562       36,272       42,907  
Total assets
    1,560,395       1,591,946       1,403,629       1,275,730       1,169,887  
Debt
    627,056       554,446       421,110       382,176       320,915  
Total stockholders’ equity
    461,080       488,998       495,411       487,315       480,093  
 
 
(1) Total revenues includes real estate revenues from property sales, timber sales, rental revenues and other revenues, primarily club operations and management and brokerage fees, and transportation revenues in 2002.
 
(2) Discontinued operations include the operations and subsequent sale of four commercial office buildings in 2006, four commercial office buildings and Advantis Real Estate Services Company (“Advantis”) in 2005, two commercial office buildings sold in 2004 and the sales in 2002 of Arvida Realty Services (“ARS”) and two commercial office buildings. (See Note 5 of Notes to Consolidated Financial Statements.)
 
(3) Includes cash, cash equivalents and marketable securities.
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-looking Statements
 
We make forward-looking statements in this Report, particularly in the Management’s Discussion and Analysis, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements in this Report that are not historical facts are forward-looking statements. You can find many of these forward-looking statements by looking for words such as “intend”, “anticipate”, “believe”, “estimate”, “expect”, “plan”, “should”, “forecast” or similar expressions. In particular, forward-looking statements include, among others, statements about the following:
 
  •  future operating performance, revenues, earnings, cash flows, and short and long-term revenue and earnings growth rates;
 
  •  future residential and commercial entitlements;
 
  •  expected development timetables and projected timing for sales or closings of homes or home sites in a community;
 
  •  development approvals and the ability to obtain such approvals, including possible legal challenges;
 
  •  the anticipated price ranges of developments;
 
  •  the number of units or commercial square footage that can be supported upon full build out of a development;
 
  •  the number, price and timing of anticipated land or building sales or acquisitions;
 
  •  estimated land holdings for a particular use within a specific time frame;
 
  •  absorption rates and expected gains on land and home site sales;
 
  •  the levels of resale inventory in our developments and the regions in which they are located;
 
  •  the development of relationships with strategic partners, including homebuilders;
 
  •  the pace at which we release new products for sale;
 
  •  comparisons to historical projects;

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  •  the amount of dividends we pay; and
 
  •  the number of shares of company stock which may be purchased under the company’s existing or future share-repurchase program.
 
Forward-looking statements are not guarantees of future performance and are subject to numerous assumptions, risks and uncertainties. Factors that could cause actual results to differ materially from those contemplated by a forward-looking statement include the risk factors described above under the heading “Risk Factors.” These statements are made as of the date hereof based on our current expectations, and we undertake no obligation to update the information contained in this Report. New information, future events or risks may cause the forward-looking events we discuss in this Report not to occur.
 
Overview
 
The St. Joe Company is one of the largest real estate development companies in Florida. We believe we have one of the largest inventories of private land suitable for development in Florida. The majority of our land is located in Northwest Florida and has a very low cost basis. In order to optimize the value of these core real estate assets, we seek to reposition our substantial timberland holdings for higher and better uses. We increase the value of our raw land assets through the entitlement, development and subsequent sale of residential and commercial parcels, home sites and homes, or through the direct sale of unimproved land.
 
We have four operating segments: residential real estate, commercial real estate, rural land sales and forestry.
 
Our residential real estate segment generates revenues from:
 
  •  the sale of developed home sites to retail customers and builders;
 
  •  the sale of parcels of entitled, undeveloped land;
 
  •  the sale of housing units built by us;
 
  •  rental income;
 
  •  resort and club operations;
 
  •  investments in limited partnerships and joint ventures;
 
  •  brokerage, title issuance and mortgage origination fees on certain transactions within our residential real estate developments; and
 
  •  management fees.
 
Our commercial real estate segment generates revenues from:
 
  •  the rental and/or sale of commercial buildings owned and/or developed by us; and
 
  •  the sale of developed and undeveloped land for retail, multi-family, office and industrial uses.
 
Our rural land sales segment generates revenues from:
 
  •  the sale of parcels of undeveloped land; and
 
  •  the sale of developed home sites primarily within rural settings.
 
Our forestry segment generates revenues from:
 
  •  the sale of pulpwood and timber; and
 
  •  the sale of cypress lumber and mulch.
 
Our ability to obtain land-use entitlements for our properties is a key requirement in repositioning our land to higher and better uses and for the generation of revenues. We continue to plan and obtain entitlements for an increasingly diverse set of land uses including residential, retail, office, industrial and multi-family uses.


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At the end of 2006, we had land-use entitlements in hand or in process for approximately 44,300 residential units and 14.5 million square feet of commercial space, with an additional 627 acres zoned for commercial uses.
 
During 2006, Florida, like many other states across the nation, experienced a dramatic slowdown in its real estate markets. This real estate slowdown was reflected in our results of operations for the year in which we experienced a 60% decline in net income. The slowdown has also led to high levels of residential resale inventories in our Florida markets, although recently we have seen an increasing level of sales-center traffic in our residential projects.
 
Due to existing market conditions, we are making a number of adjustments in our communities. The pricing of some of our resort and seasonal product is being revised to reflect current market conditions. We are also lengthening the required time periods for home-site purchasers to start construction of their homes. And, with completed homes now in greater demand than home sites, we are seeking new alliances with homebuilders to bring finished product to market in our communities.
 
We are committed to long-term value creation, further diversification of our development business and generating land sales over a broader range of uses and price points. Regardless of negative short-term market conditions, we believe that long-term prospects for Florida, driven by job growth and coupled with strong in-migration population expansion, will be favorable over the long term.
 
During the third quarter, we announced that we are exiting the Florida homebuilding business to focus on maximizing the value of our landholdings through place making. For the last several years, we have built homes in our towns in part because there was limited homebuilding capacity in Northwest Florida. As markets in the region have matured, homebuilding capacity from national, regional and local homebuilders has expanded significantly. Under our exit plan, our homebuilding operations will wind down by mid-2008.
 
We are continuing to develop our relationships with national, regional and local homebuilders (see Residential Real Estate Segment below). We have executed purchase and option contracts with several national and regional homebuilders for the purchase of developed lots in various communities. These transactions involve land positions in pre-development phases of our communities as well as phases currently under development. These transactions provide opportunities for us to accelerate value realization, while at the same time decreasing capital intensity and increasing efficiency in how we deliver housing to the market. We expect national and regional homebuilders to be important business partners going forward.
 
During late 2006 and early 2007, we implemented certain corporate organizational changes designed to position JOE for the years ahead. We eliminated certain redundancies among our field and corporate operations, and put in place a regional management structure to oversee our various product lines within specific geographical areas. We believe our new organization will facilitate the development of groups of projects with multifaceted real estate product types. As discussed further below, as a result of our exit from Florida homebuilding and corporate reorganization, we recorded a restructuring charge of $13.4 million during 2006. We expect to incur an additional charge of $3.0 million in 2007.
 
Critical Accounting Estimates
 
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on our historical experience and on various other assumptions that management believes are reasonable under the circumstances. Additionally, we evaluate the results of these estimates on an on-going basis. Management’s estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.


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We believe the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
 
Investment in Real Estate and Cost of Real Estate Sales.  Costs associated with a specific real estate project are capitalized once we determine that the project is economically probable. We capitalize costs directly associated with development and construction of identified real estate projects. Indirect costs that clearly relate to a specific project under development, such as internal costs of a regional project field office, are also capitalized. We capitalize interest based on the amount of underlying expenditures (up to total interest expense), and real estate taxes on real estate projects under development. If we determine not to complete a project, any previously capitalized costs are expensed in the period such determination is made.
 
Real estate inventory costs include land and common development costs ( such as roads, sewers and amenities), multi-family construction costs, capitalized property taxes, capitalized interest and certain indirect costs. A portion of real estate inventory and estimates for costs to complete are allocated to each unit based on the relative sales value of each unit as compared to the estimated sales value of the total project. These estimates are reevaluated at least annually, with any adjustments being allocated prospectively to the remaining units available for sale. The accounting estimate related to inventory valuation is susceptible to change due to the use of assumptions about future sales proceeds and related real estate expenditures. Management’s assumptions about future housing and home site sales prices, sales volume and sales velocity require significant judgment because the real estate market is cyclical and highly sensitive to changes in economic conditions. In addition, actual results could differ from management’s estimates due to changes in anticipated development, construction and overhead costs. Although we have not made significant adjustments affecting real estate gross profit margins in the past, there can be no assurances that estimates used to generate future real estate gross profit margins will not differ from our current estimates. Construction costs for single-family homes are determined based upon actual costs incurred.
 
Revenue Recognition — Percentage-of-Completion.  In accordance with Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate, revenue for multi-family residences under construction is recognized using the percentage-of-completion method when (1) construction is beyond a preliminary stage, (2) the buyer is committed to the extent of being unable to require a refund except for nondelivery of the unit, (3) sufficient units have already been sold to assure that the entire property will not revert to rental property, (4) sales price is assured, and (5) aggregate sales proceeds and costs can be reasonably estimated. Revenue is then recognized in proportion to the percentage of total costs incurred in relation to estimated total costs. Percentage-of-completion accounting is also used for our home site sales when required development is not complete at the time of sale and for commercial and other land sales if there are uncompleted development costs yet to be incurred for the property sold.
 
Impairment of Long-lived Assets and Goodwill.  Our long-lived assets, primarily real estate held for investment, are carried at cost unless circumstances indicate that the carrying value of the assets may not be recoverable. If we determine that an impairment exists due to the inability to recover an asset’s carrying value, a provision for loss is recorded to the extent that the carrying value exceeded estimated fair value. If such assets were held for sale, the provision for loss would be recorded to the extent that the carrying value exceeds estimated fair value less costs to sell.
 
Depending on the asset, we use varying methods to determine fair value, such as (i) discounting expected future cash flows, (ii) determining resale values by market, or (iii) applying a capitalization rate to net operating income using prevailing rates in a given market. The fair value determined under these methods can fluctuate up or down significantly as a result of a number of factors, including changes in the general economy of our markets, demand for real estate and the projected net operating income for a specific property.
 
Goodwill is carried at the lower of cost or fair value and is tested for impairment at least annually, or whenever events or changes in circumstances indicate such an evaluation is warranted, by comparing the carrying amount of the net assets of each reporting unit with goodwill to the fair value of the reporting unit taken as a whole. The impairment review involves a number of assumptions and estimates including estimating discounted future cash flows, net operating income, future economic conditions, fair value of assets held and discount rates. If this comparison indicates that the goodwill of a particular reporting unit is impaired, the


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aggregate of the fair value of each of the individual assets and liabilities of the reporting unit are compared to the fair value of the reporting unit to determine the amount of goodwill impairment, if any.
 
Intangible Assets.  We allocate the purchase price of acquired properties to tangible and identifiable intangible assets and liabilities acquired based on their respective fair values, using customary estimates of fair value, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. These fair values can fluctuate up or down significantly as a result of a number of factors and estimates, including changes in the general economy of our markets, demand for real estate, lease terms, amortization periods and fair market values assigned to leases as well as fair value assigned to customer relationships.
 
