St. Joe Company - 10-K annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File No. 1-10466

The St. Joe Company

Registrant’s telephone number, including area code: (904) 301-4200

Securities Registered Pursuant to Section 12(b) of the Act:

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

     Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

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

     The aggregate market value of the registrant’s Common Stock held by non-affiliates based on the closing price on June 30, 2003 was approximately $1.52 billion.

     As of March 10, 2004, there were 101,170,081 shares of Common Stock, no par value, issued and 75,930,545 shares outstanding with 25,239,536 shares of treasury stock.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 18, 2004 (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.

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

     JOE is one of 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 850,000 acres, which is approximately 2.4% of the land area of the State of Florida. Our acreage includes hundreds of miles of frontage on the Gulf of Mexico, bays, rivers and waterways, with nearly 40 miles of Gulf of Mexico coastline, including 5 miles of beachfront. Approximately 387,000 acres of our land are within ten miles of the coast.

     We are engaged in community and resort development, commercial and industrial land sales, and commercial real estate services. We also have significant interests in timber. 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.

     Our four operating segments are:

     In order to optimize the value of our core real estate assets in Northwest Florida, our strategic plan calls for us to continue to reposition our timberland holdings for higher and better uses. 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 allow us the financial flexibility to pursue development opportunities.

Recent Developments

     In 2003, our business experienced the following developments:

     In February 2004:

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Community Development

     Our Community Development segment develops 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 capital, and significant Gulf of Mexico beach frontage and 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 who must purchase real estate at current market prices before beginning projects. We manage the conceptual design, planning and permitting process for each of our new communities. We then construct or contract for the construction of the infrastructure for the community. Developed homesites and finished housing units are then marketed and sold.

     In addition, we own all of the outstanding stock of Saussy Burbank, a homebuilder located in Charlotte, North Carolina. In 2003, Saussy Burbank closed sales of 555 homes it constructed in North and South Carolina.

     The following table describes the primary residential or resort communities we are currently planning and developing in Florida. The expected build-out period for these communities ranges from 2004 to 2017 and the total acreage encompassed by these communities is approximately 17,700 acres. Most of the communities are on lands we own. We expect some of the communities to be developed through ventures with unrelated third parties. In addition to the properties listed in the table, we are developing in Florida the communities of Paseos, located in Palm Beach County, and Rivercrest, located in Hillsborough County, through joint ventures. These communities encompass approximately 207 and 413 acres, respectively, with build-out expected in 2006 and 2008, respectively.

Residential or Resort Communities Under Development

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     The following is a more detailed description of some of the above communities:

     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 (“DRI”) permitting process as well as state and federal environmental permits. We are building homes and condominiums and selling developed homesites in WaterColor. At full build-out, the community is planned to include approximately 1,140 units, a beach club, tennis center, boat house, restaurant on an inland freshwater lake, and a 60-room inn and restaurant, commercial space and parks. Among the amenities now open are the beach club and several community pools, the boat house, a fitness center, the Fresh Daily Market, the tennis facility, the WaterColor Inn and Fish Out of Water restaurant. Infrastructure construction in phase three began in 2003 and is planned to include a community pool and a community center.

     WaterSound Beach is located approximately four miles east of WaterColor. Situated on approximately 256 acres, WaterSound Beach includes over one mile of beachfront on the Gulf of Mexico. This community is currently planned to include approximately 499 units. Eighty-one beachfront multi-family units were substantially completed in 2003.

     WaterSound is located east of WaterSound Beach with frontage on Lake Powell. This project is situated on approximately 1,440 acres. On October 7, 2003, the Walton County Board of Commissioners approved the Application for Planned Unit Development enabling development of 478 residential units along with 35,000 square feet of commercial space. Including the amount above, the plan for WaterSound calls for approximately 1,060 residential units, 470,000 square feet of commercial space and a golf course. The DRI process for that project commenced in early 2003 and is expected to continue through 2004.

     Camp Creek Golf Club is located 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 situated on approximately 181 acres in Bay County, Florida. Preliminary design for the first phase of East Lake Powell calls for approximately 200 residential units.

