St. Joe Company - 10-Q quarterly report FY

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES þ     NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2of the Exchange Act).  YES o     NO þ

As of May 1, 2006, there were 104,001,664 shares of common stock, no par value, issued and 74,575,010 outstanding, with 29,426,654 shares of treasury stock.

The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting onForm 10-Q.Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States for complete financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and notes thereto included in the Company’s latest Annual Report onForm 10-K.In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position as of March 31, 2006 and December 31, 2005 and the results of operations and cash flows for the three month periods ended March 31, 2006 and 2005. The results of operations and cash flows for the three month periods ended March 31, 2006 and 2005 are not necessarily indicative of the results that may be expected for the full year.

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity(“FAS 150”). FAS 150 requires companies having consolidated entities with specified termination dates to treat minority owner’s interests in such entities as liabilities in an amount based on the fair value of the entities. Although FAS 150 was originally effective July 1, 2003, the FASB has indefinitely deferred certain provisions related to classification and measurement requirements for mandatorily redeemable financial instruments that become subject to FAS 150 solely as a result of consolidation. As a result, FAS 150 has no impact on the Company’s Consolidated Statements of Income for the three months ended March 31, 2006 or 2005. The Company has one consolidated entity with a specified termination date: Artisan Park, L.L.C. (“Artisan Park”). At March 31, 2006, the carrying amount of the minority interest in Artisan Park was $18.2 million and its fair value was $23.3 million. The Company has no other material financial instruments that are affected currently by FAS 150.

During the first quarter of 2006, we adopted the provisions of, FASB Statement of Financial Accounting Standards No. 123 — revised 2004, “Share-Based Payment” (“SFAS 123R”), which replaced Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation” (“SFAS 123”), and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. We elected the modified-prospective method of adoption, under which prior periods are not revised for comparative purposes. The valuation provisions of SFAS 123R apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified. Estimated compensation for the unvested portion of grants that were outstanding as of the effective date will be recognized over the remaining service period using the compensation cost estimated for the SFAS 123 pro forma disclosures. Additionally, the 15% discount at which employees may purchase the Company’s common stock through payroll deductions will be recognized as compensation expense. Upon exercise of stock options or granting of non-vested stock, we will issue new common stock.

The Company has four stock incentive plans (the 1997 Stock Incentive Plan, the 1998 Stock Incentive Plan, the 1999 Stock Incentive Plan and the 2001 Stock 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

We currently use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors (term of option), risk-free interest rate and expected dividends.

We estimate the expected term of options granted by incorporating the contractual term of the options and analyzing employees actual and expected exercise behaviors. We estimate the volatility of our common stock by using historical volatility in market price. We base the risk-free interest rate that we use in the option valuation model on U.S. Treasury 7 year issues with remaining terms similar to the expected term on the options. We anticipate paying cash dividends in the foreseeable future and therefore use an estimated dividend yield in the option valuation model.

The assumptions used to value option grants for the quarters ended March 31, 2006 and 2005 are as follows:

Total stock-based compensation recognized on our consolidated statement of income as corporate expense for the quarter ended March 31, 2006 is as follows (in thousands):

The following table sets forth the pro forma amounts of net income and net income per share for the three months ended March 31, 2005 that would have resulted if we had accounted for our employee stock plans under the fair value recognition provisions of SFAS 123 (in thousands except per share amounts):

The following table sets forth the summary of option activity under our stock option program for the three months ended March 31, 2006:

The total intrinsic value of options exercised during the period was $1.6 million. The intrinsic value is calculated as the difference between the market value as of exercise date and the exercise price of the shares.

The following table presents information regarding all options outstanding at March 31, 2006:

The following table presents information regarding options exercisable at March 31, 2006:

The aggregate intrinsic value of options outstanding and options exercisable as of March 31, 2006 was $31.7 million and $21.9 million, respectively. The intrinsic value is calculated as the difference between the market value as of March 31, 2006 and the grant date fair value. The closing price as of March 31, 2006 was $62.84 per share as reported by the New York Stock Exchange.

