THE ST. JOE COMPANY
Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549


FORM 10-K

     
(Mark One)
   
[X]
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2002
    OR
[ ]
  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   59-0432511
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
Suite 400, 1650 Prudential Drive   32207
Jacksonville, Florida   (Zip Code)
(Address of principal executive offices)    
Registrant’s telephone number, including area code: (904) 396-6600
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 whether this 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 x    NO o

     Indicate by check mark if the 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 of information statements incorporated by reference in Part III of this Form 10-K. or any amendment to this Form 10-K  o

     Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  YES x    NO o

     The aggregate market value of the registrant’s Common Stock held by non-affiliates based on the closing price on June 30,2002 was approximately $1,120 million.

     As of March 14, 2003, there were 97,903,101 shares of Common Stock, no par value, issued and 76,086,265 shares outstanding with 21,816,836 shares of treasury stock.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 20, 2003 (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

PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant’s Common Stock and Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Market Risk
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Controls And Procedures
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
INDEPENDENT AUDITORS’ REPORT
EX-21.1 SUBSIDIARIES OF THE ST. JOE COMPANY
EX-23.1 CONSENT OF KPMG LLP
EX-23.2 CONSENT OF ERNST & YOUNG LLP
EX-99.1 CERTIFICATION OF THE CEO AND CFO


Table of Contents

PART I

Item 1.     Business

      As used throughout this Form 10-K Annual Report, the terms “we,” “St. Joe,” “Company” and “Registrant” mean The St. Joe Company and its consolidated subsidiaries unless the context indicates otherwise.

      We are one of Florida’s largest real estate operating companies and the largest private landowner in the State of Florida. The majority of our land is located in Northwest Florida. We own approximately 900,000 acres which is approximately 2.5% of the land area of the State of Florida.

      We provide a broad range of residential and commercial real estate services. We believe we are one of the few real estate operating 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 primarily conduct our business in five operating segments:

  •  Community Residential Development;
 
  •  Land Sales;
 
  •  Commercial Real Estate Development and Services;
 
  •  Forestry; and
 
  •  Transportation

      We were organized as a Florida corporation in 1936 by the executors of the estate of Alfred I. duPont, a descendant of the Delaware family that founded the duPont Company, to implement Mr. duPont’s plans to establish a paper company in northwest Florida. Over the years, St. Joe, then known as St. Joe Paper Company, expanded into other lines of business primarily by acquiring assets we perceived to be undervalued, such as real estate, railroads, banks, a sugar company, a communications company and corrugated box factories.

      Since 1996, we have implemented a strategy that has led to our transformation from an industrial conglomerate to a real estate operating company. We implemented this strategy by divesting several of our non-core businesses.

  •  In 1996, we sold our linerboard mill and container plants and our communications businesses.
 
  •  In 1999, we sold our sugar assets.
 
  •  In 1999, we entered into a forward sale transaction with a major financial institution that, in effect, provided for the monetization of its long-held portfolio of equity investments. We settled the transaction in 2002 by delivering the equity securities to the financial institution.
 
  •  In 2000, we completed the tax free spin-off to our shareholders of our 54% equity interest in Florida East Coast Industries, Inc. (“FLA”).
 
  •  In 2002, we sold Arvida Realty Services, our residential real estate brokerage operations.
 
  •  In 2002, we sold the rolling stock of the Apalachicola Northern Railroad Company and leased the right-of-way and track.

      In order to optimize the value of our core real estate assets in Northwest Florida, our strategic plan calls for us to continue to increase the pace of its development. 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 the State of Florida, a very low cost basis in our land and a strong financial condition, which allows us the financial flexibility to pursue development opportunities.

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      Community Residential Development

      In this segment, we develop large-scale, mixed-use communities primarily on land that we have owned for a long period of time. We own large tracts of land in Northwest Florida, including large tracts near Tallahassee, the state capitol. These tracts include significant Gulf of Mexico beach frontage and other waterfront properties which we believe are suited for primary housing, resort and second-home communities. We believe this large, established land inventory, with a low cost basis, provides us an advantage over our competitors that must purchase real estate at current market prices before beginning projects. We also develop smaller scale residential communities that make productive use of our existing assets and on land we acquire.

      With the development of Northwest Florida, we have embarked on a regional “placemaking” effort. We continue to support local efforts to improve the regional infrastructure in Northwest Florida. Examples include:

  •  In January 2003, Sacred Heart Health System held the grand opening of its new 50-bed hospital in south Walton County, Florida, built on land we donated. The hospital is located near WaterColor, WaterSound and other of our projects.
 
  •  We intend to donate approximately 4,000 acres of our land to be used as the site of the proposed relocated Panama City-Bay County International Airport.

      We are also participating in regional planning efforts. Examples include:

  •  The West Bay Sector Plan Overlay received final approval in the fourth quarter of 2002. The sector plan sets forth a land-use blue-print for more than 70,000 acres of our land in Bay County, Florida. Its central features are 37,000 acres of conservation lands, the proposed relocated Panama City-Bay County International Airport and nearby commercial and residential land uses. The sector plan is implemented by a series of Detailed Specific Area Plans (DSAP). A DSAP for the proposed, relocated airport and a mixed-use DSAP for our lands are expected to begin the approval process in 2003.
 
  •  In January 2003, the Franklin County, Florida Board of Commissioners unanimously approved a long term visioning process for St. James Island. We own approximately 37,000 of the approximately 49,000 acres which make up St. James Island. The planning process for St. James Island is expected to be similar in scope to the West Bay Sector Plan. Florida State University has been contracted by Franklin County, Florida to facilitate the public planning and consensus building process which is expected to last for approximately one year.

      We manage the conceptual design, planning and permitting process for each of our new communities. We then construct or contract for the construction of the infrastructure for the community. Developed homesites and finished housing units are then marketed and sold.

      The community residential development segment generated revenues in 2002 from:

  •  the sale of developed homesites;
 
  •  the sale of housing units built by us;
 
  •  management fees and rental income; and
 
  •  investments in limited partnerships.

      We are a 74% partner in St. Joe/Arvida Company, L.P. (“St. Joe/Arvida”). The remaining 26% is owned by JMB Southeast Development, L.L.C. and JMB Southeast Development, L.P. The principal assets of St. Joe/Arvida are the “Arvida” name, proprietary information systems and the Arvida management team. We direct our residential development efforts through St. Joe/Arvida and conduct the majority of our residential development activity under the Arvida trademark.

      We own approximately 26% of the outstanding limited partnership interests in Arvida/JMB Partners, L.P. (“Arvida/JMB”). The primary asset of the partnership is land that is being developed into a master-

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planned community known as Weston located in Broward County, Florida. We expect the delivery of the final home in this project to occur in the first half of 2003. The winding-up of the affairs of the partnership is expected to take two or more years. Although we expect to incur losses with respect to this partnership interest during this period, we do not expect the aggregate amount of these losses to have a material adverse effect on the results of our operations or financial condition.

      In April 1999, we acquired all the outstanding stock of Saussy Burbank, a homebuilder located in Charlotte, North Carolina. In 2002, Saussy Burbank closed sales of 523 homes it constructed in North Carolina and South Carolina.

      As of December 31, 2002, we were developing approximately 20 residential or resort communities. The majority of the communities are on lands we have owned for a long period of time. The following is a description of some of the communities we are planning and developing:

      WaterColor is situated on approximately 499 acres on the beaches of the Gulf of Mexico in south Walton County, Florida. All three phases of WaterColor have been approved under Florida’s Development of Regional Impact permitting process. We are building homes and condominiums and selling developed homesites in WaterColor. Sales began in March 2000 and as of December 31, 2002, 108 residential units we built had been closed; 288 developed homesites had been closed; and 21 contracts for residential units we will build and 9 contracts for developed homesites were pending. At full build-out, the community is planned to include approximately 1,140 units, a beach club, a tennis center, a boat house, a restaurant on an inland freshwater lake, a 60-room inn and restaurant, commercial space and parks. Among the amenities now open are the beach club and community pool, the boat house, a second community pool, the Fresh Daily Market, the tennis facility, the WaterColor Inn and Fish Out of Water restaurant. Infrastructure construction in phase two is expected to be completed in the second quarter of 2003. Infrastructure construction in phase three, expected to begin in 2003, is planned to include a third community pool and a community center. Sales at WaterColor are expected to be completed by 2007 to 2008.

      WaterSound Beach is located in Walton County, Florida, approximately three miles east of WaterColor. WaterSound Beach is situated on approximately 256 acres and includes over one mile of beachfront on the Gulf of Mexico. This community is currently planned to include approximately 499 units. Eighty-one beachfront multi-family units are under construction and are expected to be completed in 2003. As of December 31, 2002, sales of 108 developed homesites had been closed and 46 contracts for beachfront multi-family units were pending. Sales are expected to continue for another three to four years.

      WaterSound is located in Walton County, Florida east of WaterSound Beach with frontage on Lake Powell. This project is situated on approximately 1,440 acres. On October 8, 2002, the Walton County Board of County Commissioners approved transmittal of a Comprehensive Plan Amendment for WaterSound, to the Florida Department of Community Affairs for state review. The state has provided Walton County with its comments and the Walton County Board of County Commissioners is expected to hold an adoption hearing on the Comprehensive Plan amendments early in 2003. Preliminary design for WaterSound calls for approximately 1,020 residential units and a golf course. The project will require a Development of Regional Impact (DRI) process that is expected to commence in early 2003 and continue for 12 to 18 months.

      Camp Creek Golf Course is located in Walton County, Florida, approximately four miles east of WaterColor and within one-half mile of WaterSound. Plans include 36 holes of golf. The first 18-hole golf course, designed by Tom Fazio, was opened for play in May, 2001.

      East Lake Powell is located in Bay County, Florida. East Lake Powell is situated on approximately 181 acres. Preliminary design for East Lake Powell calls for approximately 200 residential units.

      Summerwood is located in Panama City Beach in Bay County, Florida and includes 219 units. This project was completed in 2002.

      The Hammocks is located in Lynn Haven in Bay County, Florida. The Hammocks is situated on approximately 143 acres and is planned to include approximately 463 housing units. As of December 31, 2002, sales of 74 homes we built had been closed; 36 developed homesites had been closed and 20 contracts for

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homes we will build and six contracts for developed homesites were pending. Sales are expected to continue for another four to five years.

      Palmetto Trace is located in Bay County, Florida. Palmetto Trace is situated on approximately 138 acres and is planned to include approximately 523 housing units. As of December 31, 2002, sales of 43 homes we built had been closed and 48 contracts for homes we will build were pending. Sales are expected to continue for another five to six years.

      WindMark Beach is located in Gulf County, Florida. This community is situated on approximately 2,000 acres and includes approximately 15,000 feet of beachfront we own. Phase I of WindMark Beach is situated on approximately 80 acres and is planned to include approximately 110 units, many of which will be located on the beachfront. As of December 31, 2002, sales of 87 developed homesites had been closed; and three contracts for developed homesites were pending. Sales are expected to be completed in 2003. Future phases are planned to include approximately 1,550 units and require a Development of Regional Impact process that commenced during the first quarter of 2003 and may continue for up to 18 months. Plans also include the realignment of approximately four miles of US Highway 98. Field survey work and project engineering and design of the relocated road are ongoing.

      Mexico Beach is located in Bay County, Florida and Phase I of the community is situated on approximately 160 acres. Preliminary design has been completed; however, timing of development is uncertain.

      SouthWood is located in southeast Tallahassee, Florida. SouthWood is situated on approximately 3,770 acres. Plans for SouthWood include approximately 4,250 residential units and a traditional town center with restaurants, entertainment facilities, retail shops and offices. Over 35% of the land is designated for greenspaces including a 123-acre central park. As of December 31, 2002, sales of 148 residential units we built had been closed; sales of 128 developed homesites had been closed, and 95 contracts for residential units we will build and two developed homesites were pending. The Florida State Development Research School, a university laboratory school for grades K-12 located in SouthWood, opened in the fall of 2001. The Pope John Paul II Catholic Academy, a private parochial school for grades 9-12 located in SouthWood, also opened in the fall of 2001. In November 2002, the new Fred Couples designed 18 hole golf course opened for play. Sales are expected to continue for more than 15 years.

      SummerCamp is located in Franklin County, Florida. SummerCamp is situated on approximately 784 acres. On January 21, 2003, the Franklin County, Florida Board of Commissioners unanimously approved a comprehensive plan amendment for SummerCamp. Current plans include approximately 499 units, a beach club, community dock and nature trails. Several regulatory steps remain before construction can commence.

      James Island is located in Jacksonville, Florida, near Interstate 95 and new elementary and middle schools. James Island is situated on approximately 194 acres acquired by the Company. At full build-out, the community is expected to include approximately 365 housing units. As of December 31, 2002, sales of 293 homes we built had been closed and 36 contracts for homes we will build were pending. This project is expected to be completed in 2003.

      St. Johns Golf and Country Club is located in St. Johns County, Florida. St. Johns Golf and Country Club is situated on approximately 820 acres acquired by the Company. The community is planned to include a total of approximately 799 housing units and an 18-hole golf course. Most homes will be adjacent to golf, conservation land, lakes, or natural wooded areas. Construction of general infrastructure is complete and parcel development is ongoing. As of December 31, 2002, sales of 177 homes we built had been closed, sales of 90 developed homesites had been closed and 67 contracts for homes we will build were pending. The golf course has been completed and was opened for play in June 2001. Sales are expected to continue for four to five years.

      RiverTown is located in St. Johns County, Florida, south of Jacksonville, Florida along the St. Johns River. RiverTown is situated on approximately 4,300 acres. In late 1998, the Company transferred 120 acres in RiverTown to the St. Johns County School Board to be used as a site for a new high school. This school opened for the 2000-2001 school year. In the fourth quarter of 1999, St. Joe filed an application for a Planned

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Rural Development (PRD) for riverfront homesites in RiverTown. In January 2000, the Company obtained approval to develop the first 23 riverfront homesites. As of December 31, 2001, all 23 homesites had been closed. Predevelopment planning is underway for the remaining land. A Development of Regional Impact process is required and is expected to commence in early 2003 and continue for up to 18 months.

      Hampton Park is located in Jacksonville, Florida. Hampton Park is situated on approximately 150 acres and is planned to include approximately 158 homesites. As of December 31, 2002, sales of 36 homes we built had been closed and 32 contracts for homes we will build were pending. Sales are expected to continue for another one to two years.

      Victoria Park is located in Volusia County in central Florida. Victoria Park is situated on approximately 1,859 acres being acquired by the Company near Interstate 4 in Deland, Florida between Daytona Beach and Orlando, Florida. Plans for Victoria Park include approximately 4,000 single and multi-family units with a traditional town center and an 18-hole golf course. As of December 31, 2002, sales of 91 homes we built had been closed; 25 developed homesites had been closed and 38 contracts for homes we will build and three contracts for developed homesites were pending. Sales are expected to continue for more than ten years.

      Rivercrest is located south of Tampa, Florida along US 301. This project is situated on approximately 413 acres. Plans for this community include approximately 1,357 residential units. St. Joe/Arvida is managing the development of Rivercrest for a venture owned equally by the Company and an unrelated third party. As of December 31, 2002, sales of 76 units had been closed and 49 contracts were pending.

      Paseos is located in Jupiter in northern Palm Beach County, Florida. This project is situated on approximately 207 acres. Plans for this community include approximately 325 residential units. St. Joe/Arvida is managing the development of Paseos for a venture owned equally by the Company and an unrelated third party. As of December 31, 2002, 32 contracts were pending.

      Celebration is located near Orlando, Florida. The phase of the project to be developed by us is situated on approximately 160 acres. Infrastructure construction commenced in the fourth quarter of 2002. Current plans include approximately 300 single-family units, 50 townhomes, and 300 condominiums as well as parks, trails, and a community clubhouse with a pool and educational and recreational programming. Sales are expected to commence in 2003.

      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. Such large-scale development projects can require significant infrastructure development costs and may raise environmental issues that require mitigation.

St. Joe Land Company

      We created the St. Joe Land Company in 1999 to facilitate land sales at higher prices than we would receive from bulk timberland sales. This segment markets parcels typically between five and 5,000 acres from a portion of our long-held timberlands in Northwest Florida. This land includes forests and meadowlands with frontage on rivers, lakes and bays. These parcels are being marketed as large secluded home sites. Some of these parcels could be used as quail plantations, ranches, farms, hunting and fishing preserves and for other recreational uses.

      In 2002, St. Joe Land Company closed 176 transactions totaling 28,071 acres.

      We believe there is an opportunity to create additional value on between 300,000 and 500,000 acres of our original timberland that is not included in our current development plans. The vast majority of the holdings

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marketed by St. Joe Land Company will continue to be managed as timberland until sold. We have embarked upon a five year program seeking additional entitlements and zoning improvements throughout our land holdings. These entitlements are intended to facilitate alternative uses of our property and to increase its per acre value.

     RiverCamps

      We are in the process of introducing a new product called RiverCamps. These will be planned developments in rustic settings, supplemented with amenities that may include docks, pools, tennis courts and community river houses. Most of the lots in these developments are expected to be located on or near waterfront property. The RiverCamps concept envisions homesites and high-quality finished cabins in low-density settings with access to various outdoor activities such as fishing, hunting, boating, hiking and horseback riding.

      The first of potentially several RiverCamp developments is RiverCamps on Crooked Creek, situated on approximately 1,490 acres of our timberland in western Bay County, Florida and bounded by West Bay, the Intracoastal Waterway and Crooked Creek. In the fourth quarter of 2002, the Bay County Commission approved a development agreement for RiverCamps on Crooked Creek. While a number of predevelopment regulatory steps remain, this project is planned for up to 450 home sites.

      Planning and evaluation of a 10,600 acre parcel located on East Bay in Bay County, Florida is underway. The HGTV 2003 Dream Home, a RiverCamp concept home, is located on this parcel.

      Preliminary planning work has also started at a potential RiverCamp site located on East Bay at Sandy Creek in Bay County, Florida.

     Conservation Lands

      During 2000, we began an organized effort to sell land to conservation groups and governmental agencies. We closed seven conservation land transactions, totaling 16,512 acres in 2002.

Commercial Real Estate Development and Services

      This segment owns and manages office, industrial and retail properties throughout the southeastern United States. In Florida, we develop and manage office, industrial and retail properties. In 2002, this segment generated revenues from:

  •  rentals on properties owned by us;
 
  •  property and asset management fees;
 
  •  construction management fees;
 
  •  development fees;
 
  •  sales of properties;
 
  •  investments in partnerships; and
 
  •  lease and sales commissions.

      On October 9, 2000, we distributed to our shareholders all of our equity interest in Florida East Coast Industries, Inc., which eliminated our indirect ownership interest in Flagler Development Company, the commercial and industrial real estate subsidiary of Florida East Coast Industries, Inc. In connection with the spin-off, we and Florida East Coast Industries, Inc. entered into an Amended and Restated Master Agreement, which provides for several property management and development service agreements between our two companies. In consideration of their execution of the Amended and Restated Master Agreement, we paid Florida East Coast Industries, Inc. $6 million in three annual installments. The third and final installment was paid in October 2002. Under the terms of the various agreements, which generally extend until October

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2003, Flagler Development Company has retained us to develop and manage certain of its commercial real estate holdings. Flagler Development Company pays us fees for these services based upon market rates.

      Development. For each new development, we first direct the conceptual design, planning and permitting process and then contract for the construction of the infrastructure and building. We generally receive a development fee which is a percentage of the cost of the project for those properties in which we are less than a 100% owner.

      Some of the projects we are developing include:

      SouthWood Village is a retail development within our SouthWood community in Tallahassee, Florida being developed on property we have sold to an unrelated third party. Construction of a new 45,000 square foot supermarket is underway and is scheduled to open in the fall of 2003. During 2002, we sold two retail parcels at this site and four additional retail parcels remain for sale.

      WaterColor Crossings is a commercial center located in our WaterColor community in Walton County, Florida. Construction of a new full service 28,800 square foot supermarket is underway and is scheduled to open in the fall of 2003. The new center also includes 14,400 square feet of retail space and three out-parcels for retail operations.

      Beckrich Office Park is located in Panama City Beach, Florida. Beckrich Office One, a 34,000 square foot office building was completed in 2002 and is now part of our investment property portfolio. Construction of Beckrich Office Two, a 35,000 square foot office building is underway and is scheduled to be completed in the third quarter of 2003.

      Pier Park is located in Panama City Beach, Florida. Infrastructure construction at this mixed use project has commenced. Pier Park is a public/private venture with the City of Panama City Beach, Florida whose plan features retail, dining and family entertainment venues. The project fronts on six acres of white sand beach and includes 50 acres of land available for retail, dining and entertainment facilities near the beach and 70 acres of highway oriented commercial land.