Pension Plan.  We sponsor a cash balance defined-benefit pension plan covering a majority of our employees. Currently, our pension plan is over-funded and contributes income to the Company. The accounting for pension benefits is determined by standardized accounting and actuarial methods using numerous estimates, including discount rates, expected long-term investment returns on plan assets, employee turnover, mortality and retirement ages, and future salary increases. Changes in these key assumptions can have a significant impact on the income contributed by the pension plan. We engage the services of an independent actuary and investment consultant to assist us in determining these assumptions and in the calculation of pension income. For example, in 2006, a 1% increase in the assumed long-term rate of return on pension assets would have resulted in a $2.3 million increase in pre-tax income ($1.4 million net of tax). A 1% decrease in the assumed long-term rate of return would have caused an equivalent decrease in pre-tax income. A 1% increase or decrease in the assumed discount rate would have resulted in less than a $0.3 million change in pre-tax income.
 
Stock-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 stock-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 estimate the expected term of options granted by incorporating the contractual term of the options and analyzing employees, actual and expected exercise behaviors. We estimate the volatility of our common stock by using historical volatility in market price over a period consistent with the expected term, and other factors. We base the risk-free interest rate that we use in the option valuation model on U.S. Treasury seven year issues with remaining terms similar to the expected term on the options. We anticipate paying cash dividends in the foreseeable future and therefore use an estimated dividend yield in the option valuation model.
 
Income Taxes.  In preparing our consolidated financial statements, significant management judgment is required to estimate our income taxes. Our estimates are based on our interpretation of federal and state tax laws. We estimate our actual current tax due and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. The temporary differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We record a valuation allowance against our deferred tax assets based upon our analysis of the timing and reversal of future taxable amounts and our history and future expectations of taxable income. Adjustments may be required by a change in assessment of our deferred tax assets and liabilities, changes due to audit adjustments by federal and state tax authorities, and changes in tax laws. To the extent adjustments are required in any given period, we will include the adjustments in the tax provision in our financial statements. These adjustments could materially impact our financial position, cash flow and results of operation.
 
Recently Issued Accounting Standards
 
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of


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uncertain tax positions taken or expected to be taken in income tax returns. We will adopt this Interpretation in the first quarter of 2007. The cumulative effects, if any, of applying FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. We are currently evaluating the impact of FIN 48 on our consolidated financial statements, but are not yet in a position to determine its impact.
 
In September 2006, the FASB issued SFAS Statement No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. SFAS 157 applies only to fair-value measurements that are already required or permitted by other accounting standards and is expected to increase the consistency of those measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We do not believe SFAS 157 will have a material adverse impact on our financial position or results of operations.
 
In September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 provides guidance for SEC registrants on how the effects of uncorrected errors originating in previous years should be considered when quantifying errors in the current year. SAB 108 was issued to eliminate diversity in practice for quantifying uncorrected prior year misstatements (including prior year unadjusted audit differences) and to address weaknesses in methods commonly used to quantify such misstatements. These methods are the income statement or rollover method and the balance sheet or iron curtain method. The Company has historically followed the income statement method. Under SAB 108, SEC registrants will now have to evaluate errors under both methods. SAB 108 provides transitional guidance that allows registrants to report the effect of adoption as a cumulative adjustment to beginning of year retained earnings. If a cumulative adjustment is reported, it must be reported as of the beginning of the first fiscal year ending after November 15, 2006. SAB 108 did not have an impact on our financial statements at December 31, 2006.
 
In September 2006, the SEC Emerging Issues Task Force (EITF) issued EITF Issue No. 06-8, Applicability of the Assessment of a Buyer’s Continuing Investment under FAS No. 66 for the Sale of Condominiums (“EITF 06-8”). EITF 06-8 states that in assessing the collectibility of the sales price pursuant to paragraph 37(d) of FAS 66, an entity should evaluate the adequacy of the buyer’s initial and continuing investment to conclude that the sales price is collectible. If an entity is unable to meet the criteria of paragraph 37, including an assessment of collectibility using the initial and continuing investment tests described in paragraphs 8-12 of FAS 66, then the entity should apply the deposit method as described in paragraphs 65-67 of FAS 66. EITF 06-8 is effective for the Company’s fiscal year beginning January 1, 2008. We have not yet assessed the impact of EITF 06-8 on our consolidated financial statements, but we believe that we will be required, in most cases, to collect additional deposits from buyers in order to recognize revenue under the percentage-of-completion method of accounting. If we are unable to meet the requirements of EITF 06-8, we would be required to recognize revenue using the deposit method, which would delay revenue recognition until consumation of the sale.
 
Results of Operations
 
Net income for 2006 was $51.0 million, or $0.69 per diluted share, compared with $126.7 million, or $1.66 per diluted share, in 2005, and $90.1 million, or $1.17 per diluted share, in 2004. Results for 2006 reported in discontinued operations included after-tax gains on sales of four office buildings totaling $10.4 million, or $0.15 per diluted share. Results for 2005 reported in discontinued operations included an after-tax loss of $5.9 million, or $0.08 per diluted share, resulting from the sale of Advantis Real Estate Services Company (“Advantis”), our former commercial real estate services unit. Discontinued operations for 2005 also included after-tax gains on sales of four office buildings totaling $19.2 million, or $0.25 per diluted share.
 
We report revenues from our four operating segments: residential real estate, commercial real estate, rural land sales and forestry. Real estate sales are generated from sales of residential homes and home sites, parcels


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of developed and undeveloped land, and commercial buildings which are not reported as discontinued operations. Rental revenue is generated primarily from lease income related to our portfolio of investment and development properties as a component of the commercial real estate segment. Timber sales are generated from the forestry segment. Other revenues are primarily club operations and management fees from the residential real estate segment.
 
Consolidated Results
 
Revenues and Expenses.  The following table sets forth a comparison of the revenues and expenses for the three years ended December 31, 2006.
 
                                                         
    Years Ended December 31,     2006 vs. 2005     2005 vs. 2004  
    2006     2005     2004     Difference     % Change     Difference     % Change  
    (Dollars in millions)  
 
Revenues:
                                                       
Real estate sales
  $ 638.2     $ 824.8     $ 734.3     $ (186.6 )     (23 )%   $ 90.5       12 %
Rental
    41.0       34.6       25.1       6.4       18       9.5       38  
Timber sales
    29.9       28.0       35.2       1.9       7       (7.2 )     (20 )
Other
    39.1       44.7       43.4       (5.6 )     (12 )     1.3       3  
                                                         
Total
  $ 748.2     $ 932.1     $ 838.0     $ (183.9 )     (20 )%   $ 94.1       11 %
                                                         
Expenses:
                                                       
Cost of real estate sales
    407.1       526.1       485.4       (119.0 )     (23 )     40.7       8  
Cost of rental revenues
    16.9       13.9       10.9       3.0       22       3.0       27  
Cost of timber sales
    21.9       20.0       21.8       1.9       10       (1.8 )     (8 )
Cost of other revenues
    41.7       39.8       37.6       1.9       5       2.2       6  
Other operating expenses
    77.4       69.4       68.9       8.0       11       0.5       1  
                                                         
Total
  $ 565.0     $ 669.2     $ 624.6     $ (104.2 )     (16 )%   $ 44.6       7 %
                                                         
 
The 2006 decreases in revenues from real estate sales and costs of real estate sales were in each case primarily due to decreased sales in the residential real estate segment and, to a lesser extent, the commercial real estate segment. The decreases were partially offset by an increase in sales of rural land. Additionally, during 2006 and 2005, four buildings were sold in each year by the commercial real estate segment and recorded as discontinued operations, and during 2004, two buildings were sold by the commercial real estate segment and recorded as discontinued operations. The increases in rental revenues and costs of rental revenues were in each case primarily due to the purchase of commercial buildings.
 
Timber revenue increased in 2006 due to an increase in harvest volumes and in 2005 decreased due to price decreases. Cost of timber sales increased in 2006 due to increased logging costs caused primarily by higher fuel prices and road maintenance costs. Cost of timber sales decreased in 2005 due to lower costs in the timber operation resulting from lower sales.
 
The 2006 decrease in other revenues and related gross profit of other revenues was primarily due to decreased resale brokerage activity and increased resort costs. Other revenues and cost of other revenues increased in 2005 primarily due to increases in resort operations. Other operating expenses increased in 2006 due to increased marketing costs, increased project administration expenses and increased insurance costs in our residential real estate segment. For further discussion of revenues and expenses, see Segment Results below.
 
Corporate Expense.  Corporate expense, representing corporate general and administrative expenses, increased $3.3 million, or 7%, to $51.3 million in 2006 over 2005. The increase was primarily due to increased stock compensation and other compensation costs. Stock compensation costs increased $3.8 million primarily as a result of the acceleration of restricted stock amortization related to the retirement of our former President/COO and stock compensation expense recorded under SFAS 123R. Other compensation costs


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increased $3.5 million substantially related to retirement and/or severance costs of our former President/COO and CFO. These cost increases were primarily offset by a reduction in bonus expense of $3.2 million. In 2005, corporate expense increased $4.2 million, or 10%, to $48.0 million from $43.7 million in 2004. The increase was due to an increase in non-capitalizable entitlements costs, a decrease in pension credit and an increase in compensation costs.
 
Depreciation and Amortization.  Depreciation and amortization increased $2.9 million, or 8%, to $38.8 million in 2006 compared to $35.9 million in 2005. The increase was primarily due to an increase in depreciation resulting from the purchase of one commercial operating property. In 2005, depreciation and amortization increased $6.3 million, or 21%, to $35.9 million compared to $29.6 million in 2004. The increase was primarily due to additional investments in commercial investment property.
 
Impairment Losses.  During 2006, we recorded a $1.5 million impairment loss related to the goodwill of our wholly owned affiliate, Sunshine State Cypress, Inc., included in our forestry segment. No impairment losses were recorded in 2005. During 2004, we recorded a $2.0 million impairment loss related to one of our residential projects in North Carolina.
 
Restructuring Charge.  We recorded a restructuring charge of $13.4 million during 2006 in connection with our exit from the Florida homebuilding business and corporate reorganization. The charge included $9.3 million related to the write-off of previously capitalized homebuilding costs and $4.1 million related to one-time termination benefits.
 
Other Income (Expense).  Other income (expense) consists of investment income, interest expense, gains on sales and dispositions of assets and other, net. Other income (expense) was $(15.9) million in 2006, $(6.4) million in 2005, and $(5.2) million in 2004. Investment income increased to $5.1 million in 2006 from $3.5 million in 2005 and $0.8 million in 2004 due primarily to higher invested cash balances. Interest expense increased to $20.6 million in 2006 from $13.9 million in 2005 primarily due to an increase in the average amount of debt outstanding in 2006. Interest expense increased to $13.9 million in 2005 from $9.9 million in 2004, primarily due to an increase in the average amount of debt in 2005. Other, net decreased in 2006 primarily due to a litigation provision of $4.9 million relating to a 1996 sales commission dispute.
 
Equity in Income of Unconsolidated Affiliates.  We have investments in affiliates that are accounted for by the equity method of accounting. Equity in income of unconsolidated affiliates totaled $9.3 million in 2006, $13.0 million in 2005 and $5.6 million in 2004. Equity income decreased $3.7 million in 2006 primarily due to lower earnings in our investments in Rivercrest and Paseos, which are nearing build out. Equity income increased $7.4 million in 2005 from 2004 primarily due to increased closings at those two communities.
 
Income Tax Expense.  Income tax expense on continuing operations totaled $25.2 million in 2006, $64.1 million in 2005 and $52.3 million in 2004. Our effective tax rate was 38% in 2006, 36% in 2005 and 38% in 2004.
 
Discontinued Operations.  Discontinued operations include the operations and subsequent sales of four commercial buildings sold in 2006, the sale of Advantis and four commercial office buildings in 2005, and the operations and sales of two commercial office buildings sold in 2004. These entities’ results are not included in income from continuing operations. See “Commercial Real Estate” below for further discussion regarding our discontinued operations.
 