Prior to the adoption of SFAS 123R, we recognized the estimated compensation cost of non-vested restricted stock over the vesting term. The estimated compensation cost is based on the fair value of the Company’s common stock on the date of grant. We will continue to recognize the compensation cost over the vesting term.

As of March 31, 2006, there was $20.1 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based compensation arrangements. This cost includes $3.2 million related to stock option grants and $16.9 million of non-vested restricted stock which will be recognized over a weighted average period of four and three years, respectively.

Upon the adoption of, and in accordance with SFAS 123R, deferred compensation of $19.7 million previously reflected as a component of Stockholders’ Equity has been netted against Common Stock as of December 31, 2005, in the accompanying Consolidated Balance Sheets and Consolidated Statement of Changes in Stockholders’ Equity.

On February 14, 2006, the Board of Directors approved a management succession plan for the Company in which Kevin M. Twomey, President and Chief Operating Officer, will be retiring later this year. Mr. Twomey will remain as President and Chief Operating Officer until the Company’s 2006 Annual Meeting of Shareholders on May 16, 2006 and then will provide consulting services to the Company until he retires on December 28, 2006. Any of Mr. Twomey’s unvested shares of restricted stock will vest as of his retirement date. As a result, the increase in stock based compensation expense for the period ended March 31, 2006 in connection with accelerating the vesting on his 243,160 shares (to be fully amortized as of May 16, 2006) was $1.1 million.

Beginning in November 1999, the Company also implemented an employee stock purchase plan (“ESPP”), whereby all employees may purchase the Company’s common stock through monthly payroll deductions at a 15% discount from the fair market value of our common stock at each month end, with an annual limit of $25,000 in purchases per employee.

Earnings per share (“EPS”) is based on the weighted average number of common shares outstanding during the period. Diluted EPS assumes weighted average options have been exercised to purchase 341,734 and 1,015,372 shares of common stock in the three months ended March 31, 2006 and 2005, respectively, and that 615,135 and 527,620 shares of vested restricted stock were issued as of March 31, 2006 and 2005, respectively, each net of assumed repurchases using the treasury stock method.

From August 1998 through December 5, 2005, the Board of Directors had authorized a total of $800 million for the repurchase of the Company’s outstanding common stock from time to time. On December 6, 2005, the Board of Directors authorized and announced an additional $150 million for stock repurchases (collectively, the “Stock Repurchase Program”). A total of approximately $821.6 million had been expended in the Stock Repurchase Program from its inception through March 31, 2006. There is no expiration date on the Stock Repurchase Program.

From the inception of the Stock Repurchase Program to March 31, 2006, the Company repurchased from shareholders 27,414,711 shares and executives surrendered a total of 2,109,281 shares as payment for strike prices and taxes due on exercised stock options and vested restricted stock, for a total of 29,523,992 acquired shares. During the three month periods ended March 31, 2006 and 2005, the Company repurchased from shareholders 417,300 and 171,200 shares, respectively, and executives surrendered a total of 4,139 and 61,203 shares, respectively, as payment for strike prices and taxes due on exercised stock options and vested restricted stock.

Shares of Company stock issued upon the exercise of stock options for the three months ended March 31, 2006 and 2005 were 51,001 and 344,590 shares, respectively.

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

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

The Company has made certain reclassifications in its March 31, 2005 operating and investing cash flows which it considers to have an immaterial effect on these presentations.

The Company paid $11.4 million and $8.2 million for interest in the first three months of 2006 and 2005, respectively. The Company paid income taxes, net of refunds, of $12.6 million and $4.0 million in the first three months of 2006 and 2005, respectively. The Company capitalized interest expense of $4.2 million and $3.2 million during the first three months of 2006 and 2005, respectively.