      Port St. Joe Commerce Center is located in Port St. Joe, Florida and includes 57 net salable acres. Horizontal infrastructure construction is expected to be completed in the first quarter of 2003. In 2002, we sold one parcel and accepted contracts on four more parcels in this project, ranging in size from approximately one to six acres.

      Airport Commerce Center is located in Tallahassee, Florida and includes approximately 26 parcels with 40 net salable acres. Infrastructure construction is underway.

      Beach Commerce Center is located in Panama City Beach, Florida and includes approximately 165 net salable acres. In 2002, we sold three parcels and accepted contracts on two more parcels in this project, ranging in size from approximately one to five acres.

      South Walton Commerce Center is located in Walton County, Florida with frontage on US Highway 98 and is planned to include approximately 24 parcels totaling 85 net salable acres. In 2002, the Walton County, Florida Board of Commissioners approved transmittal of a Comprehensive Plan Amendment for this project to the Florida Department of Community Affairs for state review. A number of additional entitlement steps are required before infrastructure construction can commence.

      245 Riverside Avenue is an office building located in Jacksonville, Florida containing approximately 135,000 net rentable square feet. When complete, we will relocate our corporate headquarters to this building and occupy approximately 36,000 square feet. One other lease, covering approximately 14,000 square feet, has been executed. The building is expected to be ready for occupancy in the spring of 2003.

      We also own one-half of The Codina Group Inc. that develops and manages commercial properties in south Florida.

      Our development operations, combined with our tax strategy of reinvesting asset sales proceeds into like-kind properties, have enabled us to create a portfolio of rental properties totaling 2,383,000 square feet. As the

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table below shows, our portfolio of rental properties was 78% leased, based on net rentable square feet, as of December 31, 2002.

ST. JOE COMMERCIAL

PORTFOLIO OF RENTAL PROPERTIES

December 31, 2002
                                           
Number Net
Ownership of Rentable Leased
Investment Property Portfolio Market Percentage Buildings Sq. Ft. Percentage






Prestige Place
    Clearwater, FL       100       2       143,000       84  
Harbourside
    Clearwater, FL       100       1       146,000       86  
Lakeview
    Tampa, FL       100       1       125,000       76  
Palm Court
    Tampa, FL       100       1       62,000       61  
Westside Corporate Center
    Plantation, FL       100       1       100,000       86  
280 Interstate North
    Atlanta, GA       100       1       126,000       67  
Southhall Center
    Orlando, FL       100       1       155,000       94  
1133 20th Street, N.W. 
    Washington, D.C.       100       1       119,000       99  
1750 K Street
    Washington, D.C.       100       1       152,000       94  
Millenia Park One
    Orlando, FL       100       1       158,000       44  
Beckrich Office One
    Panama City Beach, FL       100       1       34,000       88  
5660 New Northside Drive
    Atlanta, GA       100       1       275,000       96  
                     
     
     
 
                      13       1,595,000       83  
                     
     
     
 
 

Development Property Portfolio
                                       

                                       
TNT Logistics
    Jacksonville, FL       100       1       99,000       73  
Southwood Office One
    Tallahassee, FL       100       1       88,000       35  
Alliance Bank Building(1)
    Orlando, FL       50       1       71,000       54  
355 Alhambra
    Coral Gables, FL       45       1       224,000       64  
Deerfield Commons I
    Atlanta, GA       40       1       122,000       94  
Westchase Corporate Center
    Houston, TX       93       1       184,000       89  
                     
     
     
 
                      6       788,000       69  
                     
     
     
 
 
Total
                    19       2,383,000       78  
                     
     
     
 


(1)  Property expected to be redeveloped.
 
(2)  Investment properties comprise completed buildings that we have acquired. Development properties comprise buildings we are involved in developing or redeveloping.

      As the table below shows, we had two properties totaling approximately 170,000 square feet under construction or in the planning stages as of December 31, 2002.

ST. JOE COMMERCIAL

PROPERTIES UNDER DEVELOPMENT

December 31, 2002
                           
Net Rentable Pre-Leased
Market Square Feet Percentage



Northwest Florida
                       
Beckrich Office Two
    Panama City Beach, FL       35,000       0  
Northeast Florida
                       
245 Riverside
    Jacksonville, FL       135,000       37  
             
         
 
Total
            170,000          
             
         

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      As the table below shows, we owned approximately 113 acres of land with entitlements for future development of approximately 2,847,500 square feet of commercial property as of December 31, 2002.

ST. JOE COMMERCIAL

LAND POSITIONS

December 31, 2002
                                   
Ownership Net Entitled
Market Percentage Acres(a) Sq. Ft.(b)




Southeast
                               
Glenlake
    Atlanta, GA       100       9.8       700,000  
Parkstone Plaza
    Chantilly, VA       100       19.1       240,000  
Oak Park at Westchase
    Houston, TX       100       34.2       884,000  
                     
     
 
                      63.1       1,824,000  
                     
     
 
Northeast Florida
                               
Golfway Center
    St. Augustine, FL       100       13.9       167,500  
Central Florida
                               
Millenia Park
    Orlando, FL       100       21.7       592,000  
South Florida
                               
Beacon Square at Boca
    Boca Raton, FL       100       14.0       264,000  
                     
     
 
 
Total
                    112.7       2,847,500  
                     
     
 


(a)  Net Acres represent net areas, defined as the total area excluding public roadways, easements and other undevelopable areas.
 
(b)  Excludes entitlements related to land parcels that have been developed.

      Because of our focus on Florida, we intend to sell the lands we own outside of Florida if we receive offers at prices and on terms that we think are acceptable.

      Services. We provide commercial real estate services in the southeastern United States through Advantis. In 1999, we formed Advantis by combining several businesses we had acquired. Advantis provides our clients with a complete array of services, including:

  •  brokerage;
 
  •  property management; and
 
  •  construction management.

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      We provide property management services for projects owned by us and others. We generally receive a property management fee based on the gross rental revenues of a managed project or building. The tables below summarize by region and type of property the approximately 27,506,717 rentable square feet of property we manage.

PROPERTIES MANAGED

December 31, 2002
         
Rentable
State Square Feet


Florida
    10,433,879  
Virginia
    8,425,702  
North Carolina
    4,213,713  
Georgia
    973,478  
Maryland
    2,668,421  
Washington, D.C
    791,524  
     
 
      27,506,717  
     
 
         
Rentable
Management Type Square Feet


Office property
    14,688,457  
Industrial property
    4,969,423  
Retail property
    3,348,733  
Facilities management
    3,193,523  
Asset management
    1,141,159  
Residential property
    165,422  
     
 
      27,506,717  
     
 

     Forestry

      This segment focuses on the management and harvesting of our extensive timberland holdings. We grow, harvest and sell timber and wood fiber. We are the largest private holder of timberlands in Florida, owning:

  •  Approximately 625,000 acres of planted pine forests, primarily in northwestern Florida
 
  •  Approximately 275,000 acres of mixed timberland, wetlands, lake and canal properties

      In 2002, this segment’s revenues came from selling pulpwood, timber and bulk land. Our principal forestry product is softwood pulpwood. We also grow and sell softwood and hardwood sawtimber. On December 31, 2002, our standing pine inventory totaled 24.8 million tons and our hardwood inventory totaled 7.2 million tons. Our timberlands are harvested by local independent contractors under agreements that are generally renewed annually.

      On July 1, 2000, we entered into a twelve year fiber agreement with Smurfit-Stone Container Corporation. The agreement requires us to provide Smurfit-Stone Container Corporation with 700,000 tons of pulpwood every year from our lands. Approximately 290,000 acres of our land are encumbered, subject to certain restrictions, by this agreement, although the obligation may be transferred to a third party if a parcel is sold.

      On August 20, 1999, we entered into a ten year fiber agreement with Georgia-Pacific Corporation. This agreement requires us to provide Georgia-Pacific Corporation with 450,000 tons of pulpwood every year from our lands. Our obligation to deliver pulpwood under this agreement commences no later than August 1, 2003.

      On June 20, 2001, we purchased Sunshine State Cypress, a cypress sawmill and mulch processing plant located in Liberty County, Florida.

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      Our timberlands are located near key transportation links, including roads, waterways and railroads.

      St. Joe maintains a genetics research facility in Capps, Florida, which supervises the growing of seedlings for use in the reforestation of our lands. The facility conducts research to produce faster-growing, more disease-resistant species of pine trees, and produces seedlings for planting on our plantations. In cooperation with the University of Florida, we are doing experimental work in genetics on the development of superior pine seeds.

      Our strategy is to increase the average age of our timber by extending growing periods before final harvesting in order to capitalize on the higher margins of older-growth timber. We have implemented a program to extend the growing periods for our softwood forest from an historical average of approximately 18-22 years to approximately 28-30 years. Our strategy may increase the revenues and returns of our forestry operations when a sustainable harvest of older-growth timber is achieved, although we cannot provide you with any assurances this will occur. We also seek to maximize sustainable harvest volumes through:

  •  The continued use and development of genetically improved seedlings;
 
  •  Soil mapping;
 
  •  extensive fertilization;
 
  •  vegetation control;
 
  •  thinning; and
 
  •  selective harvesting practices.

      As part of our strategy to maximize the cash flows from our forestry operations, we engage in several business activities complementary to our land holdings. In particular, we lease approximately 600,000 acres of our timberlands to private clubs and state agencies for hunting.

     Transportation

      Through August 31, 2002, we owned and operated the Apalachicola Northern Railroad Company, a short-line railroad operating between Port St. Joe and Chattahoochee, Florida, where it connects with an unaffiliated carrier. On August 31, 2002, we sold the rolling stock of the Apalachicola Northern Railroad to AN Railway L.L.C., a subsidiary of Rail Management Corporation, headquartered in Panama City, Florida. We retained ownership of the right-of-way, track, related facilities and real estate. Under the terms of the agreement, we lease the track and related facilities to AN Railway.

Risk Factors

 
      A continuation or worsening of the current downturn in economic conditions could adversely affect our business.

      Our ability to generate revenues is directly related to the real estate market, primarily in Florida, and to the national and local economy in general. Considerable economic and political uncertainties currently exist that could have adverse effects on consumer buying habits, construction costs, availability of labor and materials and other factors affecting us and the real estate industry in general.

      Significant expenditures associated with investment in real estate, such as real estate taxes, maintenance costs and debt payments, cannot generally be reduced if changes in Florida’s or the national economy cause a decrease in revenues from our properties. In particular, if the growth rate for the Florida economy declines or if a recession in the Florida economy occurs, our financial results could be materially adversely affected.

      While real estate market conditions have generally remained healthy in our regions of development, particularly in Northwest Florida, continued demand for our services and products is dependent on long term prospects for job growth and strong in-migration population expansion in our regions of development.

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      Changes in interest rates could affect demand for our products.

      An increase in interest rates could reduce the demand for homes we build, particularly primary housing, lots we develop, commercial properties we develop or sell, and land we sell.

     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 within 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 would include the adjustments within the tax provision in the statement of operations and/or balance sheet. These adjustments could materially impact our financial position and results of operation.

 
      Our businesses are concentrated in the State of Florida.

      The economic growth and health of the State of Florida are important factors in creating demand for our products and services. As a result, any adverse change to the economic growth and health of Florida could materially adversely affect our financial results.

 
      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.

 
      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;
 
  •  evolving liability theories affecting the construction industry;
 
  •  an inability to obtain required governmental permits and authorizations;
 
  •  an inability to secure tenants or anchors necessary to support commercial projects;
 
  •  failure to achieve anticipated occupancy levels or rents; and
 
  •  an inability to sell our constructed inventory.

      In addition, our real estate development activities require significant capital expenditures. We obtain funds for our capital expenditures through cash flow from operations, property sales or financings. We cannot assure you that the funds available from these sources will be sufficient to fund our required or desired capital expenditures for development. If we are unable to obtain sufficient funds, we may have to defer or otherwise limit our development activities. Our residential projects require significant capital expenditures for infrastructure development before we can begin our selling efforts. If we are unsuccessful in our selling efforts, we may not be able to recover these capital expenditures. Also, our ability to continue to make conservation land sales to government agencies depends on the agencies having sufficient funds available to purchase the lands.

 
      Our joint venture partners may have interests that differ from ours and may take actions that adversely affect us.

      We are involved in joint venture relationships and may initiate future joint venture projects as part of our overall development strategy. A joint venture involves special risks such as:

  •  the venture partner at any time may have economic or business interests or goals that are inconsistent with ours;

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  •  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; and
 
  •  the venture partner could experience financial difficulties.

      Actions by our venture partners may subject property owned by the joint venture to liabilities greater than those contemplated by the joint venture agreement or have other adverse consequences.

 
      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 approval process.

      Development of real property in Florida entails an extensive approval process involving overlapping regulatory jurisdictions. Real estate projects must generally comply with the provisions of the Local Government Comprehensive Planning and Land Development Regulation Act (the “Growth Management Act”). In addition, development projects that exceed certain specified regulatory thresholds require approval of a comprehensive Development of Regional Impact (“DRI”) application. Compliance with the Growth Management Act and the DRI process is usually lengthy and costly and can be expected to materially affect the Company’s real estate development activities.

      The Growth Management Act requires counties and cities to adopt comprehensive plans guiding and controlling future real property development in their respective jurisdictions. After a local government adopts its comprehensive plan, all development orders and development permits that it issues must be consistent with the plan. Each plan must address such topics as future land use, capital improvements, traffic circulation, sanitation, sewerage, potable water, drainage and solid wastes. The local governments’ comprehensive plans must also establish “levels of service” with respect to certain specified public facilities and services to residents. Local governments are prohibited from issuing development orders or permits if facilities and services are not operating at established levels of service, or if the projects for which permits are requested will reduce the level of service for public facilities below the level of service established in the local government’s comprehensive plan. If the proposed development would reduce the established level of services below the level set by the plan, the development order will require that, at the outset of the project, the developer either sufficiently improve the services to meet the required level or provide financial assurances that the additional services will be provided as the project progresses.

      The Growth Management Act, in some instances, can significantly affect the ability of developers to obtain local government approval in Florida. In many areas, infrastructure funding has not kept pace with growth. As a result, substandard facilities and services can delay or prevent the issuance of permits. Consequently, the Growth Management Act could adversely affect our ability to develop our real estate projects.

      The DRI review process includes an evaluation of the project’s impact on the environment, infrastructure and government services, and requires the involvement of numerous federal, state and local environmental, zoning and community development agencies and authorities. 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 there are no assurances as conditions, standards or requirements may be imposed on a developer with respect to a particular project. The DRI approval process is expected to have a material impact on the Company’s real estate development activities in the future.

 
Environmental and other regulations may have an adverse effect on our business.

      A substantial portion of our development properties in Florida is subject to federal, state and local regulations and restrictions that may impose significant limitations on our ability to develop them. Much of our property is raw land located in areas where development may affect the natural habitats of various endangered or protected wildlife species or in sensitive environmental areas such as wetlands and coastal areas.

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      In addition, our current or past ownership, operation and leasing of real property, and our 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;
 
  •  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 our fault.

      Some of our past and present real property, particularly properties used in connection with our transportation operations, involve 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 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 all lead to new or greater liabilities that could materially adversely affect our business, results of operations or financial condition.

 
      Regulation of our forestry operations may adversely affect our ability to harvest and sell lumber.

      In conducting our forestry operations, we voluntarily comply with the “Best Management Practices” recommended by the Florida Division of Forestry. From time to time, proposals have been made in the Florida state legislature regarding the regulation of timber harvesting methods. The proposals, if adopted, may adversely affect our ability to harvest and sell timber in the manner currently contemplated.

 
      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 and real estate services companies, some with greater financial and other resources, compete with us in seeking properties for acquisition, 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 homesites;
 
  •  attract purchasers;
 
  •  attract and retain tenants; and
 
  •  sell undeveloped rural land.
 
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 products are also subject to increasing competition from a

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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.
 
      We are highly dependent on our senior management.

      Our senior management has been responsible for our transformation from an industrial conglomerate to a successful real estate operating company. Our future success is highly dependent upon the continued employment of our senior management. The loss of one or more of these individuals could have a material adverse effect on our business.

 
      The occurrence of natural disasters in Florida could adversely affect our business.

      Our properties are primarily located in Florida. The occurrence of natural disasters in Florida, such as fires, hurricanes, floods, unusually heavy or prolonged rain and droughts, could have a material adverse effect on our ability to develop properties or realize income from our projects.

 
      Decline in rental income could adversely affect our financial results.

      We own a large portfolio of commercial real estate rental properties. Our financial results could be adversely affected if:

  •  a significant number of our tenants are unable to meet their obligations to us;
 
  •  we are unable to promptly 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.
 
      Our obligations to supply minimum annual volumes of wood fiber could delay or adversely impact future land sales.

      Portions of our timberland are encumbered under our existing timber supply contracts to ensure our delivery of the minimum annual volumes of wood fiber required under the timber supply contracts. Our ability to convert our timberland to higher and better uses could be delayed or adversely impacted if our customers under our existing timber supply contracts refuse to timely release the encumbrance of portions of our timberland.

 
      You should not place undue reliance on forward-looking statements made by us.

      We have made forward-looking statements in this Form 10-K, in particular under the caption entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking information to encourage companies to provide prospective information about themselves without fear of litigation so long as that information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ, possibly materially, from those in the information. You can find many of these forward-looking statements by looking for words such as “intend,” “anticipate,” “believe,” “estimate,” “expect”, “plan” or similar expressions in this Form 10-K.

      In particular, forward-looking statements include, among others, statements about the following:

  •  the size and number of commercial buildings and residential units;
 
  •  the expected development timetables, development approvals and the ability to obtain approvals;
 
  •  the anticipated price range of developments;
 
  •  the number of units that can be supported upon full build-out of a development;
 
  •  the number and price of anticipated land sales;

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  •  estimated land holdings for a particular use within a specific timeframe;
 
  •  absorption rates and expected gains on land sales;
 
  •  future operating performance, cash flows, and short and long term revenue and earnings growth rates;
 
  •  comparisons to historical projects; and
 
  •  the number of shares of Company stock which may be purchased under the terms of the Company’s existing or future share repurchase program.

      These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by the forward-looking statements include, among others, those listed in this section entitled “Risk Factors” and the following:

  •  economic conditions, particularly in Florida and key southeastern United States areas that serve as feeder markets to our Northwest Florida operations;
 
  •  acts of war or terrorism and other geopolitical events;
 
  •  local conditions such as an oversupply of homes and homesites, residential or resort properties, or a reduction in demand for real estate in the area;
 
  •  timing and costs associated with property developments and rentals;
 
  •  competition from other real estate developers;
 
  •  whether potential residents or tenants consider our properties attractive;
 
  •  increase in operating costs, including increases in real estate taxes;
 
  •  changes in the amount or timing of federal and state income tax liabilities resulting from either a change in our application of tax laws, an adverse determination by a taxing authority or court, or legislative changes to existing laws;
 
  •  how well we manage our properties;
 
  •  changes in interest rates and the performance of the financial markets;
 
  •  decreases in market rental rates for our commercial and resort properties;
 
  •  decreases in prices of wood products;
 
  •  the pace of development of infrastructure in northern Florida;
 
  •  potential liability under environmental laws or other laws or regulations;
 
  •  adverse changes in laws or regulations affecting the development of real estate;
 
  •  the availability of funding from governmental agencies and others to purchase conservation lands; and
 
  •  adverse weather conditions.

      The foregoing list is not exhaustive and should be read in conjunction with other cautionary statements in this Form 10-K.

      Forward-looking statements are not guarantees of performance. You are cautioned not to place undue reliance on any of these forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events, or otherwise.

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      Employees

      We have approximately 1,455 employees. We consider our relations with our employees to be good. These employees work in the following segments:

         
Residential real estate
    785  
Commercial real estate
    526  
Forestry
    34  
Land Company
    41  
Other — including corporate
    69  
 
      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 home page at www.joe.com.

Item 2.     Properties

      Our material physical properties at December 31, 2002 are addressed below. All properties shown are owned in fee simple, except where otherwise indicated.

 
      Corporate Facilities

      We lease approximately 40,000 square feet in a building owned by Flagler Development Company in Jacksonville, Florida at market rates.

 
      Community Residential Development

      We own thousands of acres the majority of which is located in Northwest Florida, including substantial gulf, lake and riverfront acreage, that we believe to be potentially suited to community residential and resort development. See Item 1 — “Community Residential Development” for a description of many of our developments.

      St. Joe/Arvida’s administrative offices, located in Boca Raton, Florida, are leased.

 
      Commercial Real Estate Development and Services

      On December 31, 2002, we owned approximately 113 acres of land with entitlements for future development of approximately 2,847,500 million square feet of commercial property.

      On December 31, 2002, we owned, directly or through partnership interests, 19 rental properties totaling 2,383,000 square feet.

      All Advantis offices are leased.