Segment Results
 
Residential Real Estate
 
Our residential real estate segment develops large-scale, mixed-use resort, primary and seasonal residential communities, primarily on land we own with very low cost basis. We own large tracts of land in Northwest Florida, including significant Gulf of Mexico beach frontage and waterfront properties, and land near Jacksonville, in Deland and near Tallahassee, the state capital. Our residential homebuilding business in North and South Carolina is conducted through Saussy Burbank, Inc., a wholly owned subsidiary.


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Residential sales slowed significantly in 2006, particularly in our resort markets. As a result of the slowdown, inventories of resale homes and home sites have risen dramatically in our markets. These resale inventory levels will continue to impact sales of our products in the majority of our markets throughout 2007. Although we believe these inventory levels may be trending downward by the end of 2007, we continue to believe it could take until 2008 before a supply-demand balance begins to return.
 
During the third quarter of 2006, we announced that we are exiting the Florida homebuilding business to focus on maximizing the value of our landholdings through place making. There was no material impact to our financial results in 2006 related to our exit from Florida homebuilding, other than the restructuring charge. The exit move was made possible by our expanding relationships with local, regional and national homebuilders. We have executed purchase and option contracts with several national and regional homebuilders for the purchase of developed lots in various JOE communities. These transactions involve land positions in pre-development phases as well as phases currently under development. These transactions provide opportunities for us to accelerate value realization, while at the same time decreasing capital intensity and increasing efficiency in the delivery of finished homes to the market.
 
During the period from April 1 through December 31, 2006, we had a total of 1,209 developed home sites under contract or under option with David Weekley Homes and Beazer Homes, of which 783 remain to be closed. We expect national and regional homebuilders to be important business partners going forward.
 
The table below sets forth our activity with national homebuilders from April 1 through December 31, 2006:
 
Residential Real Estate
National Homebuilder Summary
of Home Site Commitments and Purchases
April 1, 2006 through December 31, 2006
 
                                 
    Total Units
    Total Units
    Average Price
    Remaining Units
 
    Committed(1)     Closed 12/31/06     Closed Units     To Close  
 
Beazer Homes
                               
Beckrich Point
    70             N/A       70  
Laguna West
    350             N/A       350  
SouthWood
    163       107     $ 42,941       56  
Victoria Park
    179       179     $ 66,369        
David Weekley Homes
                               
Hawks Landing
    99       10     $ 60,900       89  
Palmetto Trace
    56       48     $ 77,688       8  
ParkPlace
    70             N/A       70  
RiverCamps on Crooked Creek
    3       3     $ 209,667        
SouthWood
    140             N/A       140  
Victoria Park
    72       72     $ 102,444        
WaterSound
    7       7     $ 144,248        
                                 
Total
    1,209       426               783  
                                 
 
 
(1) Includes amounts under contract or under option.


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The table below sets forth the results of operations of our residential real estate segment for the three years ended December 31, 2006. The historical results of RiverCamps on Crooked Creek have been reclassified from the rural land sales segment to the residential real estate segment to conform to the current period’s presentation.
 
                         
    Years Ended December 31,  
    2006     2005     2004  
    (In millions)  
 
Revenues:
                       
Real estate sales
  $ 499.6     $ 693.2     $ 579.0  
Rental revenues
    1.7       1.6       1.1  
Other revenues
    38.3       43.6       41.5  
                         
Total revenues
    539.6       738.4       621.6  
                         
Expenses:
                       
Cost of real estate sales
    381.1       482.8       420.4  
Cost of rental revenues
    1.8       1.7       1.2  
Cost of other revenues
    41.6       39.6       37.5  
Other operating expenses
    56.6       49.0       48.9  
Depreciation and amortization
    11.3       10.0       10.1  
Impairment loss
                2.0  
Restructuring charge
    12.3              
                         
Total expenses
    504.7       583.1       520.1  
                         
Other income (expense)
    1.7       0.1       (0.2 )
                         
Pre-tax income from continuing operations
  $ 36.6     $ 155.4     $ 101.3  
                         
 
Revenues and costs of sales associated with multi-family units and Private Residence Club (“PRC”) units under construction are recognized using the percentage-of-completion method of accounting. Revenue on contracted units is recognized in proportion to the percentage of total costs incurred in relation to estimated total costs. If a deposit is received for less than 10% for a multi-family or PRC unit, percentage-of-completion accounting is not utilized. Instead, full accrual accounting criteria are used, which requires recognition of revenue when sales contracts are closed. All deposits are non-refundable (subject to a 15-day rescission period as required by law), except for non-delivery of the unit. In the event a contract does not close for reasons other than non-delivery, we are entitled to retain the deposit. In such instances, the revenue and margin related to the previously recorded contract is reversed. Revenues and cost of sales associated with multi-family units where construction has been completed before contracts are entered into and deposits made are recognized on the full accrual method of accounting as contracts are closed.
 
Our townhomes are attached building units sold individually along with a parcel of land. Revenues and cost of sales for our townhomes are accounted for using the full accrual method. These units differ from multi-family and PRC units, in which buyers hold title to a unit or fractional share of a unit, respectively, within a building and an interest in the underlying land held in common with other building association members.
 
Profit is deferred on home site sales when required development is not complete at the time of the sale. Currently, we are deferring a portion of profit from home site sales at WaterSound West Beach, SummerCamp and RiverCamps on Crooked Creek. Homesite sales are recorded at the time of closing, but a portion of revenue and gross profit on the sales at those communities is deferred based on required development not yet completed in relation to total required development costs and recognized by the percentage-of-completion method as the work is completed.


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Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
 
Real estate sales include sales of homes and home sites, as well as sales of land. Cost of real estate sales for homes and home sites includes direct costs (e.g., development and construction costs), selling costs and other indirect costs (e.g., construction overhead, capitalized interest, warranty and project administration costs).
 
The following table sets forth the components of our real estate sales and cost of real estate sales related to homes and home sites:
 
                                                 
    Year Ended December 31, 2006     Year Ended December 31, 2005  
    Homes     Home Sites     Total     Homes     Home Sites     Total  
    (Dollars in millions)  
 
Sales
  $ 429.4     $ 69.3     $ 498.7     $ 537.6     $ 155.3     $ 692.9  
Cost of sales:
                                               
Direct costs
    292.1       31.4       323.5       375.4       33.3       408.7  
Selling costs
    21.9       1.7       23.6       27.8       5.4       33.2  
Other indirect costs
    30.3       2.9       33.2       37.1       3.7       40.8  
                                                 
Total cost of sales
    344.3       36.0       380.3       440.3       42.4       482.7  
                                                 
Gross profit
  $ 85.1     $ 33.3     $ 118.4     $ 97.3     $ 112.9     $ 210.2  
                                                 
Gross profit margin
    20 %     48 %     24 %     18 %     73 %     30 %
 
The overall decreases in real estate sales, gross profit and gross profit margin were due primarily to a decrease in home site closings in our Northwest Florida resort communities and a decrease in primary home closings in various communities.
 
The following table sets forth home and home site sales activity by geographic region and property type, excluding Rivercrest and Paseos, two 50% owned affiliates accounted for using the equity method of accounting.
 
                                                                 
    Year Ended December 31, 2006     Year Ended December 31, 2005  
    Closed
          Cost of
    Gross
    Closed
          Cost of
    Gross
 
    Units     Revenues     Sales     Profit     Units     Revenues     Sales     Profit  
    (Dollars in millions)  
 
Northwest Florida:
                                                               
Resort
                                                               
Single-family homes
    20     $ 21.8     $ 16.8     $ 5.0       8     $ 7.1     $ 5.1     $ 2.0  
Multi-family homes
                            48       21.2       13.2       8.0  
Private Residence Club
                            1       0.3       0.1       0.2  
Home sites
    67       32.5       12.0       20.5       281       126.6       29.6       97.0  
Primary
                                                               
Single-family homes
    206       62.8       49.9       12.9       301       77.7       64.3       13.4  
Townhomes
    43       6.7       5.4       1.3       135       20.5       17.4       3.1  
Home sites
    231       14.6       8.4       6.2       109       10.1       5.7       4.4  
Northeast Florida:
                                                               
Primary
                                                               
Single-family homes
    54       28.1       21.8       6.3       124       51.2       39.5       11.7  
Home sites
    7       1.1       0.5       0.6       43       3.4       0.9       2.5  
Central Florida:
                                                               
Primary
                                                               
Single-family homes
    183       81.5       56.7       24.8       353       118.8       92.6       26.2  
Multi-family homes
    136       27.6       17.9       9.7       86       51.3       38.6       12.7  
Townhomes
    60       18.8       16.1       2.7       41       11.4       10.1       1.3  
Home sites
    258       21.1       15.2       5.9       80       15.2       6.2       9.0  
North and South Carolina:
                                                               
Primary
                                                               
Single-family homes
    621       179.3       157.1       22.2       693       177.2       158.6       18.6  
Townhomes
    16       2.8       2.5       0.3       6       0.9       0.8       0.1  
                                                                 
Total
    1,902     $ 498.7     $ 380.3     $ 118.4       2,309     $ 692.9     $ 482.7     $ 210.2  
                                                                 


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In 2006 and 2005, our Northwest Florida resort and seasonal communities included WaterColor, WaterSound Beach, WaterSound West Beach, WaterSound, WindMark Beach, RiverCamps on Crooked Creek and SummerCamp, while primary communities included Hawks Landing, Palmetto Trace, The Hammocks and SouthWood. In Northeast Florida the only primary community was St. Johns Golf and Country Club. The Central Florida communities included Artisan Park and Victoria Park, both of which are primary. North and South Carolina included Saussy Burbank’s primary communities in Charlotte, Raleigh and Charleston.
 
In our Northwest Florida resort communities, closed units, revenues and gross profit decreased significantly in 2006 compared to 2005 as the demand for resort residential product has decreased. The gross profit from home site sales decreased to $20.5 million in 2006 from $97.0 million in 2005 due primarily to decreases in the number of home sites closed in SummerCamp, RiverCamps on Crooked Creek, WaterColor and WaterSound Beach. The decreases resulting from these reduced closings were partially offset by closings in WaterSound and WindMark Beach as sales of home sites in these communities commenced in the second and third quarters of 2006, respectively. No gross profit was recognized from multi-family residences in 2006, compared to $8.0 million in 2005 for the multi-family residences at WaterSound Beach which were completed in 2005.
 
Since required development was not complete at WaterSound West Beach, SummerCamp and RiverCamps on Crooked Creek at the time home sites were closed in these communities, percentage of completion accounting was used, and deferred profit will be recognized as the required infrastructure is completed. From project inception through the end of 2006, remaining unrecognized deferred profit at WaterSound West Beach was $1.4 million, substantially all of which we expect to recognize by the end of 2007; at RiverCamps on Crooked Creek it was $1.1 million, substantially all of which we expect to recognize by the end of the first quarter of 2007; and at SummerCamp it was $9.2 million, all of which we expect to recognize over the next several years.
 