The Company’s non-cash activities included the surrender of shares of Company stock by executives of the Company as payment for the exercise of stock options and the tax benefit on exercises of stock options. During the three months ended March 31, 2005, executives surrendered Company stock worth $2.4 million, as payment for strike prices of stock options. No amounts were surrendered as payment for the exercise of stock options during the three months ended March 31, 2006.

Cash flows related to assets ultimately planned to be sold, including Towns & Resorts development and related amenities, sales of undeveloped and developed land by the land sales segment, the Company’s timberland operations and land developed by the commercial segment are included in operating activities on the statements

Prior to the adoption of SFAS 123R, the Company presented all tax benefits for deductions resulting from the exercise of stock options as operating cash flows on its consolidated statement of cash flows. SFAS 123R requires the benefits of tax deductions in excess of tax benefits related to recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. Total cash flow will remain unchanged from what would have been reported under prior accounting rules.

Discontinued operations for the period ended March 31, 2005 include the results of operations of Advantis Real Estate Services Company (Advantis), which was sold on September 7, 2005 and the results of operations of four commercial buildings which were sold in the third and fourth quarters of 2005.

Real estate by segment includes the following (in thousands):

Included in operating property are Company-owned amenities related to Towns & Resorts, the Company’s timberlands and land and buildings developed by the Company and used for commercial rental purposes. Development property consists of Towns & Resorts land and inventory currently under development to be sold. Investment property includes the Company’s commercial buildings purchased with tax-deferred proceeds and land held for future use.

Depreciation expense reported on real estate was $4.8 million and $4.4 million in the three months ended March 31, 2006 and 2005, respectively.

Debt consists of the following (in thousands):

The aggregate maturities of debt subsequent to March 31, 2006 are as follows (in millions):

The senior notes and the senior revolving credit agreement contain financial covenants, including minimum net worth requirements, maximum debt ratios, and fixed charge coverage requirements, plus some restrictions on prepayment. At March 31, 2006, management believes the Company was in compliance with the covenants.

A summary of the net periodic pension credit follows (in thousands):

The Company conducts primarily all of its business in four reportable operating segments: Towns & Resorts, commercial real estate, land sales and forestry. The Towns & Resorts segment develops and sells housing units and home sites and manages residential communities. The commercial real estate segment owns and leases commercial,

The Company uses income from continuing operations before equity in income (loss) of unconsolidated affiliates, income taxes and minority interest for purposes of making decisions about allocating resources to each segment and assessing each segment’s performance, which it believes represents current performance measures.

The accounting policies of the segments are the same as those described above in the summary of significant accounting policies. Total revenues represent sales to unaffiliated customers, as reported in the Company’s consolidated income statements. All intercompany transactions have been eliminated. The caption entitled “Other” consists of general and administrative expenses, net of investment income.

The Company’s reportable segments are strategic business units that offer different products and services. They are each managed separately and decisions about allocations of resources are determined by management based on these strategic business units.

Information by business segment follows (in thousands):

The Company and its affiliates are involved in litigation on a number of matters and are subject to various 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 the Company’s consolidated financial position, results of operations or liquidity. We have established estimated accruals for our various litigation matters. However, it is possible that the actual amounts of liabilities resulting from such matters could exceed such accruals by several million dollars.

The Company has 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.

At March 31, 2006, the Company was party to surety bonds and standby letters of credit in the amounts of $52.9 million and $32.9 million, respectively, which may potentially result in liability to the Company if certain obligations of the Company are not met.

At March 31, 2006 and December 31, 2005, the Company was not liable as guarantor on any credit obligations that relate to unconsolidated affiliates or others in accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.

The Company is 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 the Company’s 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 will be reviewed and adjusted, if necessary, as additional information becomes available.