 
      Forestry

      We own, primarily in Northwest Florida, over 625,000 acres of planted pine forests and an additional 275,000 acres of mixed timberland, wetlands, lake and canal properties. The forestry segment’s administrative

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offices are based in Port St. Joe, Florida. We own forestry management facilities, cypress sawmill and pulpwood procurement offices in the following locations:
         
Forestry Management Facilities
Hosford, Florida
       
Newport, Florida
       
Port St. Joe, Florida
       
West Bay, Florida
       
Wewahitchka, Florida
       
 
Cypress Sawmill
       
Liberty County, Florida
       
 
      Transportation

      Apalachicola Northern Railroad Company owns a three story building in Port St. Joe, Florida that is partially used for Timberland’s administrative offices. We have sold all our locomotives, freight cars and related equipment. We own approximately 96 miles of main track, 13 miles of yard switching track and 3 miles of other track, together with the underlying real property.

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 have retained certain self-insurance risks with respect to losses for third party liability, worker’s compensation, property damage, group health insurance provided to employees and other types of insurance.

      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 $5.0 million of the sales proceeds are being held in escrow pending the completion of the remediation. We have separately funded the costs of remediation. Upon completion of remediation the escrowed funds will be released to us. Based upon our current environmental studies, management does not believe the costs of the remediation will materially exceed the amount held in escrow. In the event other environmental matters are discovered beyond those contemplated by the $5.0 million held in escrow, the purchasers of our sugar assets will be responsible for the first $0.5 million of the additional costs; we will be responsible for the next $4.5 million; and thereafter the parties will share costs equally. We expect remediation to be complete in 2003.

      During the fourth quarter of 2000, management became aware of an investigation being conducted by the Florida Department of Environmental Protection of our former paper mill site and some adjacent real property in Gulf County, Florida (the “Mill Site”). The real property on which our former paper mill is located is now owned by the Smurfit-Stone Container Corporation and we own the adjacent real property.

      The Florida Department of Environmental Protection submitted a Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) Site Discovery/Prescreening Evaluation to Region IV of the United States Environmental Protection Agency (“USEPA”) in Atlanta in September 2000. Based on this submission, the USEPA included the Mill Site on the CERCLIS List. The CERCLIS List is a list of

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sites which are to be evaluated to determine whether there is a potential presence of actionable contaminants. The Florida Department of Environmental Protection, under an arrangement with the USEPA, began to prepare a preliminary assessment of the Mill Site. In cooperation with the Smurfit-Stone Container Corporation, we requested the Florida Department of Environmental Protection to allow us and the Smurfit-Stone Container Corporation to conduct testing on the Mill Site prior to the submission of a preliminary assessment. At the request of the Florida Department of Environmental Protection, the USEPA agreed to allow us and the Smurfit-Stone Container Corporation to conduct a voluntary investigation prior to submitting a preliminary assessment.

      On September 27, 2001, we, the Smurfit-Stone Container Corporation and the Florida Department of Environmental Protection executed an Agreement which set forth the parameters under which we and the Smurfit-Stone Container Corporation were to conduct testing. Upon completion of the testing, we submitted our sampling and analysis report to the Florida Department of Environmental Protection on January 16, 2002. The Florida Department of Environmental Protection, which conducted independent testing of the same sample, has completed its assessment of the data obtained during our voluntary investigation. Based on its assessment, the Florida Department of Environmental Protection submitted a proposed Consent Order that we and Smurfit-Stone Container Corporation have executed. It obligates us to conduct further assessment of that portion of the Mill Site owned by us and, if necessary, rehabilitate that portion of the Mill Site. Smurfit-Stone Container Company has a corresponding obligation with respect to that portion of the Mill Site it owns.

      Through incorporation of the data and findings which resulted from our voluntary testing, the Florida Department of Environmental Protection has completed and submitted a preliminary assessment/site investigation report to the USEPA, including a recommendation that the Mill Site be considered “low priority” under CERCLA. Based on this recommendation, the USEPA has deferred further action on the Mill Site and has agreed to allow the Mill Site to be assessed and rehabilitated, if necessary, under the guidance of the Florida Department of Environmental Protection.

      Additionally, on November 5, 2002, the City of Port St. Joe, Florida, enacted a Resolution designating the Mill Site as a Brownfields Redevelopment Area for site rehabilitation under the provisions of applicable Florida law. Florida’s Brownfields program provides economic and tax incentives which may be available to us. We have entered into a Brownfield Site Rehabilitation Agreement for the Mill Site that obligates us to conduct further assessment of that portion of the Mill Site we own to delineate the extent of contamination, if any, and, if necessary, to rehabilitate that portion. The Consent Order will be held in abeyance pending the completion of the assessment and remediation, if any, of the Mill Site under the terms of the Brownfield Site Remediation Agreement.

      Based on this current information, including the environmental test results, the recommendation for “low priority” USEPA consideration, USEPA agreement to defer further action, and the Brownfields Area local designation, management does not believe our liability, if any, for the possible cleanup of any potential contaminants detected on the Mill Site will be material.

      We are currently a party to, or involved in, legal proceedings directed at the cleanup of Superfund sites. We have accrued an allocated share of the total estimated cleanup costs for these sites. Based upon management’s evaluation of the other potentially responsible parties, we do not expect to incur material additional amounts even though we have joint and several liability. Other proceedings involving environmental matters such as alleged discharge of oil or waste material into water or soil 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, based on information presently available, 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. Environmental liabilities are paid over an extended period and the timing of such payments cannot be predicted with any confidence.

Item 4.     Submission of Matters to a Vote of Security Holders

      None.

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PART II

 
Item  5.      Market for the Registrant’s Common Stock and Related Stockholder Matters

      We had approximately 28,400 beneficial owners of our Common Stock as of March 14, 2003. Our common stock is quoted on the New York Stock Exchange (“NYSE”) Composite Transactions Tape under the symbol “JOE.”

      The range of high and low closing prices for our common stock as reported on the NYSE Composite Transactions Tape for the periods indicated is set forth below:

                   
Common Stock Price High Low



2002
               
 
First Quarter
  $ 30.00     $ 27.30  
 
Second Quarter
    33.65       29.34  
 
Third Quarter
    30.33       25.09  
 
Fourth Quarter
    30.10       25.60  
2001
               
 
First Quarter
    23.53       21.07  
 
Second Quarter
    27.00       22.14  
 
Third Quarter
    29.55       23.12  
 
Fourth Quarter
    28.03       24.85  
2000
               
 
First Quarter
    28.94       23.06  
 
Second Quarter
    31.19       27.38  
 
Third Quarter
    31.00       27.75  
 
Fourth Quarter(1)
    28.31       17.94  


(1)  After the close of regular trading on the NYSE on October 9, 2000, we distributed to our shareholders all our shares of Florida East Coast Industries, Inc. Class B Common Stock. The value of the shares distributed was approximately $9.38 per share, and that amount was subtracted from our stock price when the NYSE opened for trading on October 10, 2000.

      On March 14, 2003, the closing price of our common stock on the NYSE was $26.72.

 
      Dividends

      We paid aggregate annual cash dividends of $.08 per share to holders of the Common Stock in 2002, 2001, and 2000, respectively. Although we have paid dividends in the past, there can be no assurance that such practice will continue in the future.

 
      Recent Sales of Unregistered Securities

      On February 7, 2002, St. Joe issued in a private placement the following series of senior notes:

  •  $18,000,000 5.64% Senior Notes, Series A, due February 7, 2005
 
  •  $67,000,000 6.66% Senior Secured Notes, Series B, due February 7, 2007
 
  •  $15,000,000 7.02% Senior Secured Notes, Series C, due February 7, 2009
 
  •  $75,000,000 7.3% Senior Secured Notes, Series D, due February 7, 2012

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      Wachovia Securities acted as placement agent for these notes, which were sold to various institutional investors for cash. The aggregate offering price of this private placement was $175.0 million. We paid Wachovia Securities a placement fee of $718,750 and reimbursed Wachovia Securities $27,704 for expenses incurred in connection with the placement.

      The issuances described above relied on Section 4(2) of the Securities Act of 1933 as an exemption from registration. The issuances qualified for this exemption because the notes were sold to no more than 35 accredited investors pursuant to Regulation D of the Securities Act of 1933. No resale of the notes may be made unless the notes are subsequently registered under the Securities Act of 1933 or an exemption from the registration requirements of the Act is available, including without limitation the exemption provided by Rule 144A of the Act relating to resales of the notes to qualified institutional buyers.

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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 notes related thereto included elsewhere herein. The statement of operations data with respect to the years ended December 31, 2002, 2001, and 2000 and the balance sheet data as of December 31, 2002 and 2001 have been derived from the financial statements of the Company included herein, which have been audited by KPMG LLP. The statement of operations data with respect to the years ended December 31, 1999 and 1998 and the balance sheet data as of December 31, 2000, 1999, and 1998 have been derived from the financial statements of the Company previously filed with the SEC, and have also been audited by KPMG LLP. Historical results are not necessarily indicative of the results to be expected in the future.

                                           
Year Ended December 31,

2002 2001 2000 1999 1998





(In thousands, except per share amounts)
Statement of Operations Data:
                                       
Operating revenues(1)
  $ 646,352     $ 591,134     $ 623,862     $ 540,874     $ 312,926  
Operating expenses
    474,629       449,493       399,608       392,728       213,507  
Corporate expense, net
    27,527       18,793       25,115       16,361       6,569  
Depreciation and amortization
    22,780       21,326       44,620       43,874       36,706  
Impairment losses
          500       6,455       7,162       10,238  
     
     
     
     
     
 
Operating profit
    121,416       101,022       148,064       80,749       45,906  
Other income (expense)
    120,648       (5,846 )     6,184       32,448       31,704  
     
     
     
     
     
 
Income from continuing operations before income taxes and minority interest
    242,064       95,176       154,248       113,197       77,610  
Income tax expense
    89,561       35,441       51,755       21,012       34,707  
     
     
     
     
     
 
Income from continuing operations before minority interest
    152,503       59,735       102,493       92,185       42,903  
Minority interest
    1,366       524       9,954       19,243       19,117  
     
     
     
     
     
 
Income from continuing operations
    151,137       59,211       92,539       72,942       23,786  
Income from discontinued operations
    2,339       10,994       7,784       10,061       5,052  
Gain on sale of discontinued operations
    20,887                   41,354        
     
     
     
     
     
 
Net income
  $ 174,363     $ 70,205     $ 100,323     $ 124,357     $ 28,838  
     
     
     
     
     
 
Per Share Data:
                                       
Basic
                                       
Income from continuing operations
  $ 1.93     $ 0.73     $ 1.09     $ 0.83     $ 0.26  
Earnings from discontinued operations
    0.03       0.14       0.09       0.12       0.06  
Gain on the sale of discontinued operations
    0.26                   0.47        
     
     
     
     
     
 
 
Net income
  $ 2.22     $ 0.87     $ 1.18     $ 1.42     $ 0.32  
     
     
     
     
     
 

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Year Ended December 31,

2002 2001 2000 1999 1998





(In thousands, except per share amounts)
Diluted
                                       
Income from continuing operations
  $ 1.85     $ 0.70     $ 1.06     $ 0.82     $ 0.26  
Earnings from discontinued operations
    0.03       0.13       0.09       0.12       0.05  
Gain on the sale of discontinued operations
    0.26                   0.46        
     
     
     
     
     
 
 
Net income
  $ 2.14     $ 0.83     $ 1.15     $ 1.40     $ 0.31  
     
     
     
     
     
 
Dividends paid
  $ 0.08     $ 0.08     $ 0.08     $ 0.02       0.08  
FLA spin-off(2)
                4.64              
                                         
Year Ended December 31,

2002 2001 2000 1999 1998





(In thousands, except per share amounts)
Balance Sheet Data:
                                       
Investment in real estate
  $ 806,701     $ 736,734     $ 562,181     $ 825,577     $ 616,435  
Cash and investments(3)
    74,404       205,715       203,429       330,045       305,395  
Property, plant & equipment, net
    42,907       49,826       59,665       386,437       360,817  
Total assets
    1,169,887       1,340,559       1,115,021       1,821,627       1,604,269  
Total stockholders’ equity
    480,093       518,073       569,084       940,854       883,297  


(1)  Operating revenues includes real estate revenues from property sales, rental revenues, brokerage commissions and management service fees, timber sales and transportation revenues. Net operating results of the residential real estate services and sugar segments are shown separately as income from discontinued operations for all years presented.
 
(2)  On October 9, 2000 the Company distributed to its shareholders all of its equity interest in Florida East Coast Industries, Inc. (“FLA”). To effect the distribution, the Company exchanged its 19,609,216 shares of FLA common stock for an equal number of shares of a new class of FLA common stock. On October 9, 2000, the new class of stock, FLA.B, was distributed prorata to the Company’s shareholders in a tax-free distribution. For each share of the Company common stock owned of record on September 18, 2000, the Company’s shareholders received 0.23103369 of a share of FLA.B common stock.
 
(3)  Includes cash, cash equivalents, marketable securities and short-term investments.

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Item  7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

      Management’s discussion and analysis contains forward-looking statements, including statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions, as well as trends and uncertainties that could affect our results. These statements are subject to risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. For additional information concerning these factors and related matters, see “Risk Factors” in Item 1 of this Report.

     Critical Accounting Policies and Estimates

      The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on 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.

      We believe the following critical accounting policies reflect the Company’s more significant judgments and estimates used in the preparation of our consolidated financial statements:

      Investment in real estate. Costs associated with a specific real estate project are capitalized once we determine that a real estate project is economically viable. The Company capitalizes costs directly associated with the development and construction of identified real estate projects. Indirect costs, such as internal costs of a regional project field office, that clearly relate to a specific project under development, are also capitalized. We capitalize interest based on the amount of underlying expenditures (up to an amount not to exceed total interest expense), and real estate taxes on real estate projects under development. If we determine not to complete a project, any costs previously capitalized are expensed.

      Residential real estate inventory and cost of sales. Real estate inventories include land and common development costs, such as roads, sewers, and amenities. 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. Estimates of costs to complete for sold homes are recorded at the time of closing. Estimates of sales values or costs to complete may differ from actual results.

      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 on 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 recognized in proportion to the percentage of total costs incurred in relation to estimated total costs.

      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. We review long-lived assets for impairment whenever events or changes in circumstances indicate such an evaluation is warranted. The review involves a number of assumptions and estimates used in determining whether impairment exists. Depending on the asset, we use varying methods such as i) estimating 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. These methods of determining fair value can fluctuate up or down significantly as a result of a number of factors including changes in the general economy of our markets and demand for real estate. If we determine that impairment exists due to the inability to recover an asset’s

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carrying value, a provision for loss is recorded to the extent that the carrying value exceeds estimated fair value.

      Goodwill is carried at the lower of cost or fair value and is tested for impairment at least annually 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 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 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.

      Pension plan. The Company sponsors a defined benefit pension plan covering a majority of our employees. Currently, the Company’s 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, which include 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 our independent actuary and investment consultant to assist us in determining these assumptions and in the calculation of pension income.

      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 within 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 would include the adjustments within the tax provision in the statement of operations and/or balance sheet. These adjustments could materially impact our financial position and results of operation.

     Results of Operations

      The Company reports revenues from community residential development sales, land sales, commercial real estate development and services, timber sales, and transportation operations as operating revenues. Real estate revenues are generated from sales of real estate, property sales, rental revenues, brokerage and leasing commissions and service fees from management of commercial properties. The Company also reports its equity in earnings of unconsolidated affiliates as operating revenues. The operations of the Company’s residential real estate services segment are reported as a discontinued operation and, accordingly, are not included in the Company’s income from continuing operations.

     Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

      Operating revenues increased $55.3 million, or approximately 9%, to $646.4 million in 2002 from $591.1 million in 2001. The increase was primarily due to increased sales in the community residential development segment, partially offset by a decrease in land and building sales in the commercial real estate development and services segment. Operating expenses for all segments increased $25.1 million, or 6%, to $474.6 million in 2002, from $449.5 million in 2001. The increase was primarily due to an increase in cost of sales resulting from the increase in sales in the community residential development segment, partially offset by a decrease in cost of sales resulting from the decrease in land and building sales in the commercial real estate development and services segment.

      Corporate expense, which represents corporate general and administrative expenses, increased $8.7 million, or 46%, to $27.5 million in 2002, from $18.8 million in 2001. The increase in corporate expense was primarily due to a $3.6 million decrease in the income contribution from the St. Joe Company Pension Plan (the “Plan”), an increase in other employee benefit costs of $3.6 million, and $1.5 million in costs associated with the secondary offering of the Company’s common stock completed by the Trust in 2002. For the year

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2001, the long-term actuarial expected return for the assets of the Plan was 9.2%. Based on the performance of the Company’s mix of pension assets over the last three years, the Company lowered the long-term expected return to 8.5%. Management expects the over-funded position of the Plan to continue to decline and, as a result, the contribution to pre-tax income to continue to decrease. The Company does not expect to have to fund the pension plan in the foreseeable future, unless market conditions deteriorate significantly.

      Depreciation and amortization increased $1.5 million, or 7%, to $22.8 million in 2002, compared to $21.3 million in 2001. The increase is due to higher depreciation of $6.6 million resulting primarily from expenditures for commercial and residential operating property, and property, plant and equipment. This increase was partially offset by the impact of the adoption of FAS 142, which resulted in the cessation of goodwill amortization as of January 1, 2002 and lower amortization of other assets. Goodwill amortization was $4.2 million in 2001, excluding $5.3 million included in discontinued operations.

      The Company recorded no impairment loss in 2002, compared to an impairment loss of $0.5 million in 2001. The 2001 impairment loss was related to a commercial property.

      Other income (expense) was $120.6 million in 2002 compared to $(5.8) million in 2001. Other income (expense) is made up of investment income, interest expense, gains on valuation of derivatives, gains on sales and dispositions of assets and other income. In 2002, the Company recorded a pre-tax gain on settlement of its forward sales contracts of $132.9 million. Investment income decreased to $2.9 million in 2002, from $5.1 million in 2001, primarily due to lower dividend income resulting from the disposition of securities. Interest expense decreased $0.3 million to $17.0 million in 2002 compared to $17.3 million in 2001, due to the settlement of the debt related to the Company’s forward sale contracts, which was partially offset by interest expense attributable to medium term notes, which the Company issued in 2002, and interest attributable to debt secured by commercial buildings. Other income was $1.8 million in 2002 as compared to $6.4 million in 2001. Other income includes a loss on the valuation of derivatives of $(0.9) million in 2002, compared to a gain on the valuation of derivatives of $4.0 million in 2001.

      Income tax expense on continuing operations totaled $89.6 million in 2002 compared to $35.4 million for 2001. The Company’s effective tax rate was 37% for both 2002 and 2001.

      Discontinued operations included the gain on sale and the operations of Arvida Realty Services (“ARS”) and the gain on sale and operations of two commercial office buildings disposed of in 2002. The gain recorded on the sale of ARS was $33.7 million before taxes, or $20.7 million net of taxes. Prior to its sale on April 17, 2002, ARS generated revenues of $76.2 million and operating expenses of $71.7 million during 2002. During 2001, ARS generated revenues of $277.3 million and operating expenses of $252.9 million. Net income in 2002 for the discontinued operations was $2.3 million compared to $11.0 million in 2001. Revenues from the two commercial office buildings were less than $0.1 million in 2002 and approximately $0.2 million in 2001. Net operating income from the two commercial office buildings was less than $0.1 million in 2002 and 2001. The gain on the sale of the two commercial office buildings was $0.3 million, or $0.2 million net of tax.

      Net income for 2002 was $174.4 million, or $2.14 per diluted share, compared to $70.2 million, or $0.83 per diluted share in 2001.

     Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

      On October 9, 2000, St. Joe distributed to its shareholders all of its equity interest in Florida East Coast Industries, Inc. (“FLA”). To effect the distribution, the Company exchanged its 19,609,216 shares of FLA common stock for an equal number of shares of a new class of FLA common stock. On October 9, 2000, a new class of stock, FLA class B common stock, was distributed pro rata to the Company’s shareholders in a tax-free distribution. For each share of the Company’s common stock owned of record on September 18, 2000, shareholders of the Company received 0.23103369 of a share of FLA class B common stock. The Company’s results of operations include the consolidation of FLA’s operations through October 9, 2000.

      Revenues decreased $32.8 million, or approximately 5%, to $591.1 million in 2001 from $623.9 million in 2000, primarily due to FLA operations being included through October 9, 2000 and not in 2001. Operating

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expenses for all segments increased $49.9 million, or 12%, to $449.5 million in 2001, from $399.6 million in 2000.

      Corporate expense, which represents corporate general and administrative expenses, decreased $6.3 million, or 25%, to $18.8 million in 2001, from $25.1 million in 2000. The decrease is primarily due to costs totaling $5.5 million incurred by the Company in 2000 relating to the spin-off of FLA. In addition, included in 2001 corporate expense is prepaid pension income of $11.6 million compared to $11.1 million in 2000.