     WindMark Beach is situated on approximately 2,000 acres in Gulf County, Florida, and includes approximately 15,000 feet of beachfront that we own. Phase I of WindMark Beach, situated on approximately 80 acres, includes approximately 110 homesites, many of which are located on the beachfront. Future phases are planned to include approximately 1,550 units. Significant progress on the

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     SouthWood is situated on approximately 3,770 acres in southeast Tallahassee, Florida. 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. Certain regulatory approvals are required prior to commencing development on phases of construction that begin in the 2006-2007 timeframe. Two schools opened in SouthWood in the fall of 2001: Florida State Development Research School, a university laboratory school for grades K-12, and the Pope John Paul II Catholic Academy, a private parochial school for grades 9-12. In November 2002, the new Fred Couples designed 18 hole golf course opened for play.

     SummerCamp, in Franklin County, Florida, is situated on approximately 782 acres. Current plans include approximately 499 units, a beach club, a community dock and nature trails. Several regulatory steps remain before construction can commence.

     St. Johns Golf and Country Club is situated on approximately 820 acres acquired by the Company in St. Johns County, Florida, in 2001. 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.

     RiverTown is situated on approximately 4,200 acres located in St. Johns County, Florida, south of Jacksonville along the St. Johns River. A Comprehensive Plan Amendment and DRI were approved for RiverTown by the St. Johns County Board of Commissioners in February 2004; a number of regulatory steps remain before construction can commence.

     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 which is open for play.

     Artisan Park is located in Celebration, Florida near Orlando and is being developed through a joint venture in which we own 74%. The phase of the project we are developing is situated on approximately 160 acres which we acquired in 2002. Current plans include approximately 267 single-family units, 47 townhomes, and 302 condominiums as well as parks, trails, and a community clubhouse with a pool and educational and recreational programming.

     Several of our planned developments are in the midst of the entitlement process or are in the planning stage. We cannot assure you that:

     It is not feasible to estimate project development costs until entitlements have been obtained. Large-scale development projects can require significant infrastructure development costs and may raise environmental issues that require mitigation.

     We own approximately 26% of the outstanding limited partnership interests in Arvida/ JMB Partners, L.P. (“Arvida/ JMB”). The partnership developed the master-planned community known as Weston located in Broward County, Florida. The final home in this project was delivered in the first half of 2003. The winding-up of the affairs of the partnership is expected to take two or more years. Based on current expectations, we do not anticipate any material future income or losses from our investment in Arvida/JMB.

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Commercial Real Estate Development and Services

     Our Commercial Real Estate Development and Services segment develops and sells real estate for commercial purposes. We also own and manage office, industrial and retail properties throughout the southeastern United States. Through the Advantis business unit, we provide commercial real estate services, including brokerage, property management and construction management.

     Development & Sales. We focus on development in Northwest Florida because of our large land holdings along roadways and near or within business districts in the region. We also develop parcels within or near existing Community Development projects. For each new development, we direct the conceptual design, planning and permitting process and then contract for the construction of the horizontal infrastructure and any vertical building.

     We develop and sell properties focused on the following products:

     Many of our projects are mixed-use in nature due to the large size of the land parcels that we own. The following table shows our mixed-use projects in the Northwest Florida region.

Mixed-Use Projects

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     The table below summarizes the status of JOE commerce parks throughout Northwest Florida at December 31, 2003.

Commerce Parks

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     Investment/Development Portfolios. Our commercial development operations, combined with our tax deferral strategy of reinvesting qualifying asset sale proceeds into like-kind properties, have enabled us to create a portfolio of rental properties totaling 2.9 million square feet. As the table below shows, our portfolios of investment and development properties were 86% and 70% leased, respectively, based on net rentable square feet, as of December 31, 2003.

Commercial Rental Properties

     Other Assets. We have investments in certain other assets including land positions that are held for investment and investments in real estate ventures. It is generally our intent to sell these assets over time

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     Services. We provide commercial real estate services in the southeastern United States through Advantis. Advantis provides our clients with a complete array of services, including:

     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 or on a fixed-fee basis. The table below summarizes, by state and by type of property, the approximately 26.6 million rentable square feet of property we manage.