Pursuant to the terms of various agreements by which the Company disposed of its sugar assets in 1999, the Company is obligated to complete certain defined environmental remediation. Approximately $5.0 million of the sales proceeds remain in escrow pending the completion of the remediation. The Company has separately funded the costs of remediation. In addition, approximately $1.7 million is being held in escrow representing the value of the land subject to remediation. Remediation was substantially completed in 2003. The Company expects remaining remediation to be complete and the amounts held in escrow to be released to the Company in 2006.

The Company’s former paper mill site in Gulf County and certain adjacent real property north of the paper mill site are subject to various Consent Agreements and Brownfield Site Rehabilitation Agreements with the Florida Department of Environmental Protection. The paper mill site has been assessed and rehabilitated by Smurfit-Stone Container Corporation in accordance with these agreements. Management does not believe the liability for any remaining rehabilitation on these properties will be material.

Other proceedings involving environmental matters such as alleged discharge of oil or waste material into water or soil are pending against the Company. 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 the Company’s consolidated financial position, results of operations or liquidity. Aggregate environmental-related accruals were $4.0 million as of both March 31, 2006 and December 31, 2005.

The St. Joe Company is one of Florida’s largest real estate operating companies. We believe we have one of the largest inventories of private land suitable for development in the State of Florida, with a very low cost basis. The majority of our land is located in Northwest Florida. In order to optimize the value of these core real estate assets, our business plan calls for us to reposition our substantial timberland holdings for higher and better uses. We increase the value of our raw land assets, most of which are currently managed as timberland, through the entitlement, development and subsequent sale of residential and commercial parcels, home sites and homes, or through the direct sale of unimproved land. In addition, we reinvest the proceeds of qualifying asset sales into like-kind properties under our tax deferral strategy, which has enabled us to create a significant portfolio of commercial rental properties.

We have four operating segments: Towns & Resorts, commercial real estate, land sales, and forestry.

Our Towns & Resorts segment generates revenues from:

Our commercial real estate segment generates revenues from:

Our land sales segment generates revenues from:

Our forestry segment generates revenues from:

Our ability to generate revenues, cash flows and profitability is directly related to the real estate market, primarily in Florida, and the economy in general. Economic, political and weather-related conditions could have adverse effects on consumer buying behavior, construction costs, availability of labor and materials, the cost and availability of insurance, the availability of and changes in prices of fuel and energy, and other factors affecting us and the real estate industry in general and coastal real estate in particular. Additionally, increases in interest rates could reduce the demand for homes we build and home sites we develop, particularly primary housing and home sites and commercial properties we develop or sell.

Recently, activity in our resort residential projects in Northwest Florida has slowed significantly compared to the more active pace of the prior year. Furthermore, the size of the resale inventory in our resort residential communities has increased, which suggests it will be some time before we return to a favorable balance of supply

We remain committed to long-term value creation, continuing to diversify our development business and generating land sales for a broad range of uses and price points. We are continuing to broaden our customer base, and are in active discussions with several major homebuilders interested in participating in various projects in Northwest Florida and other parts of the state. We expect that this initiative will result in meaningful sales and income this year, next year and beyond. These transactions may involve land positions in pre-development phases of JOE communities as well as phases currently under development. These transactions provide opportunities for us to accelerate value realization, while at the same time decreasing capital intensity and increasing efficiency in how we deliver primary housing to the market.

This report includes forward-looking statements, particularly in the Management’s Discussion and Analysis Section. 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. Any statements in this report that are not historical facts are forward-looking statements. You can find many of these forward-looking statements by looking for words such as “intend”, “anticipate”, “believe”, “estimate”, “expect”, “plan”, “should”, forecast”, or similar expressions. In particular, forward-looking statements include, among others, statements about the following:

Forward-looking statements are not guarantees of future performance. You are cautioned not to place undue reliance on any of these forward-looking statements. These statements are made as of the date hereof based on current expectations, and we undertake no obligation to update the information contained in thisForm 10-Q.New information, future events or risks may cause the forward-looking events we discuss in this report not to occur.