      Depreciation and amortization decreased $23.3 million, or 52%, to $21.3 million in 2001, compared to $44.6 million in 2000. The decrease is primarily due to the inclusion of FLA depreciation and amortization of $21.7 through October 9, 2000 only, which was partially offset by an increase in depreciation and amortization of $2.3 million resulting from expenditures for commercial and residential operating property and acquisitions. Goodwill amortization was $9.0 million in 2001 and $8.3 million in 2000.

      The Company recorded an impairment loss of $0.5 million in 2001, compared to impairment losses totaling $6.5 million in 2000. The 2001 impairment loss was related to a commercial property. In 2000, an impairment loss in the amount of $3.4 million was recorded related to the Company’s transportation operation Apalachicola Northern Railroad (“ANRR”). Also in 2000, FLA wrote-off goodwill totaling $3.1 million related to its trucking subsidiary.

      Other income (expense) was $(5.8) million in 2001 compared to $6.2 million in 2000. Other income (expense) is made up of investment income, interest expense, gains on valuation of derivatives, gains on sales and dispositions of assets and other income. Investment income decreased to $5.1 million in 2001, from $11.4 million in 2000, primarily due to the inclusion of FLA operations of $5.6 million through October 9, 2000. Interest expense increased $5.3 million to $17.3 million in 2001 compared to $12.0 million in 2000, primarily due to borrowings on the Company’s senior revolving credit facility and new mortgages on commercial property. The Company recorded a slight gain on sales and dispositions of assets in 2001, compared to $1.7 million in 2000. Other income was $6.4 million in 2001 as compared to $6.7 million in 2000. Other income for 2001 includes a $4.0 million gain on valuation of derivatives.

      Income tax expense on continuing operations totaled $35.4 million in 2001 compared to $51.8 million for 2000. The Company’s effective tax rate was 37% in 2001 and 34% in 2000. As a result of the FLA spin-off, the Company reversed its deferred tax liability previously recorded on the undistributed earnings of FLA and consequently, a deferred income tax benefit of $8.9 million was recorded in its 2000 operations. Excluding the $8.9 million, the Company’s effective tax rate would have been 39% in 2000.

      Discontinued operations included the operations of ARS and the operations of two commercial office buildings. During 2001, ARS generated revenues of $277.3 million and operating expenses of $252.9 million. During 2000, ARS generated revenues of $257.0 million and operating expenses of $239.0 million. Net income in 2001 for ARS was $11.0 million compared to $7.8 million in 2000. Revenues from the two commercial office buildings were approximately $0.2 million in both 2001 and 2000. Net operating income from the two commercial office buildings was less than $0.1 million in both 2001 and 2000.

      Net income for 2001 was $70.2 million, or $0.83 per diluted share, compared to $100.3 million, or $1.15 per diluted share in 2000.

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     Annual Results of Operations by Business Segment

     Community Residential Development

      The table below sets forth the results of operations of our community residential development segment for the three years ended December 31, 2002.

                         
Years Ended December 31,

2002 2001 2000



(In millions)
Revenues
  $ 398.6     $ 263.6     $ 166.2  
Operating expenses
    321.7       213.5       120.8  
Depreciation and amortization
    4.4       2.0       0.3  
Other income (expense)
    0.2       0.4       0.5  
Pretax income from continuing operations
    72.7       48.5       45.6  

      The Company’s community residential development operations consist of its residential development and management activities on Company owned land. The development and management of these activities is performed by its 74% ownership of St. Joe/Arvida Company, L.P, which is developing a total of 20 communities in various stages of planning and execution primarily focused in northwest, northeast and central Florida. The Company also has a 26% limited partnership interest in Arvida/JMB Partners, L.P. (“Arvida/JMB”). Arvida/JMB is recorded using the equity method of accounting for investments. The contribution to pre-tax income from Arvida/JMB has substantially ended and the delivery of the final home is expected to occur in the first half of 2003. The Company expects to incur losses from its investment in Arvida/JMB as the partnership winds up over the next several years; however, these losses are not expected to be material to the Company’s results of operations or financial condition. Arvida/JMB’s contribution to pre-tax income was $14.2 million in 2002, $25.1 million in 2001, and $17.2 million in 2000. The Company also formed two 50/50 joint ventures with an unrelated third party which are developing residential communities in Palm Beach County, Florida and near Tampa, Florida

     Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

      Total revenues increased $135.0 million, or 51.2%, to $398.6 million in 2002, from $263.6 million in 2001. Operating expenses, including cost of sales and administrative expenses, increased $108.2 million, or 51%, to $321.7 million in 2002, from $213.5 million in 2001.

      Sales of homes and home sites totaled $370.6 million with related costs of sales of $260.8 million during 2002 compared to sales of $235.6 million in 2001 with related cost of sales of $173.4 million. Following is a detail of activity by development:

                                                                     
Year Ended December 31, 2002 Year Ended December 31, 2001


Closed Cost of Gross Closed Cost of Gross
Units(a) Revenues Sales Profit Units(a) Revenues Sales Profit








(Dollars in millions)
Northwest Florida:
                                                               
 
Walton County:
                                                               
   
WaterColor
    230     $ 76.5     $ 39.3     $ 37.2       91     $ 52.7     $ 28.3     $ 24.4  
   
WaterSound
    64       44.1       21.4       22.7       44       14.1       5.9       8.2  
 
Bay County:
                                                               
   
The Hammocks
    68       5.7       4.7       1.0       42       5.4       4.7       0.7  
   
Palmetto Trace
    43       6.4       5.6       0.8                          
   
Summerwood
    12       1.8       1.8             58       8.9       7.8       1.1  
   
Woodrun
    1       0.3       0.4       (0.1 )     20       1.2       1.1       0.1  
   
Other Bay County
    1       0.1       0.1             14       0.4       0.1       0.3  
 
Leon County:
                                                               
   
SouthWood
    180       27.4       21.3       6.1       96       10.3       7.8       2.5  

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Year Ended December 31, 2002 Year Ended December 31, 2001


Closed Cost of Gross Closed Cost of Gross
Units(a) Revenues Sales Profit Units(a) Revenues Sales Profit








(Dollars in millions)
 
Franklin County:
                                                               
   
Driftwood
                            3       0.4       0.1       0.3  
 
Gulf County:
                                                               
   
Windmark Beach
    67       22.1       4.6       17.5       20       4.0       1.2       2.8  
Northeast Florida:
                                                               
 
St. Johns County:
                                                               
   
St. Johns Golf & Country Club
    132       35.1       28.3       6.8       135       22.5       18.1       4.4  
   
RiverTown
                            8       3.0       0.2       2.8  
 
Duval County:
                                                               
   
James Island
    72       22.5       19.3       3.2       76       24.7       21.3       3.4  
   
Hampton Park
    35       11.3       9.9       1.4       1       0.3       0.2       0.1  
Central Florida:
                                                               
 
Volusia County:
                                                               
   
Victoria Park
    89       14.7       12.4       2.3       27       3.4       2.5       0.9  
North Carolina and South Carolina:
                                                               
 
Saussy Burbank
    523       102.6       91.7       10.9       397       84.3       74.1       10.2  
     
     
     
     
     
     
     
     
 
     
Total
    1,517     $ 370.6     $ 260.8     $ 109.8       1,032     $ 235.6     $ 173.4     $ 62.2  
     
     
     
     
     
     
     
     
 


(a)  Units are comprised of lot sales as well as single-family and multi-family residences.

      At WaterColor, during 2002, 172 lots closed, generating revenue of $42.7 million and gross profit of $27.7 million, compared to 50 lots closed in 2001, generating revenue of $18.8 million and gross profit of $13.4 million. The average price of a lot sold in 2002 was $248,000 compared to $376,000 in 2001. The decrease in average price was primarily due to the closing of three beachfront lots during 2001, with an average sales price of $1,228,000 each, compared to no beachfront lots closed in 2002. There were 13 single-family residences closed at WaterColor during 2002, generating revenue of $10.5 million and gross profit of $4.0 million, compared to seven single-family residences closed during the 2001, generating revenues of $4.8 million and gross profit of $1.7 million. The average price of a single-family residence sold in the 2002 was $800,000 compared to $685,000 in 2001. The increase in average price per unit for single-family residences is primarily due to the change in mix of size and relative location. There were 45 multi-family residences closed during 2002, compared to 34 multi-family residences closed during 2001. Revenues from multi-family residences were $23.3 million in 2002 and gross profit was $5.5 million, compared to revenue of $29.1 million and gross profit of $9.3 million in 2001. The decreases in revenue and gross profit are primarily due to several beachfront multi-family units which closed in 2002, but for which most of the income was recognized in 2001 using the percentage of completion method.

      Revenue and costs of sales associated with multi-family units under construction are recognized using the percentage of completion method of accounting. Revenue is recognized in proportion to the percentage of total costs incurred in relation to estimated total costs. A 10% deposit is required on multi-family units at WaterColor upon executing a contract. If a deposit is received for less than 10%, percentage of completion accounting is not utilized. Instead, full accrual accounting criteria is used, which generally recognizes revenue when sales contracts are closed and adequate investment from the buyer is received. In the WaterSound community, where construction of 81 multi-family units has begun, deposits of 10% are required upon executing the contract and another 10% is required 180 days later. All deposits are non-refundable, except for non-delivery of the unit. In the event a contract does not close for reasons other than non-delivery, the Company is entitled to retain the deposit. However, the revenue and margin related to that contract previously

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recorded would be reversed. Revenues and cost of sales associated with multi-family units where construction has been completed are recognized on the full accrual method of accounting, as contracts are closed.

      At WaterSound, there were 64 home sites closed during 2002, generating revenues of $25.6 million and gross profit of $15.6 million, compared to 44 home sites closed in 2001, generating revenues of $14.1 million and gross profit of $8.2 million. The average price of a home site sold in 2002 was $400,000 compared to $320,000 in 2001. The increase was primarily due to the closing of two gulf front lots in 2002 with an average price of $1,237,500 and two peninsula lots at an average price of $730,000. In addition, a portion of the profit recorded from the 2001 closings was deferred until 2002 because the development of the parcels was not completed until 2002. Revenues and cost of sales in 2002 also included beachfront multi-family units for which revenue is recorded using the percentage of completion method of accounting. Revenues recognized were $18.5 million in 2002, with related cost of sales of $11.4 million. Multi-family unit percentage of completion contributions to income began in 2002 for 46 accepted contracts and is expected to be a major component of this segment’s contribution in 2003.

      At SouthWood, there were 115 homes and 65 home sites closed during 2002, compared to 33 homes and 63 home sites closed during 2001. The average price of a home was $185,000 in both 2002 and 2001. The average price of a home site was $94,000 in 2002, compared to $67,000 in 2001.

      At WindMark Beach, there were 67 home sites closed in 2002, generating revenues of $22.1 million and gross profit of $17.5 million, compared to 20 home sites closed in 2001, generating revenues of $4.0 million and gross profit of $2.8. The current phase is winding down with relatively few units remaining to be sold. As a result, management expects the contribution to revenue and gross profit to substantially decrease in 2003.

      Saussy Burbank closed 523 home sales in 2002, generating revenues of $102.6 million and gross profit of $10.9 million, compared to 397 home sales closed in 2001, generating revenues of $84.3 million and gross profit of $10.2 million. The average price of a home closed in 2002 was $196,000, compared to $212,000 in 2001. The mix of homes sold in 2002 was located in communities with lower priced homes compared to the mix of homes sold in 2001.

      In addition to revenues from sales of homes and home sites, the community residential development segment had revenues totaling $28.0 million in 2002 with $22.2 million in related costs, compared to revenues totaling $28.0 million in 2001 with $7.4 million in related costs. These include revenues from the WaterColor Inn (the “Inn”), other resort operations, management fees, rental income, the Company’s investment in Arvida/JMB, land sales and other joint ventures. Revenues from the Inn, other resort operations, management fees and rental income totaled $15.4 million with related costs of $21.9 million in 2002, compared to $2.2 million in revenues and $7.0 million in related costs in 2001. Management perceives the Inn to be a valuable asset in the generation of revenues from sales of WaterColor homes and home sites as well as surrounding St. Joe developments. The Company recorded $13.2 million of equity in income from its investment in Arvida/JMB for 2002, compared to $24.0 million in 2001. The contribution to pre-tax income from Arvida/JMB has substantially ended. Revenues from land sales were $0.7 million in 2002 with related costs of $0.3 million, compared to revenues of $1.9 million with related costs of $0.4 million in 2001. During 2002, the Company also recorded a loss from other joint ventures of $(1.3) million, compared to a loss of $(0.1) million in 2001.

      The community residential development operations also had other operating expenses, including salaries and benefits of personnel and other administrative expenses, of $38.7 million during 2002, compared to $32.7 million in 2001. The increase in other operating expenses is due to increases in marketing and other administrative expenses associated with new residential development.

      Management believes demand will continue at or better than historical levels over the near term for its community residential developments.

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Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

      Total revenues increased $97.4 million, or 59%, to $263.6 million in 2001, from $166.2 million in 2000. Operating expenses, including cost of sales and administrative expenses, increased $92.7 million, or 77%, to $213.5 million in 2001, from $120.8 million in 2000.

      Sales of homes and home sites totaled $235.6 million with related costs of sales of $173.4 million during 2001 compared to sales of $138.4 million in 2000 with related cost of sales of $97.2 million. Following is a detail of activity by development:

                                                                       
Year Ended December 31, 2001 Year Ended December 31, 2000


Closed Closed
Units Cost of Gross Units Cost of Gross
(a) Revenues Sales Profit (a) Revenues Sales Profit








(Dollars in millions)
Northwest Florida:
                                                               
 
Walton County:
                                                               
   
WaterColor
    91     $ 52.7     $ 28.3     $ 24.4       75     $ 36.9     $ 16.6     $ 20.3  
   
WaterSound
    44       14.1       5.9       8.2                          
 
Bay County:
                                                               
   
The Hammocks
    42       5.4       4.7       0.7                          
   
Summerwood
    58       8.9       7.8       1.1       46       6.4       5.6       0.8  
   
Woodrun
    20       1.2       1.1       0.1       21       2.8       2.7       0.1  
   
Other Bay County
    14       0.4       0.1       0.3       11       0.6       0.2       0.4  
 
Leon County:
                                                               
   
SouthWood
    96       10.3       7.8       2.5                          
 
Franklin County:
                                                               
   
Driftwood
    3       0.4       0.1       0.3       24       3.0       0.6       2.4  
 
Gulf County:
                                                               
   
Windmark Beach
    20       4.0       1.2       2.8                          
   
Camp Creek Point
                            1       0.6       0.1       0.5  
   
Retreat
                            8       3.2       0.2       3.0  
Northeast Florida:
                                                               
 
St. Johns County:
                                                               
   
St. Johns Golf & Country Club
    135       22.5       18.1       4.4                          
   
RiverTown
    8       3.0       0.2       2.8       15       4.9       0.8       4.1  
 
Duval County:
                                                               
   
James Island
    76       24.7       21.3       3.4       94       27.7       24.8       2.9  
   
Hampton Park
    1       0.3       0.2       0.1                          
Central Florida:
                                                               
 
Volusia County:
                                                               
   
Victoria Park
    27       3.4       2.5       0.9                          
North Carolina and South Carolina:
                                                               
 
Saussy Burbank
    397       84.3       74.1       10.2       254       52.3       45.6       6.7  
     
     
     
     
     
     
     
     
 
     
Total
    1,032     $ 235.6     $ 173.4     $ 62.2       549     $ 138.4     $ 97.2     $ 41.2  
     
     
     
     
     
     
     
     
 


(a)  Units are comprised of lot sales as well as single-family and multi-family residences.

      During 2001, there were 50 lots sold at WaterColor generating revenues of $18.8 million and gross profit of $13.4 million compared to 66 lots closed in 2000 generating revenue of $22.1 million and gross profit of $15.5 million. The average price of a lot sold in 2001 was $376,000, including 11 Gulf-view lots which sold for an average of $853,000 each. The average price of a lot sold in 2000 was $335,000, including three Gulf-front lots which sold for an average of $1,228,000 each. There were 34 multi-family units closed during 2001

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compared to nine multi-family units closed in 2000. Revenues from multi-family residences were $29.1 million and gross profit was $9.3 million in 2001 compared to revenues of $14.8 million and gross profit of $4.7 in 2000. The average price for a multi-family unit sale in 2001 was $825,000, compared to $402,000 in 2000. Included in 2001 were 16 beachside condominiums with an average price of $1,254,000. Revenue and cost of sales associated with multi-family housing units in WaterColor are recognized using the percentage of completion method of accounting. There were seven single family units closed in 2001 generating revenue of $4.8 million and gross profit of $1.7 million and no single family residences in 2000.

      In addition to revenues from sales of homes and home sites, the community residential development segment had revenues totaling $28.0 million in 2001 with $7.4 million in related costs, compared to revenues totaling $27.8 million in 2000 with $6.3 million in related costs. These include revenues from management fees and rental income, the Company’s investment in Arvida/JMB, land sales and other joint ventures. Revenues from other resort operations, management fees and rental income totaled $2.2 million with related costs of $7.0 million in 2001, compared to $0.6 million in revenues and $2.5 million in related costs in 2000. The Company recorded $24.0 million of equity in income from its investment in Arvida/JMB for 2001, compared to $16.1 million in 2000. Revenues from land sales were $1.9 million in 2001 with related costs of $0.4 million, compared to $10.1 million in 2000 with related costs of $3.8 million. There were no land sales for this segment in 2001. During 2001, the Company also recorded a loss from other joint ventures of $(0.1) million, compared to income $1.0 million in 2000.

      The community residential development operations also had other operating expenses, including salaries and benefits of personnel and other administrative expenses, of $32.7 million during 2001, compared to $17.3 million in 2000. The increase in other operating expenses is due to increases in marketing and other administrative expenses associated with new residential development.

 
Land Sales

      The table below sets forth the results of operations of our land sales segment for the year ended December 31, 2002.

                         
Years Ended December 31,

2002 2001 2000



(In millions)
Revenues
  $ 84.1     $ 76.2     $ 105.6  
Operating expenses
    16.1       12.6       12.6  
Depreciation and amortization
    0.2       0.1       0.1  
Other income
    0.3       0.3       0.7  
Pretax income from continuing operations
    68.1       63.8       93.6  
 
      Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

      During 2002, the land sales division, excluding conservation lands, had revenues of $51.1 million, which represented 176 sales totaling 28,071 acres at an average price of $1,820 per acre. During 2001, the land sales division, excluding conservation lands, had revenues of $51.7 million, which represented 128 sales totaling 26,549 acres at an average price of $1,947 per acre. The average price per acre achieved by the land sales division will vary based on the characteristics of the particular acreage sold.

      Gross profit resulting from land sales, excluding conservation lands, totaled $44.1 million, or 86% of total revenue, for 2002, compared to $45.7 million, or 88% of total revenue, for 2001.

      During 2002, the Company sold a total of 16,512 acres of conservation land for $33.0 million at an average price of $1,999 per acre. The 2002 conservation land sales consisted of the following:

  •  a sale of a 501-acre parcel known as the Aspalaga Bluffs in southwest Gadsden County, Florida to the Nature Conservancy for proceeds of $1.2 million;

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  •  a sale of a 7,008-acre conservation area known as Sweetwater Creek Ravines in Liberty County, Florida to the State of Florida for $7.3 million;
 
  •  two sales of a total of 79 acres to the Nature Conservancy for $0.2 million;
 
  •  a sale of a 2,667-acre parcel known as Bald Point in Franklin County, Florida, to the State of Florida for $10.2 million;
 
  •  a sale of a 2,518-acre parcel known as Logan Tract in Duval County, Florida, to the City of Jacksonville, Florida, for $6.5 million; and
 
  •  a sale of a 3,739-acre parcel known as the Wakulla Springs Protection Zone in Franklin County, Florida, to the State of Florida for $7.6 million.

      During 2001, the Company sold a total of 18,070 acres of conservation land for $24.4 million at an average price of $1,351 per acre. The 2001 conservation land sales consisted of the following:

  •  a sale of a 10,681-acre area called Snipe Island in Taylor County to the State of Florida for approximately $10.0 million;
 
  •  a sale of a 372-acre parcel near Toreya State Park in Florida for approximately $653,000;
 
  •  a sale of a 1,011-acre parcel in Bay County called Hobbs Pasture to the Northwest Florida Water Management District for $3.6 million;
 
  •  a sale of a 3,406-acre parcel in East Bay Apalachicola in Franklin County to the state of Florida for $6.4 million with the assistance of The Nature Conservancy; and
 
  •  a sale of a 2,600-acre area in Devil’s Swamp in Walton County, Florida to the Northwest Florida Water Management District for $3.7 million.