In our Northwest Florida primary communities, closed units, revenues and gross profit decreased in 2006 as compared to 2005 due to market conditions. The gross profit from single-family home sales decreased $0.5 million in 2006 from 2005 as a result of a decrease of 95 units closed. Due primarily to an increase in the average sales price of homes closed in Palmetto Trace and Southwood (the average price of single-family residences closed in these communities in 2006 was $305,000 compared to $258,000 in 2005), the decrease in gross profit was not as significant as the decrease in unit closings. Townhome revenues and the number of townhomes closed decreased in 2006 as compared to 2005 as we have closed most of the townhomes previously offered for sale in these communities. Home site closings and gross profit increased in 2006 compared with 2005 due primarily to increased closings in Palmetto Trace and Hawks Landing resulting from our expanding relationships with national and regional homebuilders, although the average price decreased, reflecting a change in the type of product sold. The average price of a home site sold in 2006 was $63,000 compared to $93,000 in 2005.
 
In our Northeast Florida communities, closed units, revenues and gross profit decreased in 2006 as compared to 2005 as a result of a lack of product availability. The decreases were partially offset by an increase in the average price of a single-family residence to $520,000 in 2006 compared to $413,000 in 2005. St. Johns Golf and Country Club is nearing its completion in early 2007, while James Island and Hampton Park were completed during 2005. Future home site product will become available in Northeast Florida at RiverTown, with sales expected to begin in 2007.
 
In our Central Florida communities, the gross profit on single-family home sales decreased to $24.8 million in 2006 from $26.2 million in 2005 as a result of unit closings decreasing to 183 from 353. Due to our ability to achieve stronger pricing on contracts in these communities last year (the average price of single-family residences closed in these communities in 2006 was $445,000 compared to $337,000 in 2005), the decrease in gross profit was not as significant as the decrease in unit closings. Gross profit percentages recognized using percentage-of-completion accounting on multi-family residences increased to 35% in 2006 from 25% in 2005 due primarily to our ability to raise prices to more than offset increased construction costs. Home site closings and revenue increased in 2006 compared with 2005 due primarily to third quarter sales to David Weekly Homes and fourth quarter sales to Beazer Homes. The average price of a home site in 2006


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was $82,000 compared to $190,000 in 2005 due to a change in the type of product sold to these homebuilders. Increased sales of townhomes during 2006 resulted in increased revenues and gross profit of $7.4 million and $1.4 million, respectively, as compared to 2005.
 
In our North and South Carolina communities, the gross profit on single-family home sales increased to $22.2 million in 2006 from $18.6 million in 2005 due primarily to price increases on comparable homes. The average price of a home closed in 2006 was $289,000 compared to $256,000 in 2005.
 
Other revenues included revenues from the WaterColor Inn and WaterColor vacation rental program, other resort and club operations, management fees and brokerage activities. Other revenues were $38.3 million in 2006 with $41.6 million in related costs, compared to revenues totaling $43.6 million in 2005 with $39.6 million in related costs. The decrease in other revenues and related deficit was primarily due to the decrease in resale brokerage activity and increased resort costs. The decrease in resale brokerage activity coincided with the slowdown in residential sales. The increase in resort costs included salaries and salary related costs in our Northwest Florida resort operations, which was due primarily to costs associated with new resort operations in WaterSound Beach during 2006.
 
Other operating expenses included salaries and benefits, marketing, project administration, support personnel and other administrative expenses. Other operating expenses increased to $56.6 million in 2006 from $49.0 million in 2005 due to increased marketing costs associated with a regional brand campaign, increased project administration expenses resulting from new projects at Seven Shores, RiverTown and the second phase of Windmark Beach, and increased insurance costs.
 
We recorded a restructuring charge in our residential real estate segment of $12.3 million in 2006 in connection with our exit from the Florida homebuilding business and corporate reorganization. The charge included $9.3 million related to the write off of previously capitalized homebuilding costs and $3.0 million related to one-time termination benefits for affected employees.
 
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
 
Real estate sales include sales of homes and home sites, as well as sales of land. Cost of real estate sales for homes and home sites includes direct costs (e.g., development and construction costs), selling costs and other indirect costs (e.g., construction overhead, capitalized interest, warranty and project administration costs).
 
The following table sets forth the components of our real estate sales and cost of real estate sales:
 
                                                 
    Year Ended December 31, 2005     Year Ended December 31, 2004  
    Homes     Home Sites     Total     Homes     Home Sites     Total  
    (Dollars in millions)  
 
Sales
  $ 537.6     $ 155.3     $ 692.9     $ 462.0     $ 113.8     $ 575.8  
Cost of sales:
                                               
Direct costs
    375.4       33.3       408.7       323.4       27.5       350.9  
Selling costs
    27.8       5.4       33.2       24.7       5.4       30.1  
Other indirect costs
    37.1       3.7       40.8       34.8       3.8       38.6  
                                                 
Total cost of sales
    440.3       42.4       482.7       382.9       36.7       419.6  
                                                 
Gross profit
  $ 97.3     $ 112.9     $ 210.2     $ 79.1     $ 77.1     $ 156.2  
                                                 
Gross profit margin
    18 %     73 %     30 %     17 %     68 %     27 %


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The changes in the components of our real estate sales and cost of real estate sales from the year ended December 31, 2005, to the year ended December 31, 2004, are set forth below by geographic region and product type. A more detailed explanation of the changes follows the table.
 
                                                                         
    Year Ended December 31, 2005     Year Ended December 31, 2004        
    Closed
          Cost of
    Gross
    Closed
          Cost of
    Gross
       
    Units     Revenues     Sales     Profit     Units     Revenues     Sales     Profit        
    (Dollars in millions)        
 
Northwest Florida:
                                                                       
Resort
                                                                       
Single-family homes
    8     $ 7.1     $ 5.1     $ 2.0       12     $ 15.0     $ 10.0     $ 5.0          
Multi-family homes
    48       21.2       13.2       8.0       51       55.4       34.2       21.2          
Private Residence Club
    1       0.3       0.1       0.2       87       17.0       9.4       7.6          
Home sites
    281       126.6       29.6       97.0       222       94.9       27.7       67.2          
Primary
                                                                       
Single-family homes
    301       77.7       64.3       13.4       239       52.0       47.8       4.2          
Townhomes
    135       20.5       17.4       3.1       104       14.3       13.1       1.2          
Home sites
    109       10.1       5.7       4.4       128       8.1       4.4       3.7          
Northeast Florida:
                                                                       
Primary
                                                                       
Single-family homes
    124       51.2       39.5       11.7       176       62.4       52.2       10.2          
Home sites
    43       3.4       0.9       2.5       35       2.9       1.1       1.8          
Central Florida:
                                                                       
Primary
                                                                       
Single-family homes
    353       118.8       92.6       26.2       237       63.6       51.3       12.3          
Multi-family homes
    86       51.3       38.6       12.7             14.8       12.0       2.8          
Townhomes
    41       11.4       10.1       1.3       6       2.0       1.7       0.3          
Home sites
    80       15.2       6.2       9.0       70       7.8       3.6       4.2          
North and South Carolina:
                                                                       
Primary
                                                                       
Single-family homes
    693       177.2       158.6       18.6       735       163.6       149.3       14.3          
Townhomes
    6       0.9       0.8       0.1       13       2.0       1.8       0.2          
                                                                         
Total
    2,309     $ 692.9     $ 482.7     $ 210.2       2,115     $ 575.8     $ 419.6     $ 156.2          
                                                                         
 
In 2005 and 2004, our Northwest Florida resort and seasonal communities included WaterColor, WaterSound Beach, WaterSound West Beach, WaterSound, WindMark Beach, RiverCamps on Crooked Creek and SummerCamp, while primary communities included Hawks Landing, Palmetto Trace, The Hammocks and SouthWood. In Northeast Florida the primary communities were St. Johns Golf and Country Club, Hampton Park and James Island. The Central Florida communities included Artisan Park and Victoria Park, both of which are primary. North and South Carolina included Saussy Burbank’s primary communities in Charlotte, Raleigh and Charleston.
 
In our Northwest Florida resort communities, revenue and closed units decreased in 2005 compared to 2004 due to reduced activity in the second half of the year in our resort residential projects as the 2005 hurricane season depressed normal traffic flow to the region. The gross profit percentage from single-family residence sales decreased to 28% in 2005 from 33% in 2004, primarily due to the mix of relative location and size of the home sales closed in each period. The average price of a single-family residence sold in 2005 was $888,000 compared to $1,250,000 in 2004. The decrease in average sales price is due primarily to the sale of the Southern Accents Showhouse at WaterSound Beach in 2004 at a price of $5.1 million. Gross profit recognized on the sale of multi-family residences decreased in 2005 due to the completion of profit recognition


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on certain multi-family residences in 2004. The gross profit percentage from home site sales increased to 77% in 2005 from 71% in 2004 due primarily to an increase in average prices of home sites sold and a change in the mix of relative locations of the closed home sites.
 
Since required development was not complete at WaterSound West Beach, SummerCamp and RiverCamps on Crooked Creek at the time home sites were closed in these communities, percentage of completion accounting was used and deferred profit will be recognized as the required infrastructure is completed. From project inception through the end of 2005, remaining unrecognized deferred profit at WaterSound West Beach was $3.0 million; at RiverCamps on Crooked Creek it was $3.2 million; and at SummerCamp it was $8.0 million.
 
In our Northwest Florida primary communities, units closed and revenues increased due to strong demand which supported price increases. The gross profit percentage from single-family home sales increased to 17% in 2005 from 8% in 2004, primarily due to an increase in the average sales price and the mix of location and size of the home sales closed. The average price of a single-family residence closed in 2005 was $258,000 compared to $218,000 in 2004. Also during 2004, gross profit was reduced by a $1.7 million expense recorded for warranty costs in excess of warranty reserves at a previously completed community. Townhome gross profit percentages also increased in 2005 due primarily to an increase in sales prices of approximately 10% and the mix of locations of the townhomes closed. Home site gross profit percentages decreased to 44% in 2005 from 46% in 2004 due primarily to the closing of lower margin home sites in our Port St. Joe primary housing developments during 2005.
 
In our Northeast Florida communities, closed units and revenues decreased in 2005 as a result of a lack of product availability in James Island and Hampton Park, which were substantially sold out in 2004 and completed during 2005. The gross profit percentage from single-family residence sales increased to 23% in 2005 from 16% in 2004 primarily due to the strong demand supporting higher prices as we approached sellout in these communities. The average price of a single-family residence closed in 2005 was $413,000 compared to $355,000 in 2004. Home site gross profit percentages increased to 74% in 2005 from 62% in 2004 due primarily to the mix of sizes and locations of the home sites sold during each period.
 
In our Central Florida communities, the gross profit percentage on single-family home sales increased to 22% in 2005 from 19% in 2004. The increase, which was a result of our ability to achieve stronger pricing in these primary communities, was partly offset by increasing construction costs following the 2004 hurricane season. Gross profit recognized on the sale of multi-family residences increased $9.9 million in 2005 due to the accelerated sales and construction activity and the resulting profit recognition under percentage-of-completion accounting. Gross profit percentages on multi-family residences increased to 25% in 2005 from 19% in 2004 due primarily to our ability to raise prices to more than offset increased construction costs. The gross profit percentage from home site sales increased to 59% in 2005 from 54% in 2004 due primarily to the increased average price of home sites to $190,000 in 2005 compared to $112,000 in 2004. Sales of condominium units in Artisan Park slowed in 2005 due to the increased supply of units in the Orlando area as a result of condominium conversion projects. Another factor in the slower sales was competition from the resale of units sold to investors earlier in the life of the project.
 
In our North and South Carolina communities, the gross profit percentage on single-family home sales increased to 10% in 2005 from 9% in 2004 due primarily to price increases on comparable homes, lower buyer incentives and changes in the mix of relative locations of homes closed in each period. During 2004 we also recorded an impairment loss of $2.0 million related to one of Saussy Burbank’s community development projects.
 