Properties Managed

Land Sales

     Our Land Sales segment markets parcels typically between one and 5,000 acres from a portion of our long-held timberlands in Northwest Florida. This land includes forests and meadowlands, some with frontage on rivers, lakes and bays. These parcels are being marketed as large secluded home sites as well as for plantations, ranches, farms, hunting and fishing preserves or for other recreational uses.

     In 2003, our Land Sales segment closed 166 transactions totaling 29,904 acres.

     We believe there is an opportunity to create additional value on more than 500,000 acres of our original timberland that is not included in our current development plans. This value creation results from market analysis, land use/zoning changes, and parceling of our land holdings. 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. The vast majority of the holdings marketed by our Land Sales segment will continue to be managed as timberland until sold.

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     We recently introduced a new product called RiverCamps. These are 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, 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 2003, contracts for all 23 home sites of the first release at RiverCamps on Crooked Creek closed at an average price of $150,000. Future releases of home sites for sale are expected in 2004.

     Planning and evaluation of a 7,200-acre parcel located on Sandy Creek in Bay County, Florida is underway. The HGTV 2003 Dream Home, a RiverCamp concept home, is located across the bay from this parcel.

     Additional RiverCamps locations are actively being reviewed in other parts of Northwest Florida.

     Work continued in 2003 on the launch of St. Joe Ranches, a new real estate product designed to transform what were once timberlands to higher and better uses. Ranches are for customers who want to own 10 to 150 acres, with controls on how the property around them is used. This product is initially being planned in rural settings in Leon, Wakulla and Gadsden Counties. These sites will benefit from proximity to Tallahassee and the agricultural and recreational nature of adjoining properties.

     Project improvements may generally include clearing, fencing, road stabilization and entry features. Each ranch product is to be sold with common restrictions designed to promote a sense of community as each owner finishes their property. Additional land management services will be available to ranch owners on a separate fee basis. Prices of individual tracts are expected to vary depending on the physical attributes of each site, including timber stands, topography and proximity to rivers, creeks and bays.

     Our Land Sales segment also sells land to conservation groups and governmental agencies. These sales commenced in 1999 and are expected to be completed in 2007. In 2003, we closed seven conservation land transactions, totaling 34,999 acres.

Forestry

     Our Forestry 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:

     Our principal forestry product is softwood pulpwood. We also grow and sell softwood and hardwood sawtimber. On December 31, 2003, our standing pine inventory totaled 23 million tons and our hardwood inventory totaled 6.75 million tons. Our timberlands are harvested by local independent contractors under agreements that are generally renewed annually. Our timberlands are located near key transportation links, including roads, waterways and railroads.

     Our strategy is to actively manage, with the best available silviculture practices, portions of our timberlands that produce adequate amounts of timber to meet our pulpwood supply agreement obligation with Smurfit-Stone Container Corporation, which expires June 30, 2012. We also harvest and sell

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     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 675,000 acres of our timberlands to private clubs and state agencies for hunting.

Risk Factors

     Our business faces numerous risks, including those set forth below. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations.

     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 nation’s 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 profitability 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.

     Over the last several years, investors have increasingly utilized real estate as an investment. Florida resort real estate has particularly benefited from this trend, creating demand, in addition to that described above, for our products. If this trend were to lessen, the demand for our products could decline, potentially impacting selling prices and/or absorption rates.

     The economic growth and health of the State of Florida, particularly Northwest Florida where the majority of our land is located, are important factors in sustaining demand for our products and services. As a result, any adverse change to the economic growth and health of Florida, particularly Northwest Florida, could materially adversely affect our financial results. The future economic growth in certain portions of Northwest Florida may be adversely affected if its infrastructure, such as roads, airports, medical facilities and schools, are not improved to meet increased demand. There can be no assurance that these improvements will occur.

     The 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 and sell properties or realize income from our projects.

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     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. A reduction in demand could materially adversely affect our profitability.

     Our business is affected by demographic and economic trends and the supply and rate of absorption of lot sales and new construction. As a result, our real estate operations are cyclical which may cause our quarterly revenues and operating results to fluctuate significantly from quarter to quarter and to differ from the expectations of public market analysts and investors. If this occurs, our stock’s trading price could also fluctuate significantly.