      Gross profit resulting from conservation land sales totaled $30.5 million, or 92% of total revenue, for 2002, compared to $22.7 million, or 93% of total revenue, for 2001.

      Land sales may not continue at historical levels due to the several large acre sales in 2002 and 2001, which may not be duplicated. Additionally, no assurance can be given that conservation land sales will continue at historical levels because of potential declines in government spending on acquisition of conservation lands.

 
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

      During 2001, the land sales division, excluding conservation lands, had revenues of $51.7 million, which represented 128 sales totaling 26,549 acres at an average price of $1,947 per acre. During 2000, the land sales division, excluding conservation lands, had revenues of $58.8 million, which represented 117 sales totaling 27,289 acres at an average price of $2,155 per acre.

      Gross profit resulting from land sales, excluding conservation lands, totaled $45.7 million, or 88% of total revenue, for 2001, compared to $51.3 million, or 87% of total revenue, for 2000.

      During 2001, the Company sold a total of 18,070 acres of conservation land for $24.4 million at an average price of $1,351 per acre, as detailed above.

      During 2000, the Company sold 24,310 acres of conservation land for $46.8 million at an average price of $1,927 per acre. Included in the sale of 24,310 acres of conservation land was the sale of 8,867 acres of conservation land to the state of Florida for $16.3 million and the sale of 15,443 acres in southwest Georgia to The Nature Conservancy for $30.5 million.

      Gross profit resulting from conservation land sales totaled $22.7 million, or 93% of total revenue, for 2001, compared to $44.1 million, or 94% of total revenue, for 2000.

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Commercial Real Estate Development and Services

      The table below sets forth the results of operations of our commercial real estate development and services segment for the year ended December 31, 2002.

                         
Years Ended December 31,

2002 2001 2000



(In millions)
Revenues
  $ 119.2     $ 210.8     $ 146.4  
Operating expenses
    99.4       191.9       115.7  
Depreciation and amortization
    10.3       10.0       20.9  
Impairment loss
          0.5        
Other income (expense)
    (7.5 )     (3.3 )     (0.3 )
Pretax income (loss) from continuing operations
    2.0       5.1       9.5  

      Operations of the commercial real estate development and services segment include development of St. Joe properties and rental income from St. Joe’s investment property portfolio (“St. Joe Commercial”), the Advantis service businesses and investments in unconsolidated affiliates. Until October 9, 2000, the Company owned 54% of FLA and Flagler Development Company (“FDC”), which is the wholly owned real estate subsidiary of FLA.

 
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

      Rental revenues generated by St. Joe Commercial owned operating properties were $32.4 million in 2002 compared to $20.2 million in 2001, due to five new buildings placed in service or acquired during 2002, partially offset by two buildings sold during 2002 and due to two new buildings placed in service or acquired late in the year in 2001. Operating expenses relating to these revenues were $12.7 million in 2002, compared to $7.8 million in 2001. As of December 31, 2002, St. Joe Commercial had interests in 19 operating properties with 2.4 million total rentable square feet in service. As of December 31, 2001, St. Joe Commercial had interests in 20 operating properties with 2.4 million total rentable square feet in service. At December 31, 2002, three buildings that are owned by partnerships and accounted for using the equity method of accounting totaled approximately 0.4 million square feet, compared to five buildings totaling 0.9 million square feet at December 31, 2001. The overall leased percentage decreased to 78% at December 31, 2002, compared to 84% at December 31, 2001. Millennia Park One experienced a decrease in leased percentage due to tenant bankruptcies. Additionally, the Company is still in the process of procuring tenants for SouthWood Office One, a new speculative building. Two properties totaling approximately 0.2 million square feet of office space were in predevelopment or under construction as of December 31, 2002.

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      Information about commercial income producing properties owned or managed by the Company, along with results of operations for 2002 and 2001, is presented in the tables below. Net operating income (“NOI”) is equal to rental revenues less operating expenses.

                         
Net Rentable Percentage
Square Feet at Leased at
December 31, December 31,
Location 2002 2002



Harbourside
    Clearwater, FL       146,000       86 %
Prestige Place I and II
    Clearwater, FL       143,000       84  
Lakeview
    Tampa, FL       125,000       76  
Palm Court
    Tampa, FL       62,000       61  
Westside Corporate Center
    Plantation, FL       100,000       86  
280 Interstate North
    Atlanta, GA       126,000       67  
Southhall Center
    Orlando, FL       155,000       94  
1133 20th Street
    Washington, DC       119,000       99  
1750 K Street
    Washington, DC       152,000       94  
Millenia Park One
    Orlando, FL       158,000       44  
Beckrich Office One
    Panama City Beach, FL       34,000       88  
5660 New Northside
    Atlanta, GA       275,000       96  
Westchase Corporate Center
    Houston, TX       184,000       89  
TNT Logistics
    Jacksonville, FL       99,000       73  
Southwood Office One
    Tallahassee, FL       88,000       35  
Park Center
    Panama City, FL       (a )     (a )
Tree of Life
    St. Augustine, FL       (a )     (a )
Nextel
    Panama City Beach, FL       (a )     (a )
NCCI
    Boca Raton, FL       (a )     (a )


(a)  These properties were sold prior to December 31, 2002.

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Year Ended December 31, 2002 Year Ended December 31, 2001


Adjustments Pre-tax Adjustments Pre-tax
NOI (a) Income NOI (a) Income






(In millions)
Harbourside
  $ 1.4     $ (1.4 )   $     $ 1.3     $ (1.4 )   $ (0.1 )
Prestige Place I and II
    1.0       (1.1 )     (0.1 )     1.4       (1.2 )     0.2  
Lakeview
    1.4       (1.2 )     0.2       1.3       (1.1 )     0.2  
Palm Court
    0.5       (0.4 )     0.1       0.6       (0.3 )     0.3  
Westside Corporate Center
    1.1       (1.0 )     0.1       1.0       (0.8 )     0.2  
280 Interstate North
    1.4       (1.0 )     0.4       1.4       (0.7 )     0.7  
Southhall Center
    2.1       (1.6 )     0.5       1.6       (0.9 )     0.7  
1133 20th Street
    2.8       (2.1 )     0.7       0.9       (0.5 )     0.4  
1750 K Street
    3.7       (2.5 )     1.2       0.1             0.1  
Millenia Park One
    0.5       (0.6 )     (0.1 )                  
Beckrich Office One
    0.1       (0.2 )     (0.1 )                  
5660 New Northside
    0.3             0.3                    
Westchase Corporate Center
    2.0       (2.1 )     (0.1 )     1.4       (2.2 )     (0.8 )
TNT Logistics
    0.8       (0.8 )                        
Southwood Office One
                                   
Park Center
                      0.2       (0.1 )     0.1  
Tree of Life
    0.6       (0.6 )                        
Nextel
    0.3       (0.4 )     (0.1 )                  
NCCI
                      1.4       (0.7 )     0.7  
Other
    (0.3 )     (0.4 )     (0.7 )     (0.2 )           (0.2 )
     
     
     
     
     
     
 
    $ 19.7     $ (17.4 )   $ 2.3     $ 12.4     $ (9.9 )   $ 2.5  
     
     
     
     
     
     
 


(a)  Adjustments include interest expense, depreciation and amortization.

      Advantis generated operating revenues of $58.5 million in 2002, compared to $56.0 million in 2001, an increase of 4% due to increases in brokerage and property management revenues, which were partially offset by a decrease in construction revenues. Advantis operating expenses, excluding depreciation, were $58.8 million in 2002 and in 2001. A decrease in brokerage related expenses was mostly offset by increases in property management and construction related expenses. Advantis’ expenses included commissions paid to brokers, property management expenses, office administration expenses and construction costs. Advantis recorded a pre-tax loss of $1.5 million for 2002, compared to a pre-tax loss of $6.5 million for 2001, after excluding profit of $1.3 million in 2002 and $0.9 million in 2001 related to intercompany transactions. The decrease in the net loss primarily resulted from increased revenues and a decrease in depreciation expense. The new Advantis management team is in the process of implementing numerous changes and improvements in property management, recruiting and staffing. The Company believes that, as a result of the management changes, operational changes, and an expected improvement in market conditions, Advantis’ performance should continue to improve in 2003.

      During 2002, St. Joe Commercial realized $28.2 million in revenue from real estate building and land sales. These sales include the sale of the 67,000-square-foot Nextel building, located in the Beckrich Office Park in Panama City Beach, for $8.1 million, with a pre-tax gain of $1.9 million, and the sale of the 69,000-square-foot Tree of Life building located in St. Augustine, Florida, for $9.1 million, with a pre-tax gain of $1.2 million. Proceeds from land sales totaled $11.0 million, with a pre-tax gain of $4.3 million. In 2002, the total cost of revenue from real estate sales was $20.8 million. During 2002, the commercial segment made significant progress in establishing value for land for retail, apartment and other commercial use in Northwest Florida. Opportunities for the commercial segment have also begun to emerge from activities originated in the

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community residential development segment. In 2002, three commercial land parcels were sold at SouthWood in Tallahassee, Florida. These land sales, which are included in the totals above, represented $2.2 million in proceeds and $1.2 million in pre-tax gain. There are also plans to sell parcels in a commercial area of WaterColor.

      During 2001, St. Joe Commercial realized $132.2 million in revenue from real estate sales. On April 12, 2001, St. Joe Commercial sold the NCCI center, a 310,000-square-foot building it had developed through the Codina Group, Inc. in Boca Raton, Florida, for $52.5 million. St. Joe Commercial recorded a pretax gain of approximately $4.4 million on the sale. Also in April 2001, St. Joe Commercial sold two Texas properties. The combined sales proceeds from the sale of the 3001 Knox Street parcel in Dallas and the 1200 Post Oak property in Houston were approximately $12.5 million. St. Joe Commercial recorded a pre-tax gain of $0.6 million on these sales. On October 11, 2001, St. Joe Commercial sold the 160,000-square-foot facility it developed through the Codina Group, Inc. for IBM Corporation at Beacon Square in Boca Raton, Florida, for $33.8 million. St. Joe Commercial recorded a pre-tax gain of approximately $5.7 million on the sale. Other land sales during 2001, primarily representing sales of Texas real estate, totaled $33.4 million, with a pretax gain of $2.9 million. In 2001, the total cost of revenue from real estate sales was $118.6 million.

      During 2002, the Company sold the two Park Center buildings located in Panama City, Florida for a net tax gain of $0.2 million which is included in discontinued operations. The net operating income from the Park Centers for 2002 and 2001 was less than $0.1 million.

      During 2002, the Company and CNL Financial Group, Inc. (“CNL”) completed a series of transactions. The Company has acquired CNL’s 50% interest in Millennia Park One, a 158,000 square-foot office building adjacent to other St. Joe land holdings in Orlando, Florida. Millennia Park One, which is 44% leased at December 31, 2002, is now 100% owned by the Company and is included in the Company’s investment property portfolio. Accordingly, it has been fully consolidated for periods subsequent to this transaction. Similarly, affiliates of CNL acquired St. Joe’s 50% interest in the 346,000 square-foot CNL Center. St. Joe and CNL also formed a new partnership to own and manage the 71,000 square-foot Alliance Bank building and other property in Orlando. There was no significant impact of these transactions to the results of operations of the commercial segment.

      The Company has investments in various real estate developments and affiliates that are accounted for by the equity method of accounting. In 2002, this segment recorded a loss on these investments of $(1.0) million. In 2001, earnings from these investments contributed $0.2 million to this segment’s revenues. St. Joe Commercial had management and development fees of $1.1 million and $2.2 million in 2002 and 2001, respectively.

      General and administrative expenses, which are included in operating expenses, were $7.1 million in 2002 compared to $6.7 million in 2001. The increase is primarily due to marketing costs, recruiting costs, and professional fees associated with West Florida land sales and planning activities.

      Depreciation and amortization was $10.3 million in 2002 compared to $10.0 million in 2001 and is primarily made up of depreciation on the operating properties. Goodwill amortization was $2.3 million in 2001. Pursuant to FAS 142, no amortization of goodwill was recorded in 2002.

 
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

      Revenues contributed by FLA operations for 2000 totaled $49.5 million. In 2000, pre-tax income from continuing operations from FLA was $14.8 million.

      During 2001, St. Joe Commercial realized $132.2 million in revenue from real estate sales as previously discussed. In the first quarter of 2000, St. Joe Commercial sold the Homeside Lending building in Jacksonville, Florida for gross proceeds of $16.0 million and cost of sales of approximately $14.4 million, resulting in a $1.6 million pre-tax gain. Other real estate sales in 2000 totaled $4.2 million with cost of sales of $5.6 million. Through October 9, 2000, FDC sold real estate properties for gross proceeds of $6.7 million with cost of sales of $2.5 million.

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      Revenues from rental operations in 2001 were from St. Joe Commercial owned properties only. Revenues from rental operations in 2000 are made up of rental from St. Joe Commercial owned operating properties for the entire year and rental revenues from FDC operating properties and Florida East Coast Railway Company owned rental properties through October 9, 2000.

      Rental revenues generated by St. Joe Commercial owned operating properties were $20.2 million in 2001 compared to $10.4 million in 2000. Operating expenses relating to these revenues were $7.8 million in 2001, compared to $4.3 million in 2000. As of December 31, 2001, St. Joe Commercial had interests in 20 operating properties with 2.4 million total rentable square feet in service. Four properties totaling approximately 0.4 million square feet of office space was in predevelopment or under construction as of December 31, 2001.

      Net operating income (rental revenues less operating expenses) for 2001 and 2000 from commercial income producing properties owned or managed by the Company during these years is presented in the table below.

                         
Net Rentable Percentage
Square Feet Leased at
at December 31, December 31,
Location 2001 2001



Harbourside
    Clearwater, FL       147,000       81 %
Prestige Place I and II
    Clearwater, FL       143,000       89  
Lakeview
    Tampa, FL       125,000       90  
Palm Court
    Tampa, FL       62,000       93  
Westside Corporate Center
    Plantation, FL       100,000       85  
280 Interstate North
    Atlanta, GA       126,000       92  
Southhall Center
    Orlando, FL       155,000       95  
1133 20th Street
    Washington, DC       119,000       99  
1750 K Street
    Washington, DC       152,470       96  
Westchase Corporate Center
    Houston, TX       184,259       83  
1200 Post Oak
    Houston, TX       107,000       (a )
Park Center
    Panama City, FL       22,210       81  
NCCI
    Boca Raton, FL       310,000       (a )


(a)  These properties were sold prior to December 31, 2001.

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Year Ended December 31, 2001 Year Ended December 31, 2000


Adjustments Pre-tax Adjustments Pre-tax
NOI (a) Income NOI (a) Income






Harbourside
  $ 1.3     $ (1.4 )   $ (0.1 )   $ 1.6     $ (0.5 )   $ 1.1  
Prestige Place I and II
    1.4       (1.2 )     0.2       1.4       (0.4 )     1.0  
Lakeview
    1.3       (1.1 )     0.2       0.9       (0.3 )     0.6  
Palm Court
    0.6       (0.3 )     0.3       0.3       (0.1 )     0.2  
Westside Corporate Center
    1.0       (0.8 )     0.2       0.3       (0.1 )     0.2  
280 Interstate North
    1.4       (0.7 )     0.7                    
Southhall Center
    1.6       (0.9 )     0.7                    
1133 20th Street
    0.9       (0.5 )     0.4                    
1750 K Street
    0.1             0.1                    
Westchase Corporate Center
    1.4       (2.2 )     (0.8 )     0.3       (0.8 )     (0.5 )
1200 Post Oak
                      0.1       (0.2 )     (0.1 )
Park Center
    0.2       (0.1 )     0.1       0.2       (0.1 )     0.1  
NCCI
    1.4       (0.7 )     0.7       1.0       (0.5 )     0.5  
Other
    (0.2 )           (0.2 )                  
     
     
     
     
     
     
 
    $ 12.4     $ (9.9 )   $ 2.5     $ 6.1     $ (3.0 )   $ 3.1  
     
     
     
     
     
     
 


(a)  Adjustments include interest expense, depreciation and amortization.

      In 2000, rental revenues generated by FDC owned operating properties and FLA rental properties were $42.8 million. Operating expenses on rental revenues, excluding depreciation, were $14.9 million in 2000.

      Advantis generated operating revenues of $56.0 million in 2001, compared to $63.0 million in 2000, a decrease of 11% due to decreases in the revenues associated with construction contracts and brokerage services, which were partially offset by an increase in property management revenues. Advantis operating expenses, excluding depreciation, were $58.8 million in 2001, compared to $62.4 million in 2000, a decrease of 6%, primarily due to decreases in construction costs and brokerage related expenses, which were partially offset by an increase in property management expenses. Advantis’ expenses included commissions paid to brokers, property management expenses, office administration expenses and construction costs. Advantis recorded a pre-tax loss of $6.5 million for 2001, compared to a pre-tax loss of $2.8 million for 2000. In 2001, Advantis put in place a new management team and has instituted changes in its property management, recruiting and staffing.

      The Company has investments in various real estate developments and unconsolidated affiliates that are accounted for by the equity method of accounting. Earnings from these investments contributed $0.2 million to this segment’s revenues during 2001, compared to $1.3 million in 2000. In 2001, St. Joe Commercial had management and development fees of $2.2 million.

      General and administrative expenses, which are included in operating expenses, were $6.7 million in 2001 compared to $11.6 million in 2000. Of total general and administrative expenses for 2000, $8.4 million are St. Joe Commercial related and $3.2 million are related to FDC. The decrease at St. Joe Commercial is primarily due to a decrease in payroll costs.

      Depreciation and amortization was $10.0 million in 2001 compared to $20.9 million in 2000. Included in depreciation and amortization for 2000 was $14.2 million related to FDC. Excluding FDC operations, depreciation and amortization increased $3.3 million, primarily as a result of an increase in operating properties.

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      Forestry

      The table below sets forth the results of operations of our forestry segment for the year ended December 31, 2002.

                         
Years Ended December 31,

2002 2001 2000



(In millions)
Revenues
  $ 41.3     $ 37.3     $ 36.0  
Operating expenses
    31.7       26.5       21.6  
Depreciation and amortization
    4.1       3.9       3.3  
Other income (expense)
    2.5       2.1       2.4  
Pretax income (loss) from continuing operations
    8.0       9.0       13.5  

      On June 20, 2001, the Company purchased Sunshine State Cypress, a cypress sawmill and mulch processing plant located in Liberty County, Florida, for $5.5 million in cash and the assumption of $5.8 million in debt.

 
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

      Revenues for the forestry segment were $41.3 million in 2002, an increase of 11%, compared to $37.3 million in 2001. Total sales under the Company’s fiber agreement with Smurfit-Stone Container Corporation were $12.2 million (686,000 tons) in 2002 compared to $14.3 million (709,000 tons) in 2001. The decrease in revenue is due to decreasing prices under the terms of the fiber agreement and a decrease in volume. Sales to other customers totaled $18.3 million (782,000 tons) in 2002 compared to $20.5 million (853,000 tons) in 2001. The decrease in sales to other customers is due to a decrease in prices and volume resulting from unfavorable market conditions. Revenues from the cypress mill operation, which was acquired in the second quarter of 2001, were $10.2 million in 2002, compared to $2.1 million in 2001. The forestry segment recorded revenues from land sales of $0.6 million in 2002, compared to $0.4 million in 2001.

      Operating expenses increased $5.2 million, or 20%, to $31.7 million in 2002, from $26.5 million in 2001. Cost of sales, which are included in operating expenses, increased $4.6 million to $28.9 million in 2002, compared to $24.3 million in 2001. The increase in the cost of sales was primarily due to a higher cost of sales of the cypress operation. Cost of sales as a percentage of revenue was 71% in 2002, compared to 66% in 2001. The increase in cost of sales as a percentage of revenue is primarily due to lower margins on the cypress mill operation. Cost of sales for the cypress mill operation were $8.8 million, or 86% of revenue in 2002, compared to $2.1 million, or 100% of revenue in 2001. Cost of sales for timber was $20.1 million or 66% of revenue in 2002, compared to $22.2 million, or 64% of revenue in 2001. Other operating expenses were $2.8 million in 2002, compared to $2.2 million in 2001.

 
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

      Revenues for the forestry segment were $37.3 million in 2001, an increase of 3.6%, compared to $36.0 million in 2000. Total sales under the Company’s fiber agreement with Smurfit-Stone Container Corporation were $14.3 million (709,000 tons) in 2001 compared to $16.5 million (682,000 tons) in 2000. The decrease in revenue is due to decreasing prices under the terms of the fiber agreement, partially offset by an increase in volume. Sales to other customers totaled $20.5 million (853,000 tons) in 2001 compared to $18.5 million (678,000 tons) in 2000. The increase in sales to other customers was due to an increase in volume, partially offset by a decrease in prices. The Company also realized $2.1 million in revenues in 2001 from Sunshine State Cypress. The forestry segment recorded revenues from land sales of $0.4 million in 2001, compared to $1.0 million in 2000.