Forward-looking statements are subject to numerous assumptions, risks and uncertainties. Factors that could cause actual results to differ materially from those contemplated by a forward-looking statement include the risk factors described in our annual report onForm 10-Kfor the year ended December 31, 2005, as well as, among others, the following:

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, 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.

The critical accounting policies that we believe reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements are set forth in Item 7 of our annual report onForm 10-Kfor the year ended December 31, 2005. There have been no significant changes in these policies during the first three months of 2006.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 152, Accounting for Real Estate Time-Sharing Transactions (“FAS 152”). FAS 152 clarifies the accounting for sales and other transactions involving real estate time-sharing transactions and is effective for financial statements for fiscal years beginning after June  15, 2005. The adoption of FAS 152 did not have any effect on our financial statements.

In October 2005, the FASB published FASB Staff Position (“FSP”)No. FAS 13-1,Accounting for Rental Costs Incurred during a Construction Period (“FSP13-1”),which stipulates that a lessee’s rental costs associated with operating leases during a construction period must be recognized as rental expense, included in income from continuing operations and allocated over the lease term according to current guidance on accounting for leases. Further, FSP13-1 does not apply to projects accounted for under FAS 67. The impact of adopting FSP13-1 did not have a material adverse impact on the Company’s financial position or results of operations.

In June 2005, the FASB ratified the Emerging Issues Task Force’s (“EITF”) consensus on IssueNo. 04-5,“Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights”(“EITF 04-5”).In addition, the FASB has issued FSPSOP 78-9-1,“Interactionof AICPA Statement of Position (SOP) 78-9 and EITFIssue 04-5”to amendSOP 78-9,Accounting for Investments in Real Estate Ventures, so that its guidance is consistent with the consensus reached by the EITF in EITFNo. 04-5.EITF 04-5establishes that determining control of a limited partnership requires judgment, but that generally a sole general partner is deemed to control a limited partnership unless the limited partners have (a) the ability to substantially liquidate the partnership or otherwise remove the general partner without cause and/or(b) substantive participating rights. This consensus applies to limited partnerships or similar entities, such as limited liability companies that have governing provisions that are the functional equivalent of a limited partnership. Based on our evaluation of the operating agreements and history of decision making, we believe we are not required to consolidate any of our current unconsolidated investments nor will this EITF have a material effect on our financial statements.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections (“FAS 154”). FAS 154 requires companies making voluntary changes to their accounting policies to apply the changes retrospectively, meaning that past earnings will be revised to reflect the impact in each period, rather than the current practice of taking a single charge against current earnings. The statement applies to all voluntary changes in accounting policies and to new rules issued by the FASB that require companies to change their accounting, unless otherwise stated in the new rules. FAS 154 is effective for us beginning January 1, 2006,

We adopted the provisions of, Statement of Financial Accounting Standards No. 123R Share-Based Payment(SFAS 123R), on January 1, 2006. We elected the modified-prospective method of adoption, under which prior periods are not revised for comparative purposes. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. The valuation provisions of SFAS 123R apply to new grants and to grants that were outstanding as of January 1, 2006.

We currently use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors (term of option), risk-free interest rate and expected dividends.

If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods or if we decide to use a different valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect our operating income, net income and net income per share.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of stock options. Existing valuation models, including the Black-Scholes, may not provide reliable measures of the fair values of our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in our consolidated financial statements. There currently is no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.

Net income decreased $11.7 million, or 76%, to $3.7 million, or $.05 per diluted share, in the first quarter of 2006, from $15.4 million, or $0.20 per diluted share, for the first quarter of 2005. Results for the period ended March 31, 2005 reported in discontinued operations include the operations of Advantis Real Estate Services Company (“Advantis”), and four commercial buildings sold in 2005.