Other revenues included revenues from the WaterColor Inn, other resort and club operations, management fees and brokerage activities. Other revenues were $43.6 million in 2005 with $39.6 million in related costs, compared to revenues totaling $41.5 million in 2004 with $37.5 million in related costs.
 
Other operating expenses include salaries and benefits, marketing, project administration, support personnel and other administrative expenses. Other operating expenses in 2004 included $3.0 million of nonrecurring uninsured losses related to storm damage while similar losses incurred in 2005 were $1.0 million.


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Commercial Real Estate.  Our commercial real estate segment plans, develops and entitles our land holdings for a broad portfolio of retail, office and commercial uses. We sell and develop commercial land and provide development opportunities for national and regional retailers in Northwest Florida. We believe that national and regional retail developers have now discovered Northwest Florida and continue to express a high level of interest in the region. We also offer land for commercial and light industrial uses within large and small-scale commerce parks, as well as for a wide range of multi-family for-sale and for-rent projects.
 
As a contrast to demand for residential real estate products, demand for Florida commercial real estate in 2006 was strong, consistent with 2005 and 2004. The table below sets forth the results of operations of our commercial real estate segment for the three years ended December 31, 2006.
 
                         
    Years Ended December 31,  
    2006     2005     2004  
    (In millions)  
 
Revenues:
                       
Real estate sales
  $ 48.5     $ 62.7     $ 87.2  
Rental revenues
    39.3       33.1       24.1  
Other revenues
    0.9       1.2       1.9  
                         
Total revenues
    88.7       97.0       113.2  
                         
Expenses:
                       
Cost of real estate sales
    18.6       33.8       58.9  
Cost of rental revenues
    15.1       12.2       9.7  
Other operating expenses
    7.9       8.9       10.4  
Depreciation and amortization
    20.5       17.3       11.5  
Restructuring charge
    0.1              
                         
Total expenses
    62.2       72.2       90.5  
                         
Other income (expense)
    (4.8 )     (2.5 )     (1.6 )
                         
Pre-tax income from continuing operations
  $ 21.7     $ 22.3     $ 21.1  
                         
 
Real Estate Sales.  Land sales for the three years ended December 31, 2006 included the following:
 
                                                 
    Number of
    Acres
    Average Price
    Gross
          Gross Profit
 
Land
  Sales     Sold     per Acre(c)     Proceeds     Revenue     on Sales  
                            (In millions)        
 
Year Ended December 31, 2006:
                                               
Northwest Florida
    28       244     $ 200.4     $ 48.9     $ 48.5 (a)   $ 29.9 (a)
Other
                                   
                                                 
Total/Average
    28       244     $ 200.4     $ 48.9     $ 48.5 (a)   $ 29.9 (a)
                                                 
Year Ended December 31, 2005:
                                               
Northwest Florida
    36       220     $ 140.5     $ 30.9     $ 29.9 (b)   $ 21.9 (b)
Other
    8       276       118.8       32.8       32.8       6.7  
                                                 
Total/Average
    44       496     $ 128.4     $ 63.7     $ 62.7 (b)   $ 28.6 (b)
                                                 
Year Ended December 31, 2004:
                                               
Northwest Florida
    40       384     $ 113.6     $ 43.6     $ 43.6     $ 24.0  
Other
    5       36       522.2       18.8       18.8       1.4  
                                                 
Total/Average
    45       420     $ 148.6     $ 62.4     $ 62.4     $ 25.4  
                                                 
 
 
(a) Net of deferred revenue and gain on sales, based on percentage-of-completion accounting, of $0.4 million and $0.1 million, respectively.


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(b) Net of deferred revenue and gain on sales, based on percentage-of-completion accounting, of $1.0 million and $0.7 million, respectively.
 
(c) Average price per acre in thousands.
 
The change in average per-acre prices reflected a change in the mix of commercial land sold in each period, with varying compositions of retail, office, light industrial, multi-family and other commercial uses. In 2005 and 2004, the commercial segment had larger numbers of sales due to the sale of non-strategic positions. Pricing increased in 2006 compared to 2005 and 2004 for office and light industrial land with average pricing at our Commerce Parks of $196,000 per acre for the year 2006, compared with average pricing of $97,000 per acre in 2005 and $75,000 per acre in 2004.
 
In 2006, compared to 2005 and 2004, the commercial segment shifted its multifamily focus from smaller local builders to regional and national companies. This shift resulted in fewer multifamily sales but increased pricing to $232,000 per acre for the year 2006, compared with average pricing of $105,000 per acre in 2005 and $25,000 per acre in 2004.
 
For additional information about our Commerce Parks, see the table “Summary of Additional Commercial Land-Use Entitlements” in the Business section above.
 
Rental Revenues.  Rental revenues generated by our commercial real estate segment on owned operating properties increased $6.2 million, or 19%, in 2006 compared to 2005 primarily due to the acquisition of one building in December of 2005, with approximately 225,000 rentable square feet. The year ended December 31, 2006 also included recognition of $0.8 million of termination fees related to three tenants terminating their leases early. Cost of rental revenues increased $2.9 million, or 24%, in 2006 compared to 2005, primarily due to the building acquisition and increased operating costs. Rental revenues increased $9.0 million, or 37%, for 2005 compared to 2004 due to the acquisition of five buildings in the last half of 2004, with an aggregate of 553,000 rentable square feet. Cost of rental revenues increased $2.5 million, or 26%, due to the acquired buildings.
 
Further information about our commercial income producing properties is presented in the table below.
 
                                                                             
    December 31, 2006       December 31, 2005       December 31, 2004  
          Net
                  Net
                  Net
       
    Number of
    Rentable
    Percentage
      Number of
    Rentable
    Percentage
      Number of
    Rentable
    Percentage
 
    Properties     Square Feet     Leased       Properties     Square Feet     Leased       Properties     Square Feet     Leased  
Buildings purchased with tax-deferred proceeds by location:
                                                                           
Florida
                                                                           
Jacksonville
    1       136,000       83 %       1       136,000       69 %       1       136,000       69 %
Northwest Florida
    3       156,000       100         3       156,000       95         3       156,000       95  
Orlando
    2       317,000       95         2       317,000       71         2       317,000       71  
Atlanta
    8       1,289,000       78         8       1,289,000       73         8       1,289,000       73  
Virginia
    3       354,000       97         3       354,000       96         2       129,000       96  
                                                                             
Subtotal/Average
    17       2,252,000       85         17       2,252,000       76 %       16       2,027,000       76 %
                                                                             
Development property:
                                                                           
Florida
                                                                           
Northwest Florida
    2       37,000       96         2       37,000       93 %                    
                                                                             
Subtotal/Average
    2       37,000       96         2       37,000       93 %                    
                                                                             
Total/Average
    19       2,289,000       85         19       2,289,000       76 %       16       2,027,000       76 %
                                                                             
 
The lease for the sole tenant in one of our Virginia buildings will expire in February 2008. At this time a replacement tenant has not yet been obtained. We are continuing to aggressively market the vacant spaces in Atlanta and Virginia.


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In January 2007, we entered into an exclusive listing agreement with Eastdil Secured, LLC, a real estate brokerage firm, for the marketing and potential disposition of our office building portfolio. The portfolio is located in seven markets throughout the Southeast and consists of 17 buildings with approximately 2.3 million net rentable square feet. The likelihood and timing of the possible sale will depend upon market reaction and other variables. The portfolio does not currently meet the criteria for classification as “assets held for sale”.
 
Depreciation and amortization, primarily consisting of depreciation on income producing properties and amortization of lease intangibles, increased to $20.5 million in 2006 compared to $17.3 million in 2005, due to the building placed in service in December 2005.
 
Total proceeds from building sales recorded in continuing operations in 2004 were $24.8 million, with a pre-tax gain of $2.9 million. Building sales in 2004 consisted of:
 
  •  the sale of the 99,000-square foot TNT Logistics building located in Jacksonville, Florida, for $12.8 million, with a pre-tax gain of $3.0 million; and
 
  •  the sale of the 100,000-square foot Westside Corporate Center building located in Plantation, Florida, for $12.0 million, with a pre-tax loss of $(0.1) million.
 
Discontinued Operations.  Discontinued operations related to this segment for 2006 included the sale and results of operations of four commercial buildings sold in 2006. Discontinued operations for 2005 included those four buildings, the sale and results of operations of four commercial buildings sold in 2005, and the sale and results of operations of Advantis sold in 2005.
 
Building sales included in discontinued operations for 2006 consisted of the following:
 
  •  The sale of Nextel II, with net rentable square feet of 30,000 in Panama City, Florida, on December 20 for proceeds of $4.9 million and a pre-tax gain of $1.7 million;
 
  •  The sale of One Crescent Ridge, with net rentable square feet of 158,000 in Charlotte, North Carolina, on September 29 for proceeds of $31.3 million and a pre-tax gain of $10.6 million; and
 
  •  The sales of Prestige Place One & Two, with net rentable square feet of 147,000 in Tampa, Florida, on June 28 for proceeds of $18.1 million and a pre-tax gain of $4.4 million.
 
Building sales included in discontinued operations for 2005 consisted of the following:
 
  •  1133 20th Street, with 119,000 net rentable square feet in Washington, DC, sold on September 29 for proceeds of $46.9 million and a pre-tax gain of $19.7 million;
 
  •  Lakeview, with 127,000 net rentable square feet in Tampa, Florida, sold on September 7 for proceeds of $18.0 million and a pre-tax gain of $4.1 million;
 
  •  Palm Court, with 62,000 net rentable square feet in Tampa, Florida, sold September 7 for proceeds of $7.0 million and a pre-tax gain of $1.8 million; and
 
  •  Harbourside, with 153,000 net rentable square feet in Clearwater, Florida, sold December 14 for proceeds of $21.9 million and a pre-tax gain of $5.2 million.
 
On September 7, 2005, we sold Advantis for $11.4 million (including $7.5 million in notes receivable from the purchaser) at a pre-tax loss of $9.9 million. Under the terms of the sale, we continue to use Advantis to manage certain commercial properties and also involve Advantis in certain sales of our land.
 
Building sales included in discontinued operations in 2004 consisted of the following:
 
  •  1750 K Street, with 152,000 net rentable square feet in Washington, DC, sold on July 30 for proceeds of $47.3 million ($21.9 million, net of the assumption of a mortgage by the purchaser) and a pre-tax gain of $7.5 million; and
 
  •  Westchase Corporate Center, with 184,000 net rentable square feet in Houston, Texas, sold on August 16 for proceeds of $20.3 million and a pre-tax gain of $0.2 million.


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Rural Land Sales.  Our rural land sales segment markets for sale tracts of land of varying sizes for rural recreational, conservation, residential and timberland uses. The land sales segment prepares land for sale for these uses through harvesting, thinning and other silviculture practices, and in some cases, limited infrastructure development.
 
The table below sets forth the results of operations of our rural land sales segment for the three years ended December 31, 2006.
 