      Operating expenses increased $4.9 million, or 22.7%, to $26.5 million in 2001, from $21.6 million in 2000. Cost of sales, which are included in operating expenses, increased $4.5 million to $24.3 million in 2001, compared to $19.8 million in 2000. The increase in the cost of sales was due to higher harvest volumes and the addition of cost of sales of $2.1 million from Sunshine State Cypress. Costs of sales as a percentage of sales

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were higher in 2001 because the lump sum timber sales in 2000 did not incur cut and haul charges. Other operating expenses were $2.2 million in 2001, compared to $1.8 million in 2000.
 
Transportation

      The table below set forth the results of operations of our transportation segment for the year ended December 31, 2002.

                         
Years Ended December 31,

2002 2001 2000



(In millions)
Revenues
  $ 1.2     $ 1.8     $ 167.7  
Operating expenses
    3.2       3.6       127.1  
Depreciation and amortization
    1.6       1.5       16.8  
Impairment loss
                6.4  
Other income (expense)
                3.0  
Pretax income (loss) from continuing operations
    (3.6 )     (3.3 )     20.4  

      The Company’s transportation operations consist of ANRR and, through October 9, 2000, the effective date of the spin-off of FLA, the operations of Florida East Coast Railway Company (“FEC”), International Transit, Inc. (“ITI”), and EPIK Communications Incorporated (“EPIK”), FLA’s telecommunications division.

 
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

      During the third quarter of 2002, the Company completed the sale of the rolling stock of ANRR for approximately $4.0 million. The Company also executed a lease of ANRR’s track and related facilities. The Company retains ownership of the right-of-way, track, related facilities and real estate.

      ANRR’s operating revenues decreased $0.6 million, or 33%, to $1.2 million in 2002, compared to $1.8 million in 2001. ANRR’s operating expenses decreased $0.4 million to $3.2 million in 2002, compared to $3.6 million in 2001, primarily as a result of cost cutting efforts, which were partially offset by expenses related to the sale of the rolling stock.

      Depreciation expense for ANRR was $1.6 million in 2002, compared to $1.5 million in 2001.

 
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

      ANRR’s operations reflect lost traffic from Seminole Electric Cooperative, Inc. (“Seminole”). Seminole halted shipments of coal in January 1999, and filed a lawsuit seeking to terminate its contract with ANRR to provide transportation of coal from Port St. Joe, Florida to Chattahoochee, Florida. ANRR subsequently filed suit to enforce the contract. ANRR’s workforce was significantly reduced, commensurate with the loss in traffic. In December 2000, ANRR settled the contract dispute with Seminole and received $10.0 million, which has been included in revenues in 2000.

      ANRR’s operating revenues decreased $11.0 million, or 85.9%, to $1.8 million in 2001, compared to $12.8 million in 2000. Included in 2000 operating revenues is the $10.0 million settlement received by ANRR from Seminole and contractual payments from Seminole of $0.6 million. ANRR’s operating expenses increased $0.6 million to $3.6 million in 2001, compared to $3.0 million in 2000, primarily due to increased legal fees. In addition, the Company recorded a $3.4 million impairment loss in 2000 to reflect the current net realizable value of ANRR’s net assets.

      Through October 9, 2000, FLA’s transportation operating revenues were $154.9 million and operating expenses were $124.1 million. Included in the transportation operating expenses for 2000 were restructuring and other costs totaling $2.2 million associated with revamping ITI. In addition, FLA recorded a $3.1 million impairment loss related to the write-off of ITI’s goodwill.

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      Depreciation expense for ANRR was $1.5 million in 2001, compared to $2.1 million in 2000. Depreciation expense for FLA was $14.7 million in 2000.

 
Liquidity and Capital Resources

      The Company generates cash from its:

  •  Operations;
 
  •  Investments and other liquid assets;
 
  •  Sales of land holdings, other assets and subsidiaries;
 
  •  Borrowings from financial institutions and other debt; and
 
  •  Issuance of equity, including exercise of employee stock options.

      The Company uses cash for:

  •  Real estate development;
 
  •  Construction and homebuilding;
 
  •  Repurchase of the Company’s common stock;
 
  •  Payment of dividends; and
 
  •  Repayment of debt.

      The ability of the Company to generate operating cash flows is directly related to the real estate market, primarily in Florida, and the economy in general. Considerable economic and political uncertainties currently exist that could have adverse effects on consumer buying behavior, construction costs, availability of labor and materials and other factors affecting the Company and the real estate industry in general. Real estate market conditions in the Company’s regions of development, particularly in Northwest Florida, have generally remained healthy. After a downturn in the immediate aftermath of September 11, tourism in the Northwest Florida region has rebounded primarily from drive-in markets. The Company believes that long-term prospects of job growth, coupled with strong in-migration population expansion, indicate that demand levels may be favorable over the next two to five years.

      Management believes that the financial condition of the Company is strong and that the Company’s cash, investments, real estate and other assets, operating cash flows, and borrowing capacity, taken together, provide adequate resources to fund ongoing operating requirements and future capital expenditures related to the expansion of existing businesses, including the continued investment in real estate developments. If the liquidity of the Company is not adequate to fund operating requirements, capital development, and stock repurchases, the Company has various alternatives to change its cash flow, including eliminating or reducing its stock repurchase program, altering the timing of its development projects and/or selling existing assets.

 
Cash Flows from Operating Activities

      Net cash provided by operations in 2002 was $36.8 million and included expenditures of $272.5 million relating to its community residential development segment. Net cash provided by operations in 2001 was $55.9 million and included expenditures of $229.5 million relating to its community residential development segment. Net cash flows from operations in 2000 were $2.6 million and included expenditures of $196.4 million relating to its community residential development segment.

 
Cash Flows from Investing Activities

      In 2002, net cash provided by investing activities was $121.6 million and included proceeds from the sale of discontinued operations of $138.7 million, proceeds from the disposition of assets of $111.5 million primarily consisting of proceeds from sales of land and buildings, and capital expenditures of $121.0 million. Included in capital expenditures are $58.5 million for the purchase of commercial buildings using reinvested

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tax deferred proceeds from like-kind exchanges, $39.9 million in other commercial property acquisitions and development, and $22.6 million in other development and property, plant and equipment. In 2001, net cash used in investing activities was $78.5 million. Included in net cash used in investing activities were capital expenditures of $223.4 million, consisting of $97.1 million for the purchase of commercial buildings using reinvested tax deferred proceeds from like-kind exchanges, $69.9 million in other commercial property acquisitions and development, and $56.4 million in other development and property, plant and equipment. In 2000, net cash used in investing activities was $96.6 million. Included in net cash used in investing activities were capital expenditures of $254.0 million, consisting of building acquisitions, real estate development, and FLA transportation and telecom expenditures. In 2000, excluding expenditures related to FLA, the Company expended $100.0 million, primarily for commercial acquisitions and development.
 
Cash Flows from Financing Activities

      In 2002, net cash used in financing activities was $126.0 million. In 2001 and 2000, net cash provided by financing activities was $11.9 million and $73.7 million, respectively.

      The Company secured borrowings, collateralized by its commercial property, of $26.0 million during 2002 and $72.2 million during 2001.

      On February 7, 2002, the Company issued in a private placement, a series of senior notes (the “Medium-Term Notes”) with an aggregate principal amount of $175.0 million. The notes range in maturity from three to ten years and bear fixed rates of interest ranging from 5.64% to 7.37%, depending upon maturity. Interest on the notes is payable semiannually.

      The Company has a $250 million revolving credit facility, which matures on March 30, 2004, and can be used for general corporate purposes. The credit facility includes financial performance covenants relating to the Company’s leverage position, interest coverage and a minimum net worth requirement. The credit facility also has negative pledge restrictions. Management believes that the Company is currently in compliance with the covenants of the credit facility. During 2002, the Company paid off the outstanding balance of its $250.0 million revolving credit facility, primarily with proceeds received from the sale of its Medium Term Notes. At December 31, 2002, there was no balance outstanding on the credit facility. During 2001, the Company borrowed $90.0 million on the credit line, net of repayments. During 2000, the Company borrowed $115.0 million on the credit line, net of repayments. At December 31, 2001, the balance outstanding on the credit facility was $205.0 million.

      The Company has used community development district (“CDD”) bonds to finance the construction of on-site infrastructure improvements at three 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. The Company records a liability for future assessments which are fixed or determinable and will be levied against properties owned by the Company. At December 31, 2002, CDD bonds totaling $83.5 million had been issued, of which $49.4 million had been expended. At December 31, 2001, CDD bonds totaling $33.5 million had been issued, of which $18.9 million had been expended. In accordance with Emerging Issues Task Force Issue 91-10, “Accounting for Special Assessments and Tax Increment Financing,” the Company has recorded $11.3 million and $2.9 million of this obligation as of December 31, 2002 and 2001, respectively.

      Through August 2002, the Company’s Board of Directors had authorized a total of $650.0 million for the repurchase of the Company’s outstanding common stock from time to time on the open market (“the St. Joe Stock Repurchase Program”). There remains $120.5 million under the St. Joe Stock Repurchase Program authorization at December 31, 2002.

      On June 17, 2002, the Alfred I. duPont Testamentary Trust (the “Trust”), the Company’s largest shareholder, announced that it had completed a public offering of 7.0 million shares of St. Joe common stock. Subsequently, the underwriters exercised an over-allotment option of 1.05 million shares. Concurrently with the consummation of this offering, and as a part of the St. Joe Stock Repurchase Program, the Company purchased 2,586,206 shares from the Trust for $75.0 million. Additionally, during 2002, a total of 2,583,700 shares were repurchased in the open market. As of December 31, 2002, a total of 14,588,066 shares

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have been repurchased in the open market and 6,587,606 shares have been repurchased from the Trust. In addition, the Company acquired shares that were surrendered by executives to pay taxes and the option exercise price for stock they acquired through option exercise or vesting of restricted shares; these totaled 256,729 shares for $7.4 million in 2002 and 58,550 shares for $1.3 million in 2001. The Company expended a total $157.6 million in 2002 for the purchase of its common stock, compared to $176.0 million in 2001.

      On February 10, 2003, the Company announced that it had entered into a new 90-day agreement with the Trust to participate in the St. Joe Stock Repurchase Program. The agreement calls for the Trust to sell to the Company each Monday a number of shares equal to 0.9 times the amount of shares that the Company purchased from the public during the previous week.

 
Off-Balance Sheet Debt

      The Company selectively has entered into business relationships through the form of partnerships and joint ventures with unrelated third parties. These partnerships and joint ventures are utilized to develop or manage real estate projects and services. At December 31, 2002, four of these partnerships had debt outstanding totaling $53.0 million. The Company is wholly or jointly and severally liable as guarantor on these credit obligations. The maximum amount of the debt guaranteed by the Company is $54.5 million. The Company believes that future contributions, if required, will not have a significant impact to the Company’s liquidity or financial position.

     Contractual Obligations and Commercial Commitments

 
December 31, 2002
                                           
Payments Due by Period

Less than After 5
Contractual Cash Obligations Total 1 Year 1-3 Years 4-5 Years Years






(In thousands)
Debt
  $ 320,915     $ 1,580     $ 50,304     $ 72,866     $ 196,165  
Operating leases
    17,922       5,219       7,945       3,863       895  
     
     
     
     
     
 
 
Total Contractual Cash Obligations
  $ 338,837     $ 6,799     $ 58,249     $ 76,729     $ 197,060  
     
     
     
     
     
 
                                   
Amount of Commitment Expiration Per Period

Total
Amounts Less than
Other Commercial Commitments Committed 1 Year 1-3 Years 4-5 Years





(In thousands)
Guarantees
  $ 54,477     $     $ 44,977     $ 9,500  
Surety bonds
    23,012       22,376       594       42  
Standby letters of credit
    13,253       7,309       5,944        
     
     
     
     
 
 
Total Commercial Commitments
  $ 90,742     $ 29,685     $ 51,515     $ 9,542  
     
     
     
     
 

     December 31, 2001

                                           
Payments Due by Period

Less than After 5
Contractual Cash Obligations Total 1 Year 1-3 Years 4-5 Years Years






(In thousands)
Debt
  $ 498,015     $ 393,667       23,861     $ 4,706     $ 75,781  
Operating leases
    47,964       14,772       20,141       8,913       4,138  
     
     
     
     
     
 
 
Total Contractual Cash Obligations
    545,979       408,439       44,002       13,619       79,919  
     
     
     
     
     
 

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Amount of Commitment Expiration Per Period

Total
Amounts Less than
Other Commercial Commitments Committed 1 Year 1-3 Years 4-5 Years





(In thousands)
Guarantees
  $ 83,334     $ 83,334     $     $  
Surety bonds
    33,003       32,532       453       18  
Standby letters of credit
    4,344       4,344              
     
     
     
     
 
 
Total Commercial Commitments
  $ 120,681     $ 120,210     $ 453     $ 18  
     
     
     
     
 
 
Item 7A.      Market Risk

      The Company’s primary market risk exposure is interest rate risk related to the Company’s long-term debt. The Company has a $250 million credit facility, which matures on March 30, 2004. As of December 31, 2002, the Company had paid off the balance of the credit facility in its entirety. If management decides to borrow on this line in the future, the debt accrues interest at different rates based on timing of the loan and the Company’s 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 the Company to interest rate risk relating to the change in the LIBOR rates. The Company manages its interest rate exposure by monitoring the effects of market changes in interest rates.

 
Quantitative Disclosures

      The table below presents principal amounts and related weighted average interest rates by year of maturity for the Company’s investment portfolio and its long-term debt. The weighted average interest rates for the various fixed rate investments and its long-term debt are based on the actual rates as of December 31, 2002. Weighted average variable rates are based on implied forward rates in the yield curve at December 31, 2002.

Expected Contractual Maturities

                                                                     
Fair
2003 2004 2005 2006 2007 Thereafter Total Value








$ in thousands
Short-term Investments
                                                               
 
Certificates of Deposit
  $ 1,125     $     $     $     $     $     $ 1,125     $ 1,125  
   
Wtd. Avg. Interest Rate
    3.13 %                                   3.13 %        
 
Equity Securities and Derivatives
    6                                     6       6  
Long-term Debt
                                                               
 
Fixed Rate
    1,563       1,671       20,118       3,201       69,070       192,165       287,788       302,800  
   
Wtd. Avg. Interest Rate
    7.3 %     7.3 %     7.3 %     5.8 %     4.4 %     7.3 %     7.0 %        
 
Variable Rate
    17       28,514       1             595       4,000       33,127       33,127  
   
Wtd. Avg. Interest Rate
    4.25 %     4.14 %     4.25 %           3.98 %     3.42 %     4.40 %        

      Management estimates the fair-value of long-term debt based on current rates available to the Company for loans of the same remaining maturities. As the table incorporates only those exposures that exist as of December 31, 2002, it does not consider exposures or positions that could arise after that date. As a result, the Company’s 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 on page F-2 to F-25 inclusive and the Independent Auditors’ Report on page F-1 are filed as part of this Report and incorporated herein by reference thereto.

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Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      Not applicable.

PART III

Item 10.      Directors and Executive Officers of the Registrant

      Our directors, our nominees for director and our executive officers are described in our proxy statement relating to our 2003 annual meeting of shareholders to be held on May 20, 2003. This information is incorporated by reference.

 
Item 11.      Executive Compensation

      Information concerning compensation of our executive officers for the year ended December 31, 2002, is presented under the caption “Compensation Tables” in our proxy statement. This information is incorporated by reference.

 
Item 12.      Security Ownership of Certain Beneficial Owners and Management

  •  Information concerning the security ownership of certain beneficial owners as of December 31, 2002, is set forth under the caption “Ownership of More Than 5% of St. Joe Stock” in our proxy statement and is incorporated by reference.
 
  •  Information concerning security ownership of management as of December 31, 2002, is set forth under the caption “Stock Ownership — Directors and Executive Officers” in our proxy statement and is incorporated by reference.
 
  •  Information concerning compliance with Section 16 of the Securities Exchange Act of 1934 is set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our proxy statement and is incorporated by reference.
 
Equity Compensation Plan Information

      Our shareholders have approved all 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, 2002

                           
Number of Securities
Remaining Available
Number of Securities for Future Issuance
to Be Issued Upon Weighted Average Under Equity
Exercise of Exercise Price of Compensation Plans
Outstanding Options, Outstanding (Excluding
Warrants, and Options, Warrants, Securities Reflected
Plan Category Rights and Rights in the First Column)




Equity compensation plans approved by security holders
    6,484,330     $ 18.11       2,459,901  
Equity compensation plans not approved by security holders
                 
     
     
     
 
 
Total
    6,484,330     $ 18.11       2,459,901  
     
     
     
 

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Item 13.      Certain Relationships and Related Transactions

      Information concerning certain relationships and related transactions during 2002 is set forth under the caption “Business Relationships with Directors” in our proxy statement. This information is incorporated by reference.

 
Item 14.      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-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, 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) Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in our internal controls or in other factors that could significantly affect our internal controls.

PART IV

 
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

      (a)(1) Financial Statements

      The financial statements listed in the accompanying Index to Financial Statements and Financial Statement Schedules and Independent Auditors’ Report are filed as part of this Report.

        (2) Financial Statement Schedules
 
        The financial statement schedules and Independent Auditors’ Report listed in the accompanying Index to Financial Statements and Financial Statement Schedules are filed as part of this Report.
 
        (3) Exhibits
 
        The exhibits listed on the accompanying Index to Exhibits are filed as part of this Report.

      (b) Reports on Form 8-K

        (1) We filed a Report on Form 8-K on February 6, 2003 furnishing supplemental information for the period ended December 31, 2002.
 
        (2) We filed a Report on Form 8-K on February 6, 2003 furnishing a copy of our Earnings Release for the period ended December 31, 2002.
 
        (3) We filed a Report on Form 8-K on February 11, 2003 furnishing Supplemental Financial Information for the period ended December 31, 2002.

      All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission on the schedule or because the information required is included in the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements.

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INDEX TO EXHIBITS

             
Exhibit
Number Description


  2 .1       Limited Partnership Agreement of St. Joe/Arvida Company, L.P., dated as of November 12, 1997 (incorporated by reference to Exhibit 2.01 to the registrant’s registration statement on Form S-3 (File No. 333-42397)).
  2 .2       Agreement of Limited Partnership of St. Joe/CNL Realty Group, Ltd., dated as of December 3, 1997 (incorporated by reference to Exhibit 2.02 to the registrant’s registration statement on Form S-3 (File No. 333-42397)).
  2 .3       Stock Purchase Agreement between NRT Incorporated and the registrant, dated April 17, 2002 (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K filed on April 18, 2002 (File No. 1-10466)).
  3 .1       Restated and Amended Articles of Incorporation dated May 12, 1998 (incorporated by reference to Exhibit 3.1 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  3 .2       Amended and Restated By-laws of the registrant (incorporated by reference to Exhibit 3.01 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002 (File No. 1-10466)).
  4 .1       Registration Rights Agreement between the registrant and the Alfred I. duPont Testamentary Trust, dated December 16, 1997 (incorporated by reference to Exhibit 4.01 to the registrant’s Amendment No. 1 to the registration statement on Form S-3 (File No. 333-42397)).
  4 .2       Amendment No. 1 to the Registration Rights Agreement between the Alfred I. duPont Testamentary Trust and the registrant, dated January 26, 1998 (incorporated by reference to Exhibit 4.2 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  4 .3       Amendment No. 2 to the Registration Rights Agreement between the Alfred I. duPont Testamentary Trust and the registrant, dated May 24, 2002 (incorporated by reference to Exhibit 4.3 of the registrant’s statement on Form S-1 (File 333-89146)).
  10 .1       Employment Agreement of Robert M. Rhodes, dated November 3, 1997 (incorporated by reference to Exhibit 10.03 to the registrant’s registration statement on Form S-3 (File No. 333-42397)).
  10 .2       Form of Severance Agreement (incorporated by reference to Exhibit 10.07 to the registrant’s registration statement on Form S-3 (File No. 333-42397)).
  10 .3       Distribution and Recapitalization Agreement between the registrant and Florida East Coast Industries, Inc., dated as of October 26, 1999 (incorporated by reference to Exhibit 10.01 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999 (File No. 1-10466)).
  10 .4       Indemnification Agreement, dated as of October 26, 1999, among the registrant, the Nemours Foundation and the Alfred I. duPont Testamentary Trust (incorporated by reference to Exhibit 10.02 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999 (File No. 1-10466)).
  10 .5       Amended and Restated Master Agreement, dated as of July 4, 2000, by and among the registrant and Gran Central Corporation (incorporated by reference to Exhibit 10.07 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 1-10466)).
  10 .6       Amended and Restated Severance Agreement of Peter S. Rummell, dated of August 21, 2001 (incorporated by reference to Exhibit 10.08 to the registrant’s Annual Report on Form 10-K for the fiscal year December 31, 2001 (File No. 1-10466)).
  10 .7       Long-term Incentive Compensation Agreement of Kevin M. Twomey, dated as of August 21, 2001 (incorporated by reference to Exhibit 10.09 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 1-10466)).
  10 .8       Long-term Incentive Compensation Agreement of Robert M. Rhodes, dated as of August 21, 2001 (incorporated by reference to Exhibit 10.10 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 1-10466)).