We report revenues from our four operating segments: Towns & Resorts, commercial real estate, land sales, and forestry. Real estate sales are generated from sales of residential homes and home sites, parcels of developed and undeveloped land, and commercial buildings which are not reported as discontinued operations. Rental revenue is generated primarily from lease income related to our portfolio of investment and development properties as a component of the commercial real estate segment. Timber sales are generated from the forestry segment. Other revenues are primarily club operations and management fees from the Towns & Resorts segment.

Revenues generated during the first quarter of each year by our largest segment, Towns & Resorts, are typically lower than other quarters of the year, particularly in Northwest Florida, where visitation levels and sales are lowest during this period.

Revenues and expenses.  The following table sets forth a comparison of revenues and certain expenses for the three month periods ended March 31, 2006 and 2005.

The decreases in revenues from real estate sales and cost of real estate sales for the three month period ended March 31, 2006 compared to 2005 were in each case primarily due to decreased revenues in the Towns & Resorts segment and land sales in the commercial real estate segment. The increases in rental revenues and cost of rental revenues were in each case primarily due to the purchase of a commercial building in the commercial real estate segment. Timber revenue increased primarily due to increased harvesting of pine for outside customers. Cost of timber revenues increased due to increased logging costs caused primarily by fuel shortages and road maintenance. Other revenues and cost of other revenues decreased primarily due to a decrease in resale brokerage activity in our Towns & Resorts segment. For further discussion of revenues and expenses, see Segment Results below.

Corporate expense.  Corporate expense, representing corporate general and administrative expenses, increased $3.8 million, or 32%, to $15.7 million in the first quarter of 2006, from $11.9 million in the first quarter of 2005. The increase was primarily due to increases in stock compensation, professional fees, and compensation costs. Stock compensation increased $2.3 million in the first quarter of 2006 compared to 2005 as a result of acceleration of restricted stock amortization totaling $1.1 million related to the retirement of our President and COO, $0.2 related to other restricted stock amortization and $1.0 million of stock compensation expense recorded under SFAS 123R. Professional fees increased $0.9 million as a result of increased litigation costs. Compensation costs increased $0.6 million as a result of an increase of $1.3 million from the accelerated expensing of salary and bonus related to the retirement of our President and COO, offset by a decrease of $0.7 million in corporate bonus and other employee benefits.

Depreciation and amortization.  Depreciation and amortization increased $1.1 million, or 12%, to $10.4 million in the first quarter of 2006, from $9.3 million in the first quarter of 2005. The increase was primarily due to an increase in amortization resulting from the acceleration of amortized lease costs related to early termination of tenants associated with our commercial operating properties.

Other income (expense).  Other income (expense) consists of investment income, interest expense, gains on sales and dispositions of assets, litigation reserves and other income. Other income (expense) was $(3.4) million in

Equity in income (loss) of unconsolidated affiliates.  We have investments in affiliates that are accounted for by the equity method of accounting. Equity in income of unconsolidated affiliates totaled $2.8 million in the first quarter of 2006 and $1.9 million in the first quarter of 2005. The increase was primarily due to an increase in closings at Rivercrest and increased pricing at Rivercrest and Paseos, two 50% owned unconsolidated affiliates in our Towns & Resorts segment. Sales are substantially complete at both of these communities.

Income tax expense.  Income tax expense totaled $2.5 million in the first quarter of 2006 and $9.7 million in the first quarter of 2005. Our effective tax rate was 39.7% in the first quarter of 2006 compared to 38.1% for the first quarter of 2005.

Our Towns & Resorts segment develops large-scale, mixed-use resort, primary and secondary residential communities, primarily on land with very low cost basis. We own large tracts of land in Northwest Florida, including significant Gulf of Mexico beach frontage and waterfront properties, and land near Jacksonville, in Deland and near Tallahassee, the state capital. Our residential homebuilding business in North and South Carolina is conducted through Saussy Burbank, Inc. (“Saussy Burbank”), a wholly owned subsidiary.