                         
    Years Ended December 31,  
    2006     2005     2004  
    (In millions)  
 
Revenues
                       
Real estate sales
  $ 89.9     $ 68.9     $ 68.0  
                         
Expenses:
                       
Cost of real estate sales
    7.4       9.4       6.0  
Cost of other revenues
          0.1        
Other operating expenses
    10.6       8.8       6.7  
Depreciation and amortization
    0.3       0.2       0.2  
Restructuring charge
    0.2              
                         
Total expenses
    18.5       18.5       12.9  
                         
Other income
    1.1       0.3       0.2  
                         
Pre-tax income from continuing operations
  $ 72.5     $ 50.7     $ 55.3  
                         
 
Rural land sales for the three years ended December 31, 2006 are as follows:
 
                                         
    Number
    Number of
    Average Price
    Gross Sales
    Gross
 
Period
  of Sales     Acres     Per Acre     Price     Profit  
                      (In millions)     (In millions)  
 
2006
    84       34,336     $ 2,621     $ 89.9     $ 82.5  
2005
    142       28,958     $ 2,378     $ 68.9     $ 59.3  
2004
    172       20,175     $ 3,375     $ 68.1     $ 62.0  
 
During 2006, we sold two large tracts of land totaling 15,469 acres for an average price of $1,700 per acre. We continually evaluate the pricing and timing of land sales based upon a careful analysis of the present value of the land.
 
Land sales for 2005 included the sales of two parcels totaling 1,046 acres in southwest Georgia for $2.5 million, or $2,390 per acre. Earlier in 2005, we paid $1,225 per acre for approximately 47,000 acres in southwest Georgia.
 
Land sales for 2004 included two parcels with an aggregate of 20,000 feet of frontage on North Bay in Bay County, Florida, and a parcel with approximately 5,000 feet of frontage on East Bay in Bay County. The two North Bay parcels, of approximately 349 and 323 acres, sold for $8.7 million, or approximately $25,000 per acre, and $8.7 million, or approximately $27,000 per acre, respectively. The East Bay parcel of 866 acres sold for $10.0 million, or approximately $11,550 per acre.
 
Since average sales prices per acre vary according to the characteristics of each particular piece of land being sold, our average prices may vary from one period to another.
 
The historical results of RiverCamps on Crooked Creek have been reclassified from the rural land sales segment to the residential real estate segment to conform to the current year presentation.


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Forestry.  The table below sets forth the results of operations of our forestry segment for the three years ended December 31, 2006.
 
                         
    Years Ended December 31,  
    2006     2005     2004  
    (In millions)  
 
Revenues:
                       
Timber sales
  $ 29.9     $ 27.9     $ 35.2  
Expenses:
                       
Cost of timber sales
    21.9       20.0       21.8  
Other operating expenses
    2.3       2.2       2.6  
Depreciation and amortization
    2.9       4.2       4.1  
Impairment loss
    1.5              
                         
Total expenses
    28.6       26.4       28.5  
                         
Other income
    3.1       3.1       2.4  
                         
Pre-tax income from continuing operations
  $ 4.4     $ 4.6     $ 9.1  
                         
 
Total revenues for the forestry segment increased $2.0 million, or 7%, compared to 2005. Sales under our fiber agreement with Smurfit-Stone Container Corporation were $13.0 million (692,600 tons) in 2006 and $12.0 million (678,000 tons) in 2005. Sales to other customers totaled $11.3 million (623,300 tons) in 2006 as compared to $9.9 million (529,000 tons) in 2005. The increase in revenue and tons sold to outside customers resulted from our ability to harvest more solid wood products due to better operating conditions and planning. Revenues for the cypress mill operation were $5.6 million in 2006 and $6.0 million in 2005. Revenues from the cypress mill were lower in 2006 due to the lack of customer demand for our mulch product.
 
Cost of sales for the forestry segment increased $1.9 million in 2006 compared to 2005. Costs of sales as a percentage of revenue were 73% in 2006 and 72% in 2005. The increase in cost of sales was due to increased logging costs caused by higher diesel fuel prices and increased road maintenance expense. Cost of sales for the cypress mill operation were $4.9 million or 88% of revenues in 2006 and $4.5 million or 75% of revenues in 2005.
 
During 2006, the Company utilized a discounted cash flow method to determine the fair value of Sunshine State Cypress and recorded an impairment loss to reduce the carrying amount of goodwill from $8.8 million to $7.3 million. This resulted in an impairment loss of $1.5 million pre-tax, or $0.9 million net of tax.
 
Revenues for the forestry segment in 2005 decreased $7.3 million, or 21%, compared to 2004. Total sales under the fiber agreement with Smurfit-Stone Container Corporation were $12.0 million (678,000 tons) in 2005 and $13.0 million (681,000 tons) in 2004. Sales to other customers totaled $9.9 million (529,000 tons) in 2005 and $14.5 million (653,000 tons) in 2004. The 2005 decrease in revenues under the fiber agreement was primarily due to lower pulpwood prices under the terms of the agreement. In 2005 and 2004, sales to other customers decreased due to management’s decision to reduce the harvested volume from clear-cut operations in order to retain more timber on certain tracts planned for later sale for recreational or residential purposes. Revenues from the cypress mill operation were $6.0 million in 2005 and $7.7 million in 2004. Revenues from the cypress mill were lower in 2005 due to lower prices as a result of the increased supply of fallen timber caused by hurricanes.
 
Cost of timber sales decreased $1.8 million, or 8%, in 2005 compared to 2004. Cost of sales as a percentage of revenues was 72% in 2005 and 62% in 2004. The increase in cost of sales as a percentage of revenues was due primarily to increased logging costs caused by fuel shortages from Hurricane Katrina, road maintenance and timber inventory costs. Cost of sales for the cypress mill operation were $4.5 million, or 75% of revenues, in 2005, and $5.4 million, or 70% of revenues, in 2004. Cost of sales for timber was $15.5 million, or 71% of revenues, in 2005 and $16.4 million, or 59% of revenues, in 2004.


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Liquidity and Capital Resources
 
We generate cash from:
 
  •  Operations;
 
  •  Sales of land holdings, other assets and subsidiaries;
 
  •  Borrowings from financial institutions and other debt; and
 
  •  Issuances of equity, primarily from the exercise of employee stock options.
 
We use cash for:
 
  •  Operations;
 
  •  Real estate development;
 
  •  Construction and homebuilding;
 
  •  Repurchases of our common stock;
 
  •  Payments of dividends;
 
  •  Repayments of debt;
 
  •  Payments of taxes; and
 
  •  Investments in joint ventures and acquisitions.
 
Management believes we have adequate resources to fund ongoing operating requirements and future capital expenditures related to the continued investment in real estate developments. In light of current real estate market conditions, however, we have significantly adjusted our capital investment plans and continue to evaluate the appropriateness of our plans. We also intend to continue to be prudent in our approach toward share repurchase activity in 2007 considering our other capital commitments. If our liquidity were not adequate to fund our cash requirements, we would have various alternatives available to change our cash flow, including reducing or eliminating our share repurchase program, reducing or eliminating dividends, changing our capital structure, altering the timing of our development projects and/or selling existing assets.
 
Cash Flows from Operating Activities
 
Cash flows related to assets ultimately planned to be sold, including residential real estate development and related amenities, sales of undeveloped and developed land by the rural land sales segment, the Company’s timberland operations and land developed by the commercial real estate segment, are included in operating activities on the statement of cash flows. Distributions of income from unconsolidated affiliates are also included in cash flows from operating activities.
 
Net cash (used in) provided by operations was ($143.9) million during 2006 compared to $192.0 million in 2005 and $128.2 million in 2004. Expenditures relating to our residential real estate segment in 2006, 2005 and 2004 were $531.4 million, $515.7 million and $488.8 million, respectively. Expenditures for operating properties in 2006, 2005 and 2004 totaled $55.6 million, $33.9 and $62.6 million, respectively, and were made up of commercial land development and residential club and resort property development.
 
The changes in other tax related balance sheet accounts were primarily related to $125.1 million in estimated tax payments related to the 2006 tax year. These tax payments were primarily attributable to the recognition of previously deferred gains on land sales and involuntary conversions, which have now met the criteria for recognition in our 2006 tax return. We also expect to make significant tax payments in 2007 related to an IRS audit of the years 2001-2004. The balances expected to be affected by any tax settlement include other liabilities, taxes payable and deferred taxes. We expect to continue to make significant cash payments of income taxes, including deferred taxes, in future years.
 
The expenditures for operating activities relating to our residential real estate and commercial real estate segments were primarily for site infrastructure development, general amenity construction, construction of


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single-family homes, construction of multi-family buildings and commercial land development. In 2006, approximately 50% of these expenditures were for home construction that generally takes place after the signing of a binding contract with a buyer to purchase the home upon completion of construction. Due to our exit from Florida homebuilding, we expect a significant reduction in construction expenditures related to single-family homes after we finish the homes currently under construction in Florida. Total expenditures for single-family home construction in the future are expected to decline significantly and the resulting percentage of total expenditures may significantly change depending on the total amount of non-homebuilding construction activity in future periods.
 
Over the next several years, our need for cash for operations will remain significant as development activity continues. During 2006, we had five new residential communities requiring significant up-front capital investment, and these communities will continue to require capital expenditures.
 
Cash Flows from Investing Activities
 
The Company’s buildings developed for commercial rental purposes and assets purchased with tax-deferred proceeds are held for investment purposes and related cash flows from acquisitions and dispositions of those assets are included in investing activities on the statements of cash flows. Cash flows from investing activities also include related cash flows from assets not held for sale. Distributions of capital from unconsolidated affiliates are included in cash flows from investing activities.
 
Net cash provided by (used in) investing activities was $29.9 million in 2006 compared to $(31.9) million in 2005 and $(32.4) million in 2004. Net cash provided in 2006 primarily was a result of $52.8 million in proceeds related to the sales of discontinued operations. Net cash used in 2005 included $88.8 million in proceeds from sales of discontinued operations, net of cash included in assets sold. Purchases of investments in real estate in 2005 included $20.9 million for the purchase of a commercial office building and related intangible assets net of assumption of a mortgage on the property of $29.9 million, the purchases of 16 acres of property in Manatee County for $18.0 million and 47,303 acres of timberland in Southwest Georgia for $58.3 million, in tax-deferred like-kind exchanges and $9.6 million of other real estate investments. Net cash used in investing activities in 2004 included $64.4 million for the purchase of five commercial office buildings and related intangible assets, $41.1 million in proceeds from the sale of discontinued operations and $17.7 million of other real estate investments.
 
The purchase of commercial buildings and land, comprising the majority of the cash used in investing activities, generally follow the sale of real estate, principally land sales on a tax-deferred basis. The tax deferral requires the reinvestment of proceeds from qualifying sales within a required time frame. We make these investments in buildings and land only when we can acquire these assets at attractive prices. It is becoming increasingly difficult to acquire assets that meet our pricing and other criteria for reinvestment, and as a result we may not purchase commercial buildings and vacant land to the extent we have in the past. Additionally, as our sales activity has slowed, the amount of cash available for purchase activities has decreased.
 
We have recently entered into a listing agreement for the marketing and potential disposition of our office building portfolio. Our portfolio is located in seven markets throughout the Southeast and consists of seventeen buildings with approximately 2.3 million of net rentable square feet. The potential sale proceeds related to this asset disposition could have a significant positive impact on investing cash flows in 2007 if such a sale were to occur.
 
Cash Flows from Financing Activities
 
Net cash used in financing activities was $51.7 million in 2006, $52.3 million in 2005 and $58.4 million in 2004. As a result of the significant development and investing activities anticipated over the next several years, we expect our debt to increase compared to December 31, 2006 levels. In 2007, we have approximately $229.3 million of debt maturing, and we expect to spend $50 million to $100 million for dividend payments and the repurchase of shares. Based on these factors, we expect a meaningful increase in debt during 2007. This debt increase may not occur, however, and our debt may in fact decrease if we were to sell our office building portfolio (as described above).