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Exhibit
Number Description


  10 .9       Employment Agreement of Peter S. Rummell, dated January 7, 1997 (incorporated by reference to Exhibit 10.01 to the registrant’s registration statement on Form S-3 (File No. 333-42397)).
  10 .10       Director’s 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 .11       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 .12       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 .13       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 .14       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 .15       Employment Agreement of Jerry M. Ray, dated October 22, 1997 (incorporated by reference to Exhibit 10.16 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  10 .16       Employment Agreement of Michael N. Regan, dated November 3, 1997 (incorporated by reference to Exhibit 10.17 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  10 .17       Amended and Restated Severance Agreement of Kevin M. Twomey, dated August 21, 2001 (incorporated by reference to Exhibit 10.18 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  10 .18       Amended and Restated Severance Agreement of Robert M. Rhodes, dated August 21, 2001 (incorporated by reference to Exhibit 10.19 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  10 .19       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 .20       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 .21       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 .22       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 .23       Employment Agreement of Kevin M. Twomey, dated January 27, 1999 (incorporated by reference to Exhibit 10.25 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  10 .24       Form of Stock Option Agreement (2001 Stock Incentive Plan) (incorporated by reference to Exhibit 10.26 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  10 .25       Restricted Shares Agreement of Kevin M. Twomey (1997 Stock Incentive Plan) (incorporated by reference to Exhibit 10.27 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  10 .26       Letter Agreement between the registrant and the Alfred I. duPont Testamentary Trust, dated May 24, 2002 (incorporated by reference to Exhibit 10.28 of the registrant’s registration statement on Form S-1 (File 333-89146)).
  21 .1       Subsidiaries of The St. Joe Company.
  23 .1       Consent of KPMG LLP, independent auditors for the registrant.
  23 .2       Consent of Ernst & Young LLP, independent certified public accountants for Arvida/JMB Partners, L.P.
  99 .1       Certifications by Chief Executive Officer and Chief Financial Officer.

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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/ KEVIN M. TWOMEY
 
  Kevin M. Twomey
  President, Chief Operating Officer
  and Chief Financial Officer
  (Principal Financial Officer)

Dated: March 26, 2003

      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 dates indicated.

         
Signature Title Date



/s/ PETER S. RUMMELL

Peter S. Rummell
 
Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
  March 20, 2003
 
/s/ KEVIN M. TWOMEY

Kevin M. Twomey
 
President, Chief Operating Officer
Chief Financial Officer
(Principal Financial Officer)
  March 26, 2003
 
/s/ JANNA L. CONNOLLY

Janna L. Connolly
 
Vice President and Controller (Principal Accounting Officer)
  March 26, 2003
 
/s/ MICHAEL L. AINSLIE

Michael L. Ainslie
 
Director
  March 24, 2003
 
/s/ HUGH M. DURDEN

Hugh M. Durden
 
Director
  March 25, 2003
 
/s/ JOHN S. LORD

John S. Lord
 
Director
  March 20, 2003
 
/s/ HERBERT H. PEYTON

Herbert H. Peyton
 
Director
  March 24, 2003
 
/s/ WALTER L. REVELL

Walter L. Revell
 
Director
  March 19, 2003
 
/s/ FRANK S. SHAW, JR.

Frank S. Shaw, Jr.
 
Director
  March 20, 2003
 
/s/ WINFRED L. THORNTON

Winfred L. Thornton
 
Director
  March 18, 2003
 
/s/ JOHN D. UIBLE

John D. Uible
 
Director
  March 20, 2003

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CERTIFICATIONS

I, Peter S. Rummell, certify that:

      1. I have reviewed this annual report on Form 10-K of The St. Joe Company;

      2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

      3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

      4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-14 and 15d-14) for the registrant and we have:

        a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
        b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
        c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

      5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

        a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
        b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

      6. The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

  /s/ PETER S. RUMMELL
 
  Peter S. Rummell
  Chief Executive Officer

Date: March 26, 2003

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I, Kevin M. Twomey, certify that:

      1. I have reviewed this annual report on Form 10-K of The St. Joe Company;

      2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

      3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

      4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

        a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
        b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
        c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

      5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

        a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
        b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

      6. The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

  /s/ KEVIN M. TWOMEY
 
  Kevin M. Twomey
  Chief Financial Officer

Date: March 26, 2003

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INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

THE ST. JOE COMPANY

Annual Financial Statements
           
Item 15(a)(1) and (2).
       
 
Independent Auditors Report
    F-1  
 
Consolidated Balance Sheets
    F-2  
 
Consolidated Statements of Income
    F-3  
 
Consolidated Statements of Changes in Stockholders’ Equity
    F-4  
 
Consolidated Statements of Cash Flow
    F-5  
 
Notes to Consolidated Financial Statements
    F-6  
 
Independent Auditors’ Report — Financial Statement Schedule
    S-1  
 
Schedule III — Real Estate and Accumulated Depreciation
    S-2  
 
Supplemental Financial Statements of less than 50 percent owned subsidiary of the St. Joe Company
       
 
ARVIDA/JMB PARTNERS, L.P.
Annual Financial Statements
       
 
Report of Independent Certified Public Accountants
    S-4  
 
Consolidated Balance Sheets, December 31, 2002 and 2001
    S-5  
 
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000
    S-6  
 
Consolidated Statements of Changes in Partners’ Capital Accounts for the years ended December 31, 2002, 2001 and 2000
    S-7  
 
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000
    S-8  
 
Notes to Consolidated Financial Statements
    S-9  

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders

The St. Joe Company:

      We have audited the accompanying consolidated balance sheets of The St. Joe Company and subsidiaries as of December 31, 2002 and 2001, 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, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The St. Joe Company and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

      As discussed in note 2 to the financial statements, The St. Joe Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” and Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” effective January 1, 2002.

  KPMG LLP

Jacksonville, Florida

February 3, 2003

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Table of Contents

THE ST. JOE COMPANY

CONSOLIDATED BALANCE SHEETS

                 
December 31,

2002 2001


(Dollars in thousands)
ASSETS
Investment in real estate
  $ 806,701     $ 736,734  
Cash and cash equivalents
    73,273       40,940  
Short-term investments
    1,131       23,689  
Marketable securities
          141,086  
Accounts receivable
    48,583       27,783  
Mortgage loans held for sale
          32,720  
Prepaid pension asset
    90,990       86,612  
Property, plant and equipment, net
    42,907       49,826  
Goodwill and intangible assets
    55,238       143,383  
Other assets
    51,064       57,786  
     
     
 
Total assets
  $ 1,169,887     $ 1,340,559  
     
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
               
Debt
  $ 320,915     $ 498,015  
Accounts payable
    46,409       49,290  
Accrued liabilities
    104,806       59,213  
Deferred income taxes
    212,017       211,914  
Minority interest in consolidated subsidiaries
    5,647       4,054  
     
     
 
Total liabilities
    689,794       822,486  
STOCKHOLDERS’ EQUITY:
               
Common stock, no par value; 180,000,000 shares authorized; 97,430,600 and 95,509,175 issued at December 31, 2002 and 2001
    122,709       83,154  
Retained earnings
    892,622       724,832  
Accumulated other comprehensive income
          88,137  
Restricted stock deferred compensation
    (512 )     (951 )
Treasury stock at cost, 21,426,202 and 15,999,567 shares held at December 31, 2002 and 2001
    (534,726 )     (377,099 )
     
     
 
Total stockholders’ equity
    480,093       518,073  
     
     
 
Total liabilities and stockholders’ equity
  $ 1,169,887     $ 1,340,559  
     
     
 

See notes to consolidated financial statements.

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THE ST. JOE COMPANY

CONSOLIDATED STATEMENTS OF INCOME

                               
Years ended December 31,
2002 2001 2000



(Dollars in thousands except
per share amounts)
Operating revenues
  $ 646,352     $ 591,134     $ 623,862  
     
     
     
 
Expenses:
                       
 
Operating expenses
    474,629       449,493       399,608  
 
Corporate expense, net
    27,527       18,793       25,115  
 
Depreciation and amortization
    22,780       21,326       44,620  
 
Impairment losses
          500       6,455  
     
     
     
 
     
Total expenses
    524,936       490,112       475,798  
     
     
     
 
   
Operating profit
    121,416       101,022       148,064  
     
     
     
 
Other income (expense):
                       
 
Investment income, net
    2,932       5,122       11,425  
 
Interest expense
    (16,978 )     (17,335 )     (11,964 )
 
Gain on settlement of forward sale contracts
    132,915              
 
Other, net
    1,779       6,367       6,723  
     
     
     
 
     
Total other income (expense)
    120,648       (5,846 )     6,184  
     
     
     
 
Income from continuing operations before income taxes and minority interest
    242,064       95,176       154,248  
     
     
     
 
Income tax expense (benefit):
                       
 
Current
    (180 )     (6,118 )     28,436  
 
Deferred
    89,741       41,559       23,319  
     
     
     
 
     
Total income tax expense
    89,561       35,441       51,755  
     
     
     
 
Income from continuing operations before minority interest
    152,503       59,735       102,493  
Minority interest
    1,366       524       9,954  
     
     
     
 
Income from continuing operations
    151,137       59,211       92,539  
     
     
     
 
Income from discontinued operations:
                       
Earnings from discontinued operations (net of income taxes of $1,469, $6,904 and $4,888)
    2,339       10,994       7,784  
Gain on sales of discontinued operations (net of income taxes of $13,110)
    20,887              
     
     
     
 
 
Total income from discontinued operations
    23,226       10,994       7,784  
     
     
     
 
 
Net income
  $ 174,363     $ 70,205     $ 100,323  
     
     
     
 
EARNINGS PER SHARE
                       
Basic
                       
Income from continuing operations
  $ 1.93     $ 0.73     $ 1.09  
Earnings from discontinued operations
    0.03       0.14       0.09  
Gain on sale of discontinued operations
    0.26              
     
     
     
 
 
Net income
  $ 2.22     $ 0.87     $ 1.18  
     
     
     
 
Diluted
                       
Income from continuing operations
  $ 1.85     $ 0.70     $ 1.06  
Earnings from discontinued operations
    0.03       0.13       0.09  
Gain on sale of discontinued operations
    0.26              
     
     
     
 
 
Net income
  $ 2.14     $ 0.83     $ 1.15  
     
     
     
 

See notes to consolidated financial statements.

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THE ST. JOE COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands, except share and per share amounts)
                                                           
Common Stock Accumulated Other Restricted Stock

Retained Comprehensive Deferred Treasury
Shares Amount Earnings Income Compensation Shares Total







Balance at December 31, 1999
    86,431,984     $ 13,170     $ 961,819     $ 90,597     $ (3,564 )   $ (121,168 )   $ 940,854  
     
     
     
     
     
     
     
 
Comprehensive income:
                                                       
 
Net income
                100,323                         100,323  
 
Decrease in net unrealized gain on available-for-sale securities, net of tax of $14,344
                      (12,834 )                 (12,834 )
                                                     
 
Total comprehensive income
                                        87,489  
                                                     
 
Dividends ($.08 per share)
                (6,816 )                       (6,816 )
Spin-off of Florida East Coast Industries
                (393,826 )     366                   (393,460 )
Issuance of common stock
    1,011,374       18,011                         326       18,337  
Amortization of restricted stock deferred compensation
                            1,307             1,307  
Purchase of treasury shares
    (3,517,066 )                             (78,627 )     (78,627 )
     
     
     
     
     
     
     
 
Balance at December 31, 2000
    83,926,292       31,181       661,500       78,129       (2,257 )     (199,469 )     569,084  
     
     
     
     
     
     
     
 
Comprehensive income:
                                                       
 
Net income
                70,205                         70,205  
 
Transition adjustment for derivative instruments, net of tax of $5,389
                      10,008                   10,008  
                                                     
 
Total comprehensive income
                                        80,213  
                                                     
 
Dividends ($.08 per share)
                (6,873 )                       (6,873 )
Issuance of common stock
    2,713,166       40,161                               40,161  
Tax benefit on exercise of stock options
          11,812                               11,812  
Amortization of restricted stock deferred compensation
                            1,306             1,306  
Purchase of treasury shares
    (7,129,850 )                             (177,630 )     (177,630 )
     
     
     
     
     
     
     
 
Balance at December 31, 2001
    79,509,608       83,154       724,832       88,137       (951 )     (377,099 )     518,073  
     
     
     
     
     
     
     
 
Comprehensive income:
                                                       
 
Net income
                174,363                         174,363  
 
Settlement of available-for-sale securities and derivative instruments
                      (88,137 )                 (88,137 )
                                                     
 
Total comprehensive income
                                        86,226  
                                                     
 
Dividends ($.08 per share)
                (6,573 )                       (6,573 )
Issuance of common stock
    1,877,443       30,877                               30,877  
Tax benefit on exercise of stock options
          8,678                               8,678  
Amortization of restricted stock deferred compensation
                            439             439  
Purchase of treasury shares
    (5,382,653 )                             (157,627 )     (157,627 )
     
     
     
     
     
     
     
 
Balance at December 31, 2002
    76,004,398     $ 122,709     $ 892,622     $     $ (512 )   $ (534,726 )   $ 480,093  
     
     
     
     
     
     
     
 

See notes to consolidated financial statements.

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THE ST. JOE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOW

                               
Years Ended December 31,

2002 2001 2000



(Dollars in thousands)
Cash flows from operating activities:
                       
 
Net income
  $ 174,363     $ 70,205     $ 100,323  
 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
   
Gain on settlement of forward sale contracts
    (132,915 )            
   
Depreciation and amortization
    23,845       29,619       51,783  
   
Imputed interest on long-term debt
    4,292       9,524       8,776  
   
Minority interest in income
    1,366       524       9,954  
   
Gain on sale of property and investments
    (89,170 )     (38,331 )     (106,764 )
   
Equity in income of unconsolidated joint ventures
    (10,940 )     (24,127 )     (18,217 )
   
Distributions from unconsolidated community residential joint ventures
    41,363       22,473       17,623  
   
Origination of mortgage loans, net of proceeds from sales
    (3,641 )     (32,720 )      
   
Proceeds from mortgage warehouse line of credit, net of repayments
    (13,951 )     32,066        
   
Gain on sale of discontinued operations
    (20,887 )            
   
Deferred income tax expense
    93,449       42,799       23,750  
   
Impairment losses
          500       6,455  
   
Purchases and maturities of trading investments, net
                25,040  
   
Cost of community residential properties
    260,814       173,407       97,264  
   
Expenditures for community residential properties
    (272,501 )     (229,530 )     (196,382 )
   
Loss (gain) on valuation of derivatives
    894       (3,966 )      
   
Changes in operating assets and liabilities:
                       
     
Accounts receivable
    (20,835 )     17,990       (36,705 )
     
Other assets
    (3,499 )     (38,281 )     (32,205 )
     
Accounts payable and accrued liabilities
    4,717       28,807       49,839  
     
Income taxes payable
          (5,057 )     2,062  
     
     
     
 
Net cash provided by operating activities
    36,764       55,902       2,596  
     
     
     
 
Cash flows from investing activities:
                       
 
Purchases of property, plant and equipment
    (16,722 )     (15,068 )     (135,590 )
 
Purchases of investments in real estate
    (104,262 )     (208,296 )     (118,367 )
 
Purchases of short-term investments
    (1,007 )           (7,359 )
 
Investments in joint ventures and purchase business acquisitions, net of cash received
    (11,710 )     (16,880 )     (19,196 )
 
Proceeds from dispositions of assets
    111,526       155,242       143,465  
 
Proceeds from sale of discontinued operations
    138,743              
 
Proceeds from settlement of forward purchase contracts
    1,735              
 
Maturities and redemptions of short-term investments
    3,304       6,530       40,404  
     
     
     
 
Net cash provided by (used in) investing activities
    121,607       (78,472 )     (96,643 )
     
     
     
 
Cash flows from financing activities:
                       
 
Proceeds from revolving credit agreements, net of repayments
    (210,764 )     83,470       122,360  
 
Proceeds from other long-term debt
    233,689       77,230       27,000  
 
Repayments of other long-term debt
    (15,640 )     (4,453 )     (8,681 )
 
Proceeds from exercise of stock options and stock purchase plan
    30,877       40,161       18,337  
 
Dividends paid to stockholders
    (6,573 )     (6,873 )     (6,816 )
 
Dividends paid to minority interest
                (980 )
 
Spin off of subsidiary
                1,072  
 
Treasury stock purchased
    (157,627 )     (177,630 )     (78,627 )
     
     
     
 
Net cash (used in) provided by financing activities
    (126,038 )     11,905       73,665  
     
     
     
 
Net increase (decrease) in cash and cash equivalents
    32,333       (10,665 )     (20,382 )
Cash and cash equivalents at beginning of year
    40,940       51,605       71,987  
     
     
     
 
Cash and cash equivalents at end of year
  $ 73,273     $ 40,940     $ 51,605  
     
     
     
 

See notes to consolidated financial statements.

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Table of Contents

THE ST. JOE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2002, 2001, and 2000
(Dollars in thousands except per share amounts)

1. Nature of Operations

      The St. Joe Company (the “Company”) is a real estate operating company primarily engaged in community residential and commercial development, along with commercial real estate services and land sales. The Company also has significant interests in timber and a transportation operation. While the Company’s real estate operations are in various states throughout the southeast, the majority of the real estate operations, as well as the timber and transportation operations, are principally within the state of Florida. Consequently, the Company’s performance, and particularly that of its real estate operations, is significantly affected by the general health of the Florida economy.

      On April 17, 2002, the Company completed the sale of Arvida Realty Services (“ARS”), its residential real estate services segment. Accordingly, the consolidated financial statements and notes thereto reflect ARS as a discontinued operation.

 
FLA Spin-off

      On October 9, 2000, the Company distributed to its shareholders all of its equity interest in Florida East Coast Industries, Inc. (“FLA”). Various service agreements between the Company and FLA’s wholly owned subsidiary Flagler Development Company (“FDC”) became effective. Under the terms of these agreements, which extend for up to three years after the closing of the transaction, FDC will retain the Company, through its commercial real estate affiliates, to continue to develop and manage certain commercial real estate holdings of FDC.

 
Real Estate

      The Company currently conducts its real estate operations in three principal segments: community residential development, commercial development and management, and land sales. The Company’s community residential development division develops large tracts of land in northwest Florida including significant Gulf of Mexico frontage and in west Florida near Tallahassee, Florida. The Company is developing and managing residential communities on certain lands owned by the Company through its 74% owned limited partnership, St. Joe/Arvida Company, L.P. (“Arvida”). The Company also has a 26% limited partner interest in Arvida/JMB Partners, L.P., a limited partnership whose development operations were substantially completed in 2002. The Company conducts its residential homebuilding in North Carolina and South Carolina through Saussy Burbank, Inc. (“Saussy Burbank”), a 100% owned subsidiary.

      The Company owns and develops commercial properties through several wholly owned subsidiaries and partnership ventures. Through the Company’s wholly owned subsidiary, Advantis Real Estate Services Inc. (“Advantis”), the Company provides commercial real estate services including brokerage, property management and construction management. The Company is also a partner in several joint ventures that own, develop and manage commercial property in Florida and Georgia. The St. Joe Land Company (“St. Joe Land”) sells parcels of land from a portion of the Company’s total of 800,000 acres of timberland primarily in northwest Florida.

 
Forestry

      The Company is the largest private owner of timberlands in Florida. The principal product of the Company’s forestry operations is pine pulpwood and timber products. In addition, the Company owns and operates a cypress sawmill and mulch plant which converts cypress logs into wood products and mulch.

      A significant portion of the wood harvested by the Company is sold under a long-term wood fiber supply agreement with Jefferson Smurfit, also known as Smurfit-Stone Container Corporation. The 12-year

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agreement requires an annual pulpwood volume of 700,000 tons per year that must come from company-owned fee simple lands. At December 31, 2002, approximately 290,000 acres were encumbered, subject to certain restrictions, by this agreement, although the obligation may be transferred to a third party if a parcel is sold.

      The Company also plans to continue to sell some of its timber resources through the Company’s real estate division, St. Joe Land.

     Transportation

      During 2002, the Company completed the sale of the rolling stock of Apalachicola Northern Railroad (“ANRR”). The Company also executed a lease of ANRR’s track and related facilities. The Company retains ownership of the right-of-way, track, related facilities and real estate. Prior to the FLA spin-off, the Company also owned the majority of FLA’s transportation subsidiary, Florida East Coast Railway (“FEC”).