Resort residential sales slowed significantly in the first quarter, compared to the more active pace of the prior year. Although the first quarter is traditionally the off-season in Northwest Florida, sales activity in our resort residential projects was slower than the same period a year ago. Furthermore, the size of the resale inventory in our resort residential communities has increased, which suggests it will be some time before we return to a favorable balance between supply and demand in this market segment. We are introducing new products at lower price points within our developments to fill market segments where there is more limited competitive supply.

We continue to see increases in labor and construction material costs. Consequently, we believe our margins may continue to be adversely affected by any additional increases in such costs.

We are continuing to broaden our customer base, and are in active discussions with several major homebuilders interested in participating in various projects in Northwest Florida and other parts of the state. We expect that this initiative will result in meaningful sales and income this year, next year and beyond. These transactions may involve land positions in pre-development phases of JOE communities as well as phases currently under development. These transactions provide opportunities for us to accelerate value realization, while at the same time decreasing capital intensity and increasing efficiency in how we deliver primary housing to the market.

The table below sets forth the results of operations of our Towns & Resorts development segment for the three month periods ended March 31, 2006 and 2005:

Revenues and costs of sales associated with multi-family units and Private Residence Club (“PRC”) units under construction are recognized using thepercentage-of-completionmethod of accounting. Revenue is recognized in proportion to the percentage of total costs incurred in relation to estimated total costs. If a deposit is received for less than 10% for a multi-family or PRC unit,percentage-of-completionaccounting is not utilized. Instead, full accrual accounting criteria are used, which recognize revenue when sales contracts are closed. All deposits are non-refundable (subject to a15-dayrescission period as required by law), except for non-delivery of the unit. In the event a contract does not close for reasons other than non-delivery, we are entitled to retain the deposit. However, the revenue and margin related to the previously recorded contract is reversed. Revenues and cost of sales associated with multi-family units where construction has been completed before contracts are signed and deposits made are recognized on the full accrual method of accounting as contracts are closed. Percentage-of-completion accounting was utilized at Artisan Park in the first quarter of 2006 and Artisan Park, WaterColor and WaterSound Beach in the first quarter of 2005.

Our townhomes are attached building units sold individually along with a parcel of land. Revenues and cost of sales for our townhomes are accounted for using the full accrual method. These units differ from multi-family and PRC units, in which buyers hold title to a unit or fractional share of a unit, respectively, within a building and an interest in the underlying land held in common with other building association members.

Profit is deferred on home site sales when required development is not complete at the time of the sale. Currently, we are deferring profit for home site sales at WaterSound West Beach and SummerCamp. The closing of the home site is recorded at the time of the sale, while a portion of revenue and gross profit on the sales at those communities is deferred based on required development not yet completed in relation to total required development costs.

WaterColor is situated on approximately 499 acres on the beaches of the Gulf of Mexico in south Walton County. We are building single-family and multi-family residences and selling developed home sites in WaterColor. The community is planned to include approximately 1,140 units, including a PRC with fractional ownership. From WaterColor’s inception through March 31, 2006, total contracts accepted or closed totaled 864 homes and home sites, including 11 PRC units. Each PRC unit represents 8 PRC interests.

WaterSound Beach, located approximately five miles east of WaterColor and situated on approximately 256 acres, includes over one mile of beachfront on the Gulf of Mexico. This community is currently entitled to include 511 units. From WaterSound Beach’s inception through March 31, 2006, contracts for 410 units were accepted or closed.

WaterSound West Beach, located over one half mile west of WaterSound Beach on the beach side of County Road 30A, is being designed as a high-end resort community with 199 single-family home sites on approximately 62 acres. From WaterSound West Beach’s inception through March 31, 2006, contracts for 11 units were accepted or closed.

Construction is proceeding at WaterSound, a resort community located approximately three miles from WaterSound Beach, less than two miles from the Gulf of Mexico and north of U.S. Highway 98 in Walton County.

Palmetto Trace is a primary home community in Panama City Beach planned for 481 units on 141 acres. As of March 31, 2006, there were 431 units sold or under contract. David Weekley Homes, LLP, a national homebuilder, is building out the last phase of Palmetto Trace.