     Our real estate development activities entail risks that include:

     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 be sure 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.

     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, or DRI, application. Compliance with the Growth Management Act and the DRI process is usually lengthy and costly and can be expected to materially affect our 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 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 waste disposal. The local governments’

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     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 a project’s impact on the environment, infrastructure and government services, and requires the involvement of numerous state and local environmental, zoning and community development agencies. Local government approval of any DRI is subject to appeal to the Governor and Cabinet by the Florida Department of Community Affairs, and adverse decisions by the Governor or Cabinet are subject to judicial appeal. The DRI approval process is usually lengthy and costly, and conditions, standards or requirements may be imposed on a developer with respect to a particular project, which may materially increase the cost of the project. The DRI approval process is expected to have a material impact on our real estate development activities in the future.

     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.

     In addition, our current or past ownership, operation and leasing of real property, and our current or past transportation and other operations are subject to extensive and evolving federal, state and local environmental laws and other regulations. The provisions and enforcement of these environmental laws and regulations may become more stringent in the future. Violations of these laws and regulations can result in:

     In addition, some of these environmental laws impose strict liability, which means that we may be held liable for any environmental damages on our property regardless of fault.

     Some of our past and present real property, particularly properties used in connection with our previous transportation and papermill operations, 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

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     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, profitability, or financial condition.

     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:

     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.

     In preparing our consolidated financial statements, significant management judgment is required to estimate our income taxes. Our estimates are based on our interpretation of federal and state tax laws. We estimate our actual current tax due and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. The temporary differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. Adjustments may be required by a change in assessment of our deferred tax assets and liabilities, changes due to audit adjustments by federal and state tax authorities, and changes in tax laws. To the extent adjustments are required in any given period, we would include the adjustments in the tax provision in our statement of operations and/or balance sheet. These adjustments could materially impact our financial position and results of operation.

     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:

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     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 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.

     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 our senior managers could have a material adverse effect on our business. In August 2003, we entered into five-year employment agreements with Peter Rummell, our Chairman and Chief Executive Officer, and Kevin Twomey, our President, Chief Operating Officer and Chief Financial Officer. We do not have key-person life insurance on any of our senior managers.

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

     As of March 1, 2004, the Alfred I. duPont Testamentary Trust and its beneficiary, The Nemours Foundation, together owned 17,870,965 shares, or approximately 24%, of our outstanding common stock. In addition, three of our current directors are trustees of the Trust. Under the terms of our registration rights agreement with the Trust, the Trust is entitled to nominate two members of our board of directors so long as the Trust beneficially owns at least 20% of our common stock. If the Trust beneficially owns less than 20% but at least 5% of our outstanding shares of common stock, the Trust will be entitled to nominate one member of our board. Accordingly, the Trust will continue to be able to have significant influence over our corporate and management policies, including decisions relating to mergers, acquisitions, the sale of all or substantially all of our assets and other significant transactions. The interests of the Trust may not be aligned with our interests or the interests of other shareholders.

     We cannot predict the effect, if any, that future sales of shares by the Trust, or the availability of shares for future sale, will have on the market price of our common stock. Sales of substantial amounts of our common stock in the public market or the perception that such sales may occur could adversely affect the market price of our common stock.

Forward-looking Statements

     This Form 10-K includes forward-looking statements, which are statements that are not historical facts. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about

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     We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or risks. New information, future events or risks may cause the forward-looking events we discuss in this Form 10-K not to occur.

Employees

     We had approximately 1,478 full-time employees and 115 part-time employees at December 31, 2003. We consider our relations with our employees to be good. These employees work in the following segments:

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

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     We own our principal executive office located in Jacksonville, Florida. The majority of our other administrative offices are leased.

     We own approximately 850,000 acres, the majority of which are located in Northwest Florida, including substantial gulf, lake and riverfront acreage. Most of our raw land assets are managed as timberland until designated for development. For more information on our real estate assets, see Item 1. Business.

     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. Remediation was substantially completed in 2003. We expect the amounts held in escrow to be released to us during the second half of 2004.