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In 2005, we entered into a new four-year $250 million senior revolving credit facility (the “Credit Facility”). The Credit Facility bears interest based on leverage levels at LIBOR plus an applicable margin in the range of 0.4% to 1.0%. The Credit Facility contains financial covenants including maximum debt ratios and minimum fixed charge coverage and net worth requirements. The balance outstanding at December 31, 2006 was $60.0 million; no balance was outstanding on the Credit Facility at December 31, 2005. Management believes that we were in compliance with the covenants of the Credit Facility at December 31, 2006.
 
In February 2007, we increased the size of the Credit Facility to $500 million. None of the material terms of the Credit Facility were changed in connection with the expansion. Proceeds from the increased Credit Facility will be used for the repayment of debt maturing in 2007, development and construction projects and general corporate purposes.
 
Senior notes issued in private placements had an outstanding principal amount of $307.0 million at December 31, 2006 and $407.0 million at December 31, 2005. These senior notes have financial performance covenants similar to those in the Credit Facility. In July 2006, we entered into an amendment agreement with the 2002 noteholders that modifies certain financial covenants. The amendment provides increased leverage capacity along with increased flexibility in maintaining minimum net worth levels. The covenant modifications were subject to certain conditions, including prepayment of our $100 million outstanding 2004 senior notes. We paid these notes in November 2006.
 
The proceeds of the senior notes were used to finance development and construction projects, as well as for general corporate purposes.
 
During 2005, we assumed an existing mortgage of $29.9 million on a commercial building we purchased.
 
We have used community development district (“CDD”) bonds to finance the construction of infrastructure improvements at six of our projects. The principal and interest payments on the bonds are paid by assessments on, or from sales proceeds of, the properties benefited by the improvements financed by the bonds. We record a liability for future assessments which are fixed or determinable and will be levied against our properties. In 2005, we paid $10.5 million in principal to one of the community development districts to pay off a portion of the CDD bonds. In accordance with Emerging Issues Task Force Issue 91-10, Accounting for Special Assessments and Tax Increment Financing, we have recorded as debt $43.1 million and $14.7 million related to CDD bonds as of December 31, 2006 and 2005, respectively.
 
Through December 31, 2006, our Board of Directors had authorized a total of $950.0 million for the repurchase of our outstanding common stock from shareholders from time to time (the “Stock Repurchase Program”), of which $103.8 million remained available at December 31, 2006. There is no expiration date for the Stock Repurchase Program, and the specific timing and amount of repurchases will vary based on available cash, market conditions, securities law limitations and other factors. From the inception of the Stock Repurchase Program to December 31, 2006, the Company repurchased from shareholders 27,945,611 shares. During 2006, 2005 and 2004, the Company repurchased from shareholders 948,200, 1,705,000 and 1,561,565 shares, respectively. Given the challenges presented by the current operating environment, we will be prudent in our approach to share repurchase activity over the near term until the depth and duration of the current downturn in the residential market is more readily discernible. As a result, we did not purchase any of our shares on the open market during the fourth quarter of 2006.
 
Executives have surrendered a total of 2,253,559 shares of our stock since 1998 in payment of strike prices and taxes due on exercised stock options and vested restricted stock. For 2006, 2005 and 2004, 148,417 shares worth $7.6 million, 68,648 shares worth $4.8 million and 884,633 shares worth $35.3 million, respectively, were surrendered by executives, of which $7.6 million, $2.3 million and $13.9 million, respectively, were for the cash payment of taxes due on exercised stock options and vested restricted stock.
 
Off-Balance Sheet Arrangements
 
We are not currently a party to any material off-balance sheet arrangements as defined in Item 303 of Regulation S-K.


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Contractual Obligations and Commercial Commitments at December 31, 2006
 
                                         
    Payments Due by Period  
          Less Than
                More Than
 
Contractual Cash Obligations
  Total     1 Year     1-3 Years     3-5 Years     5 Years  
    (In millions)  
 
Debt
  $ 627.1     $ 229.3     $ 84.2     $ 29.8     $ 283.8  
Interest related to debt
    139.2       30.5       40.6       34.8       33.3  
Purchase obligations(1)
    128.2       13.6       114.6              
Operating leases
    2.1       1.2       0.8       0.1        
                                         
Total Contractual Cash Obligations
  $ 896.6     $ 274.6     $ 240.2     $ 64.7     $ 317.1  
                                         
 
 
(1) These aggregate amounts include individual contracts in excess of $2.0 million.
 
                                         
    Amount of Commitment Expirations Per Period  
    Total Amounts
    Less Than
                More Than
 
Other Commercial Commitments
  Committed     1 Year     1-3 Years     3-5 Years     5 Years  
    (In millions)  
 
Surety bonds
  $ 64.3     $ 63.9     $ 0.4     $     $  
Standby letters of credit
    25.0       25.0                    
                                         
Total Commercial Commitments
  $ 89.3     $ 88.9     $ 0.4     $     $  
                                         
 
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk
 
Our primary market risk exposure is interest rate risk related to our long-term debt. As of December 31, 2006, there was $60.0 million outstanding under our Credit Facility, which matures on July 21, 2009. This debt accrues interest at different rates based on timing of the loan and our preferences, but generally will be either the one, two, three or six month London Interbank Offered Rate (“LIBOR”) plus a LIBOR margin in effect at the time of the loan. This loan potentially subjects us to interest rate risk relating to the change in the LIBOR rates. We manage our interest rate exposure by monitoring the effects of market changes in interest rates. If LIBOR had been 100 basis points higher or lower, the effect on net income with respect to interest expense on the credit facility would have been a respective decrease or increase in the amount of $0.6 million pre-tax ($0.4 million net of tax.)
 
We have recently expanded the available principal amount of the Credit Facility to $500 million, and we expect the outstanding balance borrowed under the Credit Facility to increase in the near term. An increase in borrowing under the Credit Facility will cause a corresponding increase in interest rate risk.
 
The table below presents principal amounts and related weighted average interest rates by year of maturity for our long-term debt. The weighted average interest rates for our fixed-rate long-term debt are based on the actual rates as of December 31, 2006. Weighted average variable rates are based on implied forward rates in the yield curve at December 31, 2006.
 
Expected Contractual Maturities
 
                                                                 
                                              Fair
 
    2007     2008     2009     2010     2011     Thereafter     Total     Value  
    $ in millions  
 
Long-term Debt
                                                               
Fixed Rate
  $ 69.2     $ 52.9     $ 17.1     $ 1.1     $ 1.1     $ 283.8     $ 425.2     $ 417.8  
Wtd. Avg. Interest Rate
    6.6 %     7.4 %     6.5 %     5.6 %     5.6 %     5.4 %     5.9 %        
Variable Rate
  $ 160.1     $ 4.2     $ 10.0     $ 17.6     $ 10.0           $ 201.9     $ 201.9  
Wtd. Avg. Interest Rate
    5.7 %     4.2 %     4.4 %     4.0 %     4.0 %           5.3 %        


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Management estimates the fair value of long-term debt based on current rates available to us for loans of the same remaining maturities. As the table incorporates only those exposures that exist as of December 31, 2006, it does not consider exposures or positions that could arise after that date. As a result, our ultimate realized gain or loss will depend on future changes in interest rate and market values.
 
Item 8.   Financial Statements and Supplementary Data
 
The Financial Statements in pages F-2 to F-33 and the Report of Independent Registered Public Accounting Firm on page F-1 are filed as part of this Report and incorporated by reference thereto.
 
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.   Controls and Procedures
 
(a) Evaluation of Disclosure Controls and Procedures.  Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings under the Exchange Act.
 
(b) Management’s Annual Report on Internal Control Over Financial Reporting.
 
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is 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. The Company’s internal control over financial reporting includes those policies and procedures that:
 
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 
(ii) 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
 
(iii) 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.
 
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
Based on our assessment and those criteria, management believes that the Company’s internal control over financial reporting as of December 31, 2006 was effective.
 
The Company’s independent auditors, KPMG LLP, an independent registered public accounting firm, has issued a report on management’s assessment of the Company’s internal control over financial reporting, which report appears below.
 
(c) Report of Independent Registered Public Accounting Firm.


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The Board of Directors and Shareholders
The St. Joe Company:
 
We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that The St. Joe Company maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The St. Joe Company’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. Our responsibility is to express an opinion on management’s assessment and 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, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, 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, management’s assessment that The St. Joe Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by COSO. Also, in our opinion, The St. Joe Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by COSO.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The St. Joe Company and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders’ equity, and cash flow for each of the years in the three-year period ended December 31, 2006 and the related financial statement schedule, and our report dated February 28, 2007 expressed an unqualified opinion on those consolidated financial statements and the related financial statement schedule.
 
/s/  KPMG LLP
 
Certified Public Accountants
Jacksonville, Florida
February 28, 2007


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(d) Changes in Internal Control over Financial Reporting.  During the fourth quarter and year ended December 31, 2006, there have not been any changes in our internal controls that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Item 9B.   Other Information
 
Amendment of a Material Definitive Agreement and Creation of a Direct Financial Obligation
 
In July 2005, we entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”) with Wachovia Bank, National Association, as Agent, Bank of America, N.A., as Syndication Agent, each of SunTrust Bank and Wells Fargo Bank, National Association, as Co-Documentation Agents, and the other lenders party thereto. The Credit Agreement provided for a $250 million revolving credit facility that matures on July 21, 2009. A description of the Credit Agreement may be found in our Current Report on Form 8-K filed on July  28, 2005, which description is incorporated by reference. A complete copy of the Credit Agreement was filed as Exhibit 10.1 to that Form 8-K.
 
On February 26, 2007, we exercised our right, pursuant to Section 2.16 of the Credit Agreement, to increase the aggregate amount of commitments under the Credit Agreement from $250 million to $500 million. This increase is set forth in a first amendment (the “Amendment”) to the Credit Agreement. The Amendment also provides for minor modifications to certain restrictive covenants and definitions with the effect of permitting qualified installment sales of timberland by us and excluding from financial covenant calculations the notes created in connection with such transactions. The Amendment does not change any pricing, maturity or other material terms of the Credit Agreement. The proceeds of any borrowings under the Credit Agreement may be used for general corporate purposes, which may include debt payments and development expenditures.
 
A copy of the Amendment is filed as Exhibit 10.2 to this Annual Report on Form 10-K. The foregoing description of the Amendment does not purport to be complete, and is qualified in its entirety by reference to the full text of the Amendment, which is incorporated by reference.
 
From time to time, certain lenders party to the Credit Agreement and their affiliates have provided, and may in the future provide, investment banking and commercial banking services and general financial and other services to us for which they have in the past received, and may in the future receive, customary fees. We are currently a party to a mortgage company joint venture with an affiliate of Wells Fargo Bank, National Association. Certain lenders and their affiliates provide other loan, securities, credit and banking services to us, all on commercial terms.
 
Results of Operations and Financial Condition
 
On February 28, 2007 we issued a press release announcing an update to the Company’s financial results for the quarter and year ended December 31, 2006. A judicial decision released on February 26, 2007 resulted in a modification to our litigation reserves as of December 31, 2006. The updated results reflect fourth quarter 2006 net income of $22.3 million, or $0.30 per share, down from $23.8 million, or $0.32 per share, as previously reported February 6, 2007, and full year 2006 net income of $51.0 million, or $0.69 per share, down from net income of $52.5 million, or $0.71 per share. A copy of the press release is furnished as Exhibit 99.1 hereto.
 