Hawks Landing is a primary home community in Lynn Haven, in Bay County, Florida on approximately 88 acres. We plan to develop and sell 168 home sites at Hawks Landing to local and national home builders.

At WindMark Beach, construction continued on the next phase, presently planned for 1,552 units along more than 15,000 feet of beachfront near the town of Port St. Joe. Sales on this next phase are expected to begin in the second quarter of 2006. Construction on the realignment of a3.5-milesegment of U.S. 98 within WindMark Beach is scheduled for completion during the third quarter of 2006. Plans provide for a public beachfront trail system to be constructed on the existing road bed once the road has been relocated away from the beach. Five retail home sites and one beachfront home remain to be sold of the 110 units in the first80-acrephase, none of which have been offered for sale. From WindMark Beach’s inception through March 31, 2006, contracts for 104 home sites were accepted or closed.

SouthWood, situated on approximately 3,370 acres in southeast Tallahassee, has land use entitlements for up to 4,770 residential units and a town center with restaurants, retail shops, and offices. From SouthWood’s inception through March 31, 2006, contracts for 2,018 units were accepted or closed.

Present plans for SummerCamp call for a499-unitdevelopment on 762 acres located approximately 45 miles south of Tallahassee in Franklin County on the Gulf of Mexico. From SummerCamp’s inception through March 31, 2006, contracts for 67 units were accepted or closed.

Environmental permitting and predevelopment planning continue at RiverTown, which is planned for 4,500 units on 4,170 acres located in St. Johns County, south of Jacksonville, Florida, with more than 3.5 miles of frontage on the St. Johns River. Home site sales are currently scheduled to start in 2006 with the first home site closings expected during the fourth quarter of 2006.

St. Johns Golf & Country Club is a primary residential community located on approximately 820 acres in St. Johns County, Florida. The community is planned to include a total of approximately 799 housing units and an18-hole golf course. From its inception through March 31, 2006, contracts for 762 units were accepted or closed.

Victoria Park is situated on 1,859 acres in Deland between Daytona Beach and Orlando. Plans include approximately 4,200 residences built among parks, lakes and conservation areas. From Victoria Park’s inception through March 31, 2006, contracts for 1,029 units were accepted or closed.

Artisan Park, located in Celebration, near Orlando, is being developed through a joint venture in which we own 74%. Artisan Park is situated on approximately 175 acres which we acquired. Current plans include approximately 616 units. From Artisan Park’s inception through March 31, 2006, contracts for 516 units were accepted or closed.

The Company manages and owns 50% of the joint ventures developing Rivercrest and Paseos, two primary residential communities. Sales are substantially complete at Rivercrest, a1,382-unitprimary residential community located near Tampa, and Paseos, a325-unitprimary residential community situated on 175 acres in Jupiter.

Infrastructure construction has started on SevenShores, formerly known as Perico Island. Located in the City of Bradenton in Manatee County, SevenShores is entitled for 686 condominium units on 192 acres, with a club house, related amenities, and access to a marina being developed by us. Sales started in late April 2006 with closings expected to begin in 2007.

Real estate sales include sales of homes and home sites, as well as sales of land. Cost of real estate sales for homes and home sites includes direct costs (e.g., development and construction costs), selling costs and other indirect costs (e.g., construction overhead, capitalized interest, warranty and project administration costs).

The following table sets forth the components of our real estate sales and cost of real estate sales:

The overall decrease in real estate sales and cost of sales was primarily due to decreased home site sales and revenues and cost of sales associated with multi-family residences at our resort communities and units closed in Northeast Florida, partially offset by an increase in revenues and cost of sales associated with North and South Carolina and Northwest Florida primary communities.

The following table sets forth home and home site sales activity by individual developments, excluding Rivercrest and Paseos, two 50% owned affiliates accounted for using the equity method of accounting.