     During the fourth quarter of 2000, management became aware of an investigation being conducted by the Florida Department of Environmental Protection (“DEP”) of our former paper mill site and some adjacent real property north of the paper mill site in Gulf County, Florida (the “Mill Site”). The real property on which our former paper mill is located was sold to the Smurfit-Stone Container Corporation (“Smurfit”) and we retained ownership of the adjacent real property. In January 2004, we entered into a joint venture with Smurfit; this joint venture now owns the site of our former paper mill.

     The DEP 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 sites which are to be evaluated to determine whether there is a potential presence of actionable contaminants.

     Based on its assessment of data obtained from voluntary testing performed by us and Smurfit, the DEP submitted a proposed Consent Order that we and Smurfit have executed. It obligates us to conduct further assessment of that portion of the Mill Site owned by us at that time and, if necessary, to rehabilitate that portion of the Mill Site. Smurfit has a corresponding obligation with respect to its portion of the Mill Site.

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     Through incorporation of the data and findings which resulted from our voluntary testing, the DEP 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 DEP.

     On November 5, 2002, the Mill Site was designated 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 entered into a Brownfield Site Rehabilitation Agreement for the Mill Site that obligates us to conduct further assessment of our portion of the Mill Site 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, the 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.

     None.

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PART II

     We had approximately 42,000 beneficial owners of our common stock as of March 10, 2004. 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 prices for our common stock as reported on the NYSE Composite Transactions Tape for the periods indicated is set forth below:

     On March 10, 2004, the closing price of our common stock on the NYSE was $40.40.

Dividends

     In September 2003, we initiated the payment of quarterly dividends to holders of our common stock at the rate of $.12 per share. We paid an aggregate of $.32 per share in dividends in 2003. In 2002 and 2001, we paid annual cash dividends of $0.08 per share.

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     The selected consolidated financial data set forth below are qualified in their entirety by and should be read in conjunction with the consolidated financial statements and the related notes included elsewhere herein. The statement of operations data with respect to the years ended December 31, 2003, 2002, and 2001 and the balance sheet data as of December 31, 2003 and 2002 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, 2000 and 1999 and the balance sheet data as of December 31, 2001, 2000, and 1999 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.

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Overview

     The St. Joe Company is one of Florida’s largest real estate operating companies. We have one of the largest inventories of private land suitable for development in the State of Florida, with very low cost basis. The majority of our land is located in Northwest Florida. In order to optimize the value of our core real estate assets in Northwest Florida, our strategic plan calls for us to reposition our 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 development and subsequent sale of parcels, home sites, and homes, or through the direct sale of unimproved land. In addition, we reinvest qualifying asset sales proceeds into like-kind properties under our tax deferral strategy which has enabled us to create a significant portfolio of commercial rental properties. We also provide commercial real estate services, including brokerage, property management and construction management.

     We have four operating segments: community development; commercial real estate development and services; land sales; and forestry.

     Our community development segment generates revenues from:

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     Our commercial real estate development and services 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. Considerable economic and political uncertainties exist that could have adverse effects on consumer buying behavior, construction costs, availability of labor and materials and other factors affecting us and the real estate industry in general. Additionally, increases in interest rates could reduce the demand for homes we build, particularly primary housing, commercial properties we develop or sell, and lots we develop. However, we believe our secondary resort housing markets are less sensitive to changes in interest rates. We have the ability to mitigate these risks by building to contract as well as building in phases. Management periodically conducts market research in the early stages of a project’s development to ensure our product meets expected customer demand. We also continuously and actively monitor local competitors’ product offerings to evaluate the competitive position of our products. Real estate market conditions in our regions of development, particularly for residential and resort property in Northwest Florida, have been exceptionally strong. These current market conditions place us in an unusually favorable position which may not continue in the future. However, we believe that long-term prospects of job growth, coupled with strong in-migration population expansion in Florida, indicate that demand levels may remain favorable over at least the next two to five years.

     Our commercial real estate development and services segment continues to build on strong market interest in Northwest Florida’s retail, office, multi-family and other mixed-use products caused by historical constraints on supply in the area as well as high interest by developers. Although the timing of transactions in this business is hard to predict, we expect 2004 results to be the same as or better than 2003 results.