PART III
 
Item 10.   Directors, Executive Officers and Corporate Governance
 
Information concerning our directors, nominees for director, executive officers and certain corporate governance matters is described in our proxy statement relating to our 2007 annual meeting of shareholders to be held on May  15, 2007 (the “proxy statement”). This information is set forth in the proxy statement under the captions “Proposal No. 1 — Election of Directors”, “Executive Officers”, and “Corporate Governance and Related Matters”. This information is incorporated by reference.
 
Item 11.   Executive Compensation
 
Information concerning compensation of our executive officers for the year ended December 31, 2006, is presented under the caption “Executive Compensation and Other Information” in our proxy statement. This information is incorporated by reference.


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Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Information concerning the security ownership of certain beneficial owners and of management is set forth under the caption “Security Ownership of Certain Beneficial Owners, Directors and Executive Officers” in our proxy statement and is incorporated by reference.
 
Equity Compensation Plan Information
 
Our shareholders have approved all of our equity compensation plans. These plans are designed to further align our directors’ and management’s interests with the Company’s long-term performance and the long-term interests of our shareholders.
 
The following table summarizes the number of shares of our common stock that may be issued under our equity compensation plans as of December 31, 2006:
 
                         
                Number of Securities
 
    Number of Securities
          Remaining Available for
 
    to be Issued
    Weighted-Average
    Future Issuance Under
 
    Upon Exercise of
    Exercise Price of
    Equity Compensation Plans
 
    Outstanding Options,
    Outstanding Options,
    (Excluding Securities Reflected
 
Plan Category
  Warrants and Rights     Warrants and Rights     in the First Column)  
 
Equity compensation plans approved by security holders
    780,909     $ 32.42       1,306,902  
Equity compensation plans not approved by security holders
                 
                         
Total
    780,909     $ 32.42       1,306,902  
                         
 
For additional information regarding our equity compensation plans, refer to Note 2 to the consolidated financial statements under the heading “Stock-based Compensation”.
 
Item 13.   Certain Relationships and Related Transactions and Director Independence
 
Information concerning certain relationships and related transactions during 2006 and director independence is set forth under the captions “Certain Relationships and Related Transactions” and “Director Independence” in our proxy statement. This information is incorporated by reference.
 
Item 14.   Principal Accountant Fees and Services
 
Information concerning our independent auditors is presented under the caption “Audit Committee Information” in our proxy statement and is incorporated by reference.
 
PART IV
 
Item 15.   Exhibits and Financial Statement Schedule
 
(a)(1) Financial Statements
 
The financial statements listed in the accompanying Index to Financial Statements and Financial Statement Schedule and Report of Independent Registered Public Accounting Firm are filed as part of this Report.
 
(2) Financial Statement Schedule
 
The financial statement schedule listed in the accompanying Index to Financial Statements and Financial Statement Schedule is filed as part of this Report.
 
(3) Exhibits
 
The exhibits listed on the accompanying Index to Exhibits are filed or incorporated by reference as part of this Report.


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INDEX TO EXHIBITS
 
         
Exhibit
   
Number  
Description
 
  3 .1   Restated and Amended Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 of the registrant’s registration statement on Form S-3 (File 333-116017)).
  3 .2   Amended and Restated By-laws of the registrant (incorporated by reference to Exhibit 3 to the registrant’s Current Report on Form 8-K dated December 14, 2004).
  10 .1   Third Amended and Restated Credit Agreement dated as of July 22, 2005, among the registrant, Wachovia Bank, National Association, as agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 of the registrant’s current report on Form 8-K dated July 28, 2005).
  10 .2   First Amendment to Third Amended and Restated Credit Agreement dated February 26, 2007.
  10 .3   Note Purchase Agreement dated as of February 7, 2002, among the registrant and the purchasers party thereto ($175 million Senior Secured Notes) (incorporated by reference to Exhibit 10.25 of the registrant’s annual report on Form 10-K for the year ended December 31, 2003).
  10 .4   First Amendment to Note Purchase Agreements dated June 8, 2004, by and among the registrant and certain holders of the registrant’s 2002 Senior Notes party thereto (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on July 31, 2006).
  10 .5   Second Amendment to Note Purchase Agreements dated July 28, 2006, by and among the registrant and the holders of the registrant’s 2002 Senior Notes party thereto (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on July 31, 2006).
  10 .6   Note Purchase Agreement dated as of August 25, 2005 by and among the registrant and the purchasers party thereto ($150 million Senior Notes)(incorporated by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K dated August 30, 2005).
  10 .7   Credit Agreement dated July 28, 2006 by and among the registrant, Bank of America, N.A. and Banc of America Securities, LLC (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed on July 31, 2006).
  10 .8   Employment Agreement between the registrant and Peter S. Rummell dated August 19, 2003 (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).
  10 .9   Form of Executive Employment Agreement (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed on July 31, 2006).
  10 .10   First Amendment to Employment Agreement of Michael N. Regan dated January 5, 2007 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on January 9, 2007).
  10 .11   Directors’ Deferred Compensation Plan, dated December 28, 2001 (incorporated by reference to Exhibit 10.10 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  10 .12   Deferred Capital Accumulation Plan, as amended and restated effective January 1, 2002 (incorporated by reference to Exhibit 10.11 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  10 .13   First Amendment to the Deferred Capital Accumulation Plan, dated May 22, 2003 and effective as of June 1, 2003 (incorporated by reference to Exhibit 10.16 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2005).
  10 .14   Second Amendment to the Deferred Capital Accumulation Plan, dated November 2, 2005 and effective as of September 8, 2005 (incorporated by reference to Exhibit 10.17 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2005).
  10 .15   Third Amendment to the Deferred Capital Accumulation Plan, dated as of November 30, 2005 and effective as of January 1, 2005 (incorporated by reference to Exhibit 10.18 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2005).
  10 .16   Fourth Amendment to The St. Joe Company Deferred Capital Accumulation Plan (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on September 22, 2006).


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Exhibit
   
Number  
Description
 
  10 .17   Supplemental Executive Retirement Plan, as amended and restated effective January 1, 2002 (incorporated by reference to Exhibit 10.15 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  10 .18   First Amendment to the Supplemental Executive Retirement Plan, dated May 22, 2003 and effective as of June 1, 2003 (incorporated by reference to Exhibit 10.20 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2005).
  10 .19   Second Amendment to the Supplemental Executive Retirement Plan, dated November 2, 2005 and effective as of September 8, 2005 (incorporated by reference to Exhibit 10.21 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2005).
  10 .20   Third Amendment to The St. Joe Company Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on September 22, 2006).
  10 .21   1999 Employee Stock Purchase Plan, dated November 30, 1999 (incorporated by reference to Exhibit 10.12 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  10 .22   Amendment to the 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.13 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  10 .23   Second Amendment to the St. Joe Company 1999 Employee Stock Purchase Plan.
  10 .24   Third Amendment to the St. Joe Company 1999 Employee Stock Purchase Plan.
  10 .25   Fourth Amendment to the St. Joe Company 1999 Employee Stock Purchase Plan.
  10 .26   1997 Stock Incentive Plan (incorporated by reference to Exhibit 10.21 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  10 .27   1998 Stock Incentive Plan (incorporated by reference to Exhibit 10.22 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  10 .28   1999 Stock Incentive Plan (incorporated by reference to Exhibit 10.23 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  10 .29   2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.24 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  10 .30   Form of Stock Option Agreement (incorporated by reference to Exhibit 10.23 of the registrant’s annual report on Form 10-K for the year ended December 31, 2003).
  10 .31   Form of Restricted Stock Agreement-Bonus Award (incorporated by reference to Exhibit 10.24 of the registrant’s annual report on Form 10-K for the year ended December 31, 2003).
  10 .32   Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10 of the registrant’s Current Report on Form 8-K dated September 23, 2004).
  10 .33   Form of Amendment to Restricted Stock Agreements and Stock Option Agreements (incorporated by reference to Exhibit 10.6 to the registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2006).
  10 .34   Form of Stock Option Agreement for use with grants on or after July 27, 2006 (incorporated by reference to Exhibit 10.6 to the registrant’s Current Report on Form 8-K filed on July 31, 2006).
  10 .35   Form of Restricted Stock Agreement for use with grants on or after July 27, 2006 (incorporated by reference to Exhibit 10.5 to the registrant’s Current Report on Form 8-K filed on July 31, 2006).
  10 .36   Summary of Non-Employee Director Compensation (incorporated by reference to the registrant’s Current Report on Form 8-K dated January 5, 2005).
  10 .37   Description of Additional Compensation for Lead Director (incorporated by reference to the information contained in the registrant’s Current Report on Form 8-K dated May 15, 2006).
  10 .38   Form of Non-Employee Director Stock Agreement (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated January 5, 2005).
  10 .39   Form of Director Investment Election Form (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K dated January 5, 2005).

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Exhibit
   
Number  
Description
 
  10 .40   Annual Incentive Plan (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K dated February 17, 2006).
  10 .41   Summary of 2006 provisions of the Annual Incentive Plan (incorporated by reference to the information set forth under the caption “Approval of the 2006 Annual Incentive Plan” contained in the registrant’s current report on Form 8-K filed on February 17, 2006).
  10 .42   Summary of 2007 provisions of the Annual Incentive Plan (incorporated by reference to the information set forth in the registrant’s current report on Form 8-K filed on February 16, 2007).
  14 .1   Code of Conduct (revised December 4, 2006)(incorporated by reference to the registrant’s Current Report on Form 8-K filed on December 7, 2006).
  21 .1   Subsidiaries of The St. Joe Company.
  23 .1   Consent of KPMG LLP, independent registered public accounting firm for the registrant.
  31 .1   Certification by Chief Executive Officer.
  31 .2   Certification by Chief Financial Officer.
  32 .1   Certification by Chief Executive Officer.
  32 .2   Certification by Chief Financial Officer.
  99 .1   Press Release dated February 28, 2007.

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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 authorized representative.
 
The St. Joe Company
 
  By: 
/s/  Peter S. Rummell
Peter S. Rummell
Chairman, Chief Executive Officer and President
 
Dated: February 28, 2007
 
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 in the capacities and as of February 28, 2007.
 
         
Signature
 
Title
 
/s/  Peter S. Rummell

Peter S. Rummell
  Chairman of the Board, Chief Executive Officer and President
(Principal Executive Officer)
     
/s/  WM. Britton Greene

Wm. Britton Greene
  Chief Operating Officer
     
/s/  Michael N. Regan

Michael N. Regan
  Chief Financial Officer
(Principal Financial and Accounting Officer)
     
/s/  Michael L. Ainslie

Michael L. Ainslie
  Director
     
/s/  Hugh M. Durden

Hugh M. Durden
  Director
     
/s/  Thomas A. Fanning

Thomas A. Fanning
  Director
     
/s/  Harry H. Frampton, III

Harry H. Frampton, III
  Director
     
/s/  Dr. Adam W. Herbert, Jr.

Dr. Adam W. Herbert, Jr.
  Director
     
/s/  Delores M. Kesler

Delores M. Kesler
  Director
     
/s/  John S. Lord

John S. Lord
  Director
     
/s/  Walter L. Revell

Walter L. Revell
  Director
     
/s/  William H. Walton, III

William H. Walton, III
  Director


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INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
 
         
  F-1
  F-2
  F-3
  F-4
  F-5
  F-6