2. Summary of Significant Accounting Policies

     Principles of Consolidation

      The consolidated financial statements include the accounts of the Company and all of its majority-owned and controlled subsidiaries. The consolidated financial statements include the accounts of FLA and its wholly owned subsidiaries through October 9, 2000, the effective date of the spin-off. The operations of ARS are included in discontinued operations through April 17, 2002, when ARS was sold. Investments in joint ventures and limited partnerships in which the Company does not have majority voting control are accounted for by the equity method. All significant intercompany transactions and balances have been eliminated.

     Revenue Recognition

      Operating revenues consist of real estate property sales, brokerage commissions, real estate service fees and development fees, rental revenues, revenues from sales of forestry products, transportation revenues, and equity in the income of unconsolidated investments.

      Revenues from real estate property sales earned therefrom are recognized upon closing of sales contracts in accordance with Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate, (“FAS 66”). A portion of real estate inventory and estimates for costs to complete are allocated to each housing unit based on the relative sales value of each unit as compared to the sales value of the total project. Revenue for multi-family residences under construction is recognized, in accordance with FAS 66, 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 collectible and 5) aggregate sales proceeds and costs can be reasonably estimated. Revenue is recognized in proportion to the percentage of total costs incurred in relation to estimated total costs. Revenue for multi-family residences is recognized at closing using the full accrual method of accounting if the criteria for using the percentage of completion method are not met before construction is substantially completed.

      Revenues from brokerage commissions are earned when the underlying transactions are closed.

      Real estate service and development fees are recognized in the period in which the services are performed. Rental revenues are recognized as earned, using the straight-line method over the life of the contract.

      Revenues from sales of forestry products are recognized generally on delivery of the product to the customer.

 
      Cash and Cash Equivalents

      Cash and cash equivalents include cash on hand, bank demand accounts, money market accounts, and repurchase agreements having original maturities at acquisition date of 90 days or less.

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      Investment in Real Estate

      Investment in real estate is carried at cost. Depreciation is computed on straight-line and accelerated methods over the useful lives of the assets ranging from 15 to 40 years. Depletion of timber is determined by the units of production method. An adjustment to depletion is recorded, if necessary, based on the continuous forest inventory (“CFI”) analysis prepared every 5 years.

 
      Property, Plant and Equipment

      Depreciation is computed using both straight-line and accelerated methods over the useful lives of various assets. Gains and losses on normal retirements of these items are credited or charged to accumulated depreciation.

 
      Goodwill and Intangible Assets

      Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 141, Business Combinations (“FAS 141”), and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“FAS 142”). FAS 141 requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. FAS 141 also specifies criteria that must be met by intangible assets acquired in a purchase method business combination in order for them to be recognized and reported apart from goodwill. FAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of FAS 142.

      Through December 31, 2001, goodwill associated with the Company’s business combinations was being amortized on a straight-line basis over periods ranging from 10 years to 30 years. Intangible assets includes $2,068 in acquired lease intangibles which are being amortized over their applicable lease periods which range from 1 to 10 years.

      As a result of FAS 142, the Company ceased to amortize $143,383 of goodwill as of January 1, 2002. In lieu of amortization, FAS 142 requires that the Company perform an initial impairment review of all goodwill in 2002. Additionally, FAS 142 requires the Company to perform an annual impairment review each year beginning in 2002. The Company has performed all necessary impairment reviews in 2002 and has found no impairment.

      A portion of goodwill pertaining to ARS was removed as a result of the sale of ARS on April 17, 2002. The remaining goodwill balance at December 31, 2002 is $53,074.

 
      Earnings Per Common Share

      Earnings per common share (“EPS”) are based on the weighted average number of common shares outstanding during the year. Diluted EPS assumes weighted average options to purchase 2,903,902, 3,329,331, and 1,908,592 shares of common stock in 2002, 2001, and 2000, respectively, have been exercised using the treasury stock method.

      In August 1998, February 2000, May 2001, and August 2002, the Company’s Board of Directors authorized a total of $650,000 for the repurchase of the Company’s outstanding common stock from time to time on the open market (“the St. Joe Stock Repurchase Program”), of which approximately $120,500 remains. On December 6, 2000, the Company entered into an agreement with the Alfred I. DuPont Testamentary Trust (the “Trust”), the majority stockholder of the Company, and the Trust’s beneficiary, The Nemours Foundation (the “Foundation”), to participate in the St. Joe Stock Repurchase Program for a 90-day period. This agreement was renewed for two additional 90-day periods which expired on September 6, 2001. Subsequent to December 31, 2002, the Company announced that it had entered into another 90-day agreement with the Trust to again participate in the St. Joe Stock Repurchase Program. In June 2002, concurrently with a secondary public offering of the Company’s common stock by the Trust, and as a part of the St. Joe Stock Repurchase Program, the Company purchased 2,586,206 shares from the Trust for $75,000.

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As of December 31, 2002, the Company had repurchased 14,588,066 shares in the open market and 6,587,606 shares from the Trust.

      Weighted average basic and diluted shares taking into consideration shares issued, weighted average options used in calculating EPS and treasury shares repurchased for each of the years presented is as follows:

                         
2002 2001 2000



Basic
    78,436,713       80,959,416       84,958,872  
Diluted
    81,340,615       84,288,746       86,867,464  
 
      Stock-Based Compensation

      Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (“FAS 123”) permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, FAS 123 also allows entities to apply the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value based method defined in FAS 123 has been applied. Under APB 25, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.

      In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“FAS 148”). FAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. FAS 148 also requires prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transitional guidance and annual disclosure requirements of FAS 148 are effective for fiscal years ending after December 15, 2002.

      As permitted under FAS 148 and FAS 123, the Company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosure provisions of FAS 148 and FAS 123. Accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements.

      Effective January 6, 1997, the Company granted Mr. Rummell, Chairman and CEO of the Company, 201,861 restricted shares of the Company’s common stock and in February 1999, the Company granted Mr. Twomey, President, CFO and COO, 100,000 restricted shares. The restricted shares vest over five-year periods, beginning on the date of each grant. The Company carries deferred compensation of approximately $512 for the unamortized portion of these grants as of December 31, 2002. Compensation expense related to these grants totaled approximately $439, $1,306, and $1,307 in 2002, 2001, and 2000, respectively.

      On January 7, 1997, the Company adopted the 1997 Stock Incentive Plan (the “1997 Incentive Plan”), whereby awards may be granted to certain employees and non-employee directors of the Company in the form of restricted shares of Company stock or options to purchase Company stock. Awards are discretionary and are determined by the Compensation Committee of the Board of Directors. The total amount of restricted shares and options available for grant under the Incentive Plan is 8.1 million shares. The options are exercisable in equal installments on the first anniversaries of the date of grant and expire generally 10 years after date of grant.

      On February 24, 1998, the Company adopted the 1998 Stock Incentive Plan (the “1998 Incentive Plan”) whereby awards may be granted to employees and non-employee directors of the Company in the form of restricted shares of Company stock, options to purchase Company stock or stock appreciation rights (SAR’s). The total amount of restricted shares, options, and stock appreciation rights available for grant under the 1998 Incentive Plan was 1.4 million. On May 9, 1999, the Company converted all of its outstanding SAR’s to options. The terms of the options are similar to the terms under the 1997 Incentive Plan.

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      On February 22, 1999, the Company adopted the 1999 Stock Incentive Plan (the “1999 Incentive Plan”) with similar terms to the 1997 Incentive Plan. The total amount of restricted shares or options under the 1999 Plan is 2.0 million shares.

      On August 21, 2001, the Company adopted the 2001 Stock Incentive Plan (the “2001 Incentive Plan”), with similar terms to the 1999 Incentive Plan. The total amount of restricted shares or options under the 2001 Plan is 3.0 million shares.

      Stock option activity during the period indicated is as follows:

                   
Number of Weighted Average
Shares Exercise Price


Balance at December 31, 1999
    7,307,980     $ 22.27  
 
Granted
    730,000       24.24  
 
Exercised
    (1,178,946 )     15.32  
 
Forfeited
    (262,525 )     25.32  
 
FLA spin-off adjustment
    3,351,487       (7.23 )
     
     
 
Balance at December 31, 2000
    9,947,996       15.65  
 
Granted
    709,139       26.35  
 
Forfeited
    (233,648 )     16.78  
 
Exercised
    (2,596,066 )     15.44  
     
     
 
Balance at December 31, 2001
    7,827,421       16.65  
 
Granted
    775,000       29.24  
 
Forfeited
    (284,628 )     18.33  
 
Exercised
    (1,833,463 )     16.47  
     
     
 
Balance at December 31, 2002
    6,484,330     $ 18.11  
     
     
 

      All options have been granted at the Company’s then current market price on the date of grant and ranged from $13.14 to $33.26.

      The per share weighted-average fair value of stock options granted/converted during 2002, 2001 and 2000, respectively, was $12.60, $12.70 and $8.21 on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions: 2002 - 0.3% expected dividend yield, risk-free interest rate of 4.26%, weighted average expected volatility of 24.01% and an expected life of 7.5 years; 2001 - 0.3% expected dividend yield, risk-free interest rate of 5.64%, weighted average expected volatility of 24.64% and an expected life of 7.5 years; 2000 - 0.4% expected dividend yield, risk-free interest rate of 5.11%, weighted average expected volatility of 25.50% and an expected life of 7.5 years.

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      Had the Company determined compensation costs based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s net income would have been reduced to the pro forma amounts indicated below:

                             
2002 2001 2000



Net income:
                       
 
Net income as reported
  $ 174,363     $ 70,205     $ 100,323  
 
Add: stock-based employee compensation expense included in reported net income
    270       804       804  
 
Deduct: total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects
    (5,304 )     (11,000 )     (10,114 )
     
     
     
 
   
Net income — pro forma
  $ 169,329     $ 60,009     $ 91,013  
     
     
     
 
Per share — Basic:
                       
 
Earnings per share as reported
  $ 2.22     $ 0.87     $ 1.18  
 
Earnings per share — pro forma
  $ 2.16     $ 0.74     $ 1.07  
Per share — Diluted:
                       
 
Earnings per share as reported
  $ 2.14     $ 0.83     $ 1.15  
 
Earnings per share — pro forma
  $ 2.10     $ 0.71     $ 1.05  

      The following table presents information regarding all options outstanding at December 31, 2002.

                             
Weighted
Average Weighted
Number of Remaining Range of Average
Options Contractual Exercise Exercise
Outstanding Life Prices Price




  4,384,281       4.9 years     $ 13.14-$19.80     $ 14.38  
  2,100,049       8.1 years     $ 19.81-$33.26     $ 25.88  
 
                         
  6,484,330       5.9 years     $ 13.14-$33.26     $ 18.11  
 
                         

      The following table presents information regarding options exercisable at December 31, 2002:

                     
Weighted
Number of Range of Average
Options Exercise Exercise
Exercisable Prices Price



  3,395,590     $ 13.14-$19.80     $ 13.84  
  521,067     $ 19.81-$28.29     $ 22.00  
 
                 
  3,916,657     $ 13.14-$28.29     $ 14.92  
 
                 

      Deferred incentive compensation is being amortized on a straight-line basis over a five-year vesting period, which is deemed to be the period for which services are performed.

     Comprehensive Income

      The Company’s comprehensive income differs from net income due to changes in the net unrealized gains on marketable securities available for sale and in the value of the derivatives that have been designated to hedge the fair value of marketable securities available for sale. The Company has elected to disclose comprehensive income in its Consolidated Statements of Changes in Stockholders’ Equity.

 
Income Taxes

      The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences

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between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 
Short-Term Investments and Marketable Securities

      Investments consist principally of common stocks, derivative instruments, and certificates of deposit. Investments maturing in three months to one year are classified as short term. Those having maturities in excess of one year are classified as marketable securities.

      The Company classifies its marketable equity securities and related derivative instruments as available-for-sale.

      Short-term investments and available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related income tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders’ equity until realized.

      On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS 133”) and Statement of Financial Accounting Standards No. 138, Accounting for Derivative Instruments and Hedging Activities, an amendment to FAS 133 (“FAS 138”). FAS 138 and FAS 133 establish accounting and reporting standards for derivative instruments and hedging activities and require entities to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company owned no derivative instruments at December 31, 2002. At December 31, 2001, all derivative instruments held by the Company have been designated as hedges of the fair value of the Company’s marketable securities and included at fair value in marketable securities on the balance sheet. From January 1, 2001 until the final settlement of the Company’s derivative instruments on October 15, 2002 (See Note 7), changes in the intrinsic value of the derivatives were recorded through the statements of income and offset by changes in the fair value of the hedged marketable securities. Changes in the time value component of the change in fair value were also recorded through the statement of income as they have been excluded from the Company’s assessment of hedge effectiveness.

      A decline in the market value of any available-for-sale security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security.

      Realized gains and losses for securities classified as available-for-sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

 
Long-Lived Assets

      On January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”). FAS 144 provides guidance on the accounting for long-lived assets to be disposed of. FAS 144 also broadens the scope of discontinued operations.

      The Company’s properties have operations and cash flows that can be clearly distinguished from the rest of the Company. Beginning in 2002, in accordance with FAS 144, the operations and gains on sales reported in discontinued operations include operating properties sold during the year for which operations and cash flows can be clearly distinguished. The operations from these properties have been eliminated from ongoing operations and the Company will not have continuing involvement after disposition. Prior periods have been restated to reflect the operations of these properties as discontinued operations. The operations and gains on sales of operating properties for which the Company has some continuing involvement are reported as income from continuing operations.

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      The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the asset.

      During 2001, the Company recorded a $500 impairment loss on a commercial property. During 2000, the Company recorded a $3,355 impairment loss to reflect the current net realizable value of ANRR’s net assets and FLA recorded a write-down of goodwill totaling $3,100 in connection with a restructuring of its trucking subsidiary.

 
Reclassifications

      Certain prior year amounts have been reclassified to conform with the current year’s presentation.

 
Supplemental Cash Flow Information

      The Company paid $17,074, $14,414, and $7,559 for interest and $1,952, $2,497, and $30,665 for income taxes in 2002, 2001, and 2000, respectively. The Company capitalized interest expense of $8,148, $7,043, and $5,328 in 2002, 2001, and 2000, respectively.

      Cash flows related to residential real estate development activities are included in operating activities on the statement of cash flows.

      The Company’s non-cash activities included the settlement of its Forward Sale Contracts (Note 7) in 2002. In addition to cash received, the Company transferred investments with a fair value of $96,600 to a financial institution and settled hedge instruments with a fair market value of $43,300 to satisfy the debt associated with the forward sale of the equity securities of $135,600. The Company’s non-cash activities also included the distribution of its equity interest in FLA totaling $393,460 on October 9, 2000.

 
Fair Value of Financial Instruments

      The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses, approximate their fair values due to the short-term nature of these assets and liabilities. The fair value of the Company’s long-term debt, including the current portion, is $335,927 at December 31, 2002. At December 31, 2001, the book value of the Company’s debt approximated fair value because the balance predominantly consisted of variable-rate debt. Management estimates the fair value of long-term debt based on current rates available to the Company for loans of the same remaining maturities.

 
Estimates

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 
Recent Accounting Pronouncements

      In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”). FIN 45 introduces new disclosure and liability recognition requirements for guarantees of debt that fall within its scope. The Company has adopted FIN 45. The liability recognition requirements will be applied for all guarantees entered into or modified after December 31, 2002.

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      In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). FIN 46 addresses consolidation by business enterprises of variable interest entities which do not effectively disperse risk among parties involved. FIN 46 requires an enterprise to consolidate the operations of a variable interest entity if the enterprise absorbs a majority of the variable interest entity’s expected losses, receives a majority of its expected residual returns, or both. The provisions of FIN 46 are effective for financial statements issued after January 31, 2003 and the Company plans to adopt FIN 46 as of that date. Management has not yet completed its evaluation of the applicability of FIN 46 to its current structure, but does not believe that it is reasonably possible that any loss will result from the adoption of FIN 46.

3. Business Combinations

      During 2002, the Company purchased the remaining interest in an unconsolidated affiliate for $770.

      During 2001, the Company purchased the remaining interest in a previously 50%-owned homebuilding subsidiary, McNeill Burbank, for $1,117. During 2002, the Company accrued additional contingent consideration of $552 related to the McNeill Burbank acquisition, which will be paid in 2003. In 2001, the Company also purchased Sunshine State Cypress, a cypress mill, for $5,506 plus the assumption of $5,811 in debt, resulting in goodwill of $5,823. Additionally, the Company accrued additional contingent consideration in 2001 of $1,011 related to the Saussy Burbank acquisition and $938 related to the McNeill Burbank acquisition.

      Additional contingent consideration will be accrued in 2003 and paid in 2004 in relation to the McNeill Burbank acquisition if certain performance targets of McNeill Burbank are met.

      These acquisitions were accounted for as purchases and as such, the results of their operations are included in the consolidated financial statements from the date of acquisition. None of the acquisitions were significant to the financial condition and operations of the Company in the year in which they were acquired or the year preceding the acquisition.

      During the years ended December 31, 2001 and 2000, goodwill related to previous acquisitions was amortized on a straight-line basis over periods of 20 years, 10 years and 15 years for ARS, Saussy Burbank and Sunshine State Cypress, respectively. As of December 31, 2002, the Company ceased amortization of goodwill pursuant to FAS 142.

4. Discontinued Operations

      As a result of rapid consolidation in the real estate services business, the Company had the opportunity to sell ARS, its wholly-owned subsidiary, at an attractive value. On April 17, 2002, the Company completed the sale of ARS, its residential real estate services segment, to Cendant Corporation’s subsidiary, NRS, Inc., for approximately $170,000, which includes payment for working capital of ARS at April 17, 2002 of approximately $13,000, in an all cash transaction. Net cash received by the Company was approximately $138,700, reflecting gross proceeds less closing costs and cash balances of ARS at closing. The gain recorded on the sale was approximately $33,700 before taxes, or approximately $20,700 net of taxes. This gain is subject to adjustment, and a liability has been recorded, pending the resolution of an issue with an outside party over the use of the Arvida name. The outside party has not yet asserted a claim and the Company is not, at this time, able to quantify the liability, if any, which will result if the claim is asserted. The Company, based on current information, does not believe any claim, if asserted, will have a material adverse effect on the results of operations of the Company. The Company has reported its residential real estate services operations as discontinued operations for all periods presented. Revenues from ARS were approximately $76,200, $277,300, and $257,000 for 2002, 2001, and 2000, respectively. Net income for ARS was approximately $2,300, $11,000, and $7,800 for 2002, 2001, and 2000, respectively.

      Also included in discontinued operations is the sale in 2002 of two commercial office buildings, which generated a gain of $300,000, or $200,000 net of tax. Revenues from the buildings were less than $100,000 in

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2002 and approximately $200,000 in 2001. Net operating income from the buildings was less than $100,000 in 2002 and 2001.

5. Investment in Real Estate

      Real estate by segment as of December 31 consists of:

                   
2002 2001


Operating property:
               
 
Community residential development
    61,801       36,944  
 
Land sales
    117       1,387  
 
Commercial real estate
    304,976       230,409  
 
Forestry
    89,074       95,976  
 
Hospitality and other
    815       19,331  
     
     
 
Total operating property
    456,783       384,047  
     
     
 
Development property
               
 
Community residential development
    240,725       215,816  
 
Land sales
    4,298       390  
 
Forestry
    356        
     
     
 
Total development property
    245,379       216,206  
     
     
 
Investment property
               
 
Land sales
    165       161  
 
Commercial real estate
    59,067       58,054  
 
Forestry
    799        
 
Hospitality and other
    2,386       3,503  
     
     
 
Total investment property
    62,417       61,718  
     
     
 
Investment in unconsolidated affiliates
               
 
Community residential development
    37,873       60,949  
 
Commercial real estate
    21,472       23,282  
     
     
 
Total investment in unconsolidated affiliates
    59,345       84,231  
     
     
 
      823,924       746,202  
Less: Accumulated depreciation
    17,223       9,468  
     
     
 
    $ 806,701     $ 736,734  
     
     
 

      Included in operating property are the Company’s timberlands, and land and buildings used for commercial rental purposes. Development property consists of community residential land currently under development. Investment property is the Company’s land held for future use.

      Real estate properties having a net book value of approximately $265,133 at December 31, 2002 are leased under non-cancelable operating leases with expected aggregate rentals of approximately $122,834, of which $28,571, $24,493, $21,087, $16,223, and $11,244 is due in the years 2003 through 2007, respectively, and $21,216 thereafter.

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6. Investment in Unconsolidated Affiliates

      Investments in unconsolidated affiliates are included in real estate investments and as of December 31, consist of:

                         
Ownership 2002