     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.

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     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 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 our more significant judgments and estimates used in the preparation of our consolidated financial statements:

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

     Real estate inventory costs include land and common development costs (such as roads, sewers, and amenities), home construction costs, property taxes, capitalized interest, and certain indirect costs. A portion of real estate inventory and estimates for costs to complete are allocated to each unit based on the relative sales value of each unit as compared to the estimated sales value of the total project. These estimates are reevaluated at least annually, with any adjustments being allocated prospectively to the remaining units available for sale. The accounting estimate related to inventory valuation is susceptible to change due to the use of assumptions about future sales proceeds and related real estate expenditures. Management’s assumptions about future housing and home site sales prices, sales volume and sales velocity require significant judgment because the real estate market is cyclical and highly sensitive to changes in economic conditions. In addition, actual results could differ from management’s estimates due to changes in anticipated development, construction and overhead costs. Although we have not made significant adjustments affecting real estate gross profit margins in the past, there can be no assurances that estimates used to generate future real estate gross profit margins will not differ from our current estimates.

     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. This review involves a number of assumptions and estimates used in determining whether impairment exists, including estimation of undiscounted cash flows. Depending on the asset, we use varying methods to determine fair value, such as (i) discounting of expected future cash flows, (ii) determining resale values by market, or (iii) applying a capitalization rate to net operating income using prevailing rates in a given market. These methods of determining fair value can fluctuate up

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     Goodwill is carried at the lower of cost or fair value and is tested for impairment at least annually, or whenever events or changes in circumstances indicate such an evaluation is warranted, by comparing the carrying amount of the net assets of each reporting unit with goodwill to the fair value of the reporting unit taken as a whole. The impairment review involves a number of assumptions and estimates including estimating discounted future cash flows, net operating income, future economic conditions, fair value of assets held and discount rates. If this comparison indicates that the goodwill of a particular reporting unit is impaired, the 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.

     Intangibles. We allocate the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values, using customary estimates of fair value, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. These fair values can fluctuate up or down significantly as a result of a number of factors and estimates, including changes in the general economy of our markets, demand for real estate, and fair market values assigned to leases as well as fair value assigned to customer relationships.

     Pension Plan. The Company sponsors a defined benefit pension plan covering a majority of our employees. Currently, our pension plan is over-funded and contributes income to the Company. The accounting for pension benefits is determined by standardized accounting and actuarial methods using numerous estimates, including discount rates, expected long-term investment returns on plan assets, employee turnover, mortality and retirement ages, and future salary increases. Changes in these key assumptions can have a significant impact on the income contributed by the pension plan. We engage the services of an independent actuary and investment consultant to assist us in determining these assumptions and in the calculation of pension income. For example, in 2003, a 1% increase in the assumed long-term rate of return on pension assets would have resulted in a $2.2 million increase in pre-tax income ($1.4 million net of tax). A 1% decrease in the assumed long-term rate of return would have caused an equivalent decrease in income. A 1% increase in the assumed discount rate on pension obligations would have resulted in a $0.4 million decrease in pre-tax income ($0.3 million net of tax). A 1% decrease in the assumed discount rate would have resulted in a $0.6 million increase in pre-tax income ($0.4 million net of tax).

     Income Taxes. In preparing our consolidated financial statements, significant management judgment is required to estimate our income taxes. Our estimates are based on our interpretation of federal and state tax laws. We estimate our actual current tax due and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. The temporary differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. 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 in 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

     Net income for 2003 was $75.9 million, or $0.98 per diluted share, compared with $174.4 million, or $2.14 per diluted share, in 2002 and $70.2 million, or $0.83 per diluted share, in 2001. The results for 2003 included a non-cash asset impairment charge, net of tax, relating to Advantis, our commercial real estate services unit, of $8.8 million, or $0.11 per diluted share. The results for 2002 included a net gain on the sale of Arvida Realty Services (“ARS”), our former residential real estate services segment, of $20.7 million, or $0.25 per diluted share, and a gain on the forward sale of securities of $86.4 million, or

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     We report revenues from our four operating segments: community development, commercial real estate development and services, land sales, and forestry. Real estate sales are generated from sales of housing units and developed home sites in our community development segment, developed and undeveloped land and in-service buildings in our commercial real estate development and services segment, parcels of undeveloped land and developed rural sites in our land sales segment and occasionally sales of bulk land from our forestry segment. Realty revenues, consisting of property and asset management fees, construction management fees, and lease and sales commissions, are generated from the commercial real estate development and services segment. Timber sales are generated from the forestry segment. 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 development and services segment. Other revenues are primarily club operations and management fees from the community development segment and development fees from the commercial real estate development and services segment.

     Revenues and Expenses.The following table sets forth a comparison of the revenues and expenses for the three years ended December 31, 2003.

     The increases in revenues from real estate sales and costs of real estate sales were in each case primarily due to increased sales in the community development segment, partially offset by decreases in the commercial real estate development and services segment, which is a function of the sale of several large in-service buildings in 2002 and 2001 with no such sales in 2003. The increase in realty revenues was due to increases in brokerage and construction revenues, which were partially offset by a small decrease in property management revenues. The increase in cost of realty revenues was due to increases in the costs of brokerage, property management, and construction revenues. The increases in rental revenues and costs of rental revenues were in each case primarily due to an increase in the amount of investment in operating property in the commercial real estate development and services segment. Other revenues and costs of other revenues increased primarily due to increases in the community development segment’s club operations. Other operating expenses increased from 2002 to 2003 primarily due to increases in the community development segment and the commercial real estate development and services segment. Other

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     Corporate Expense.Corporate expense, which represents corporate general and administrative expenses, increased $7.0 million, or 25%, to $34.5 million in 2003, from $27.5 million in 2002. The increase was primarily due to a $4.3 million decrease in the income contribution from the St. Joe Company Pension Plan (the “Pension Plan”) and an increase in employee benefit costs of $2.3 million. Corporate expense increased $8.7 million, or 46%, in 2002 from $18.8 million in 2001. This increase was primarily due to a $3.6 million decrease in the income contribution from the Pension Plan, an increase in employee benefit costs of $3.6 million, and $1.5 million in costs associated with the secondary offering of our common stock completed by the Trust in 2002. For the year 2001, the long-term actuarial expected return for the assets of the Pension Plan was 9.2%. Based on the performance of our mix of pension assets over the previous three years, we lowered the long-term expected return to 8.5%. Management does not expect the over-funded position of the Pension Plan to continue to decline. We do not expect to have to fund the Pension Plan in the foreseeable future, unless market conditions deteriorate significantly.

     Depreciation and Amortization.Depreciation and amortization increased $8.7 million, or 38%, to $31.5 million in 2003, compared to $22.8 million in 2002. The increase was due to a $6.6 million increase in depreciation resulting primarily from additional investments in commercial and residential operating property and property, plant and equipment and a $2.1 million increase in amortization primarily resulting from an increase in intangible assets. Depreciation and amortization increased $1.5 million, or 7%, to $22.8 million in 2002, compared to $21.3 million in 2001. The increase was due to a $6.6 million increase in depreciation 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 Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets(“FAS 142”), which resulted in the cessation of goodwill amortization as of January 1, 2002. Goodwill amortization was $4.2 million in 2001, excluding $5.3 million included in discontinued operations.

     Impairment Losses.During 2003, we recorded an impairment loss to reduce the carrying amount of Advantis’ goodwill from $28.9 million to $14.8 million, pursuant to FAS 142. This resulted in an impairment loss of $14.1 million pre-tax, $8.8 million net of tax. See note 10 of Notes to Consolidated Financial Statements. No impairment losses were recorded in 2002. Impairment losses of $0.3 million and $0.5 million were recorded in 2003 and 2001, respectively, related to commercial properties.

     Other Income (Expense).Other income (expense) was $(8.7) million in 2003, $120.6 million in 2002 and $(5.8) million in 2001. Other income (expense) was made up of investment income, interest expense, gains on sales and dispositions of assets and other income and, in 2002 and 2001, gains and losses on the valuation and settlement of forward sale contracts.

     In October 1999, we entered into a forward sale transaction with a major financial institution that, in effect, provided for the monetization of our long-held portfolio of equity investments which, at December 31, 1998, had a cost of approximately $1.7 million and a fair value of approximately $144 million. Under the forward sale agreement, we received approximately $111 million in cash and were required to settle the forward transaction by October 15, 2002, by delivering either the securities or the equivalent value of the securities in cash to the financial institution. The agreement permitted us to retain that amount of the securities representing appreciation up to 20% of their value on October 15, 1999 should the value of the securities increase. The securities were recorded at fair value on the balance sheet and the related unrealized gain, net of tax, was recorded in accumulated other comprehensive income. At the time of entering into the forward sale contracts, we recorded a liability in long-term debt for approximately $111.1 million, subject to increase as interest expense was imputed at an annual rate of 7.9%. The liability was also subject to increase by the amount, if any, that the fair value of the securities increased beyond the retained 20%.

     On February 26, 2002 and October 15, 2002, in two separate transactions, we settled our forward sale contracts by delivering equity securities to the financial institution for an aggregate pre-tax gain of $132.9 million. The liability related to the contracts settled in February was $97.0 million at the time of

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     Investment income decreased to $0.9 million in 2003 from $2.9 million in 2002, primarily due to lower dividend income resulting from the disposition of securities. Interest expense decreased $4.5 million to $12.5 million in 2003 compared to $17.0 million in 2002, due to the settlement of the debt related to the forward sale contracts, which was partially offset by interest expense attributable to medium term notes we issued in 2002, and interest attributable to debt secured by commercial buildings. Other income was $2.9 million in 2003 as compared to $1.8 million in 2002. Other income included a loss on the valuation of forward sale contracts of $(0.9) million in 2002. 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 forward sale contracts, which was partially offset by interest expense attributable to medium term notes we 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 forward sale contracts of $(0.9) million in 2002, compared to a gain on the valuation of forward sale contracts of $4.0 million in 2001.

     Equity in (Loss) Income of Unconsolidated Affiliates. We have investments in affiliates that are accounted for by the equity method of accounting. Equity in (loss) income of unconsolidated affiliates totaled $(2.2) million in 2003, $10.9 million in 2002 and $24.1 million in 2001.

     The community development segment’s unconsolidated affiliates include our 26% limited partnership interest in Arvida/JMB Partners, L.P. (“Arvida/JMB”). Arvida/JMB completed its operations in 2003 and is currently winding up its affairs. As a result, the contribution to pre-tax income from Arvida/JMB substantially ended at the end of 2002. Arvida/JMB has finalized its current estimates of future costs and future cash distributions associated with the completion of operations, and, as a result, we adjusted our investment in the partnership by a $3.5 million pre-tax charge in 2003. Arvida/JMB’s contribution to equity in (loss) income of unconsolidated affiliates was $13.2 million in 2002 and $24.0 million in 2001. Based on current expectations, we do not anticipate any material future income or losses from our investment in Arvida/JMB.

     The commercial real estate development and services segment recorded equity in income (loss) of unconsolidated affiliates of $1.9 million in 2003, $(1.0) million in 2002, and $0.2 million in 2001. Included was $(0.3) million in 2003, $(0.3) million in 2002, and $0.9 million in 2001 related to our 50% interest in Codina Group, Inc. (“Codina”), a commercial services company headquartered in Coral Gables, Florida. Although 2003 and 2002 results were negative, we expect Codina to return to profitability in the near term. In 2003, we sold our 45% partnership interest in the 355 Alhambra building, recognizing a gain of $1.0 million which is included in income of unconsolidated affiliates.

     Income Tax Expense.Income tax expense on continuing operations totaled $42.6 million in 2003, $89.6 million for 2002 and $35.4 million for 2001. Our effective tax rate decreased to 35% in 2003 compared to 39% in 2002 and 37% in 2001 because the deferred tax liability for state taxes was reduced to reflect the effect of a recently implemented state tax strategy.

     Discontinued Operations.Discontinued operations included the gain on sale and the operations of ARS and the gain on sale and operations of two commercial office buildings disposed of in 2002. These entities’ results are not included in income from continuing operations.

     As a result of rapid consolidation in the real estate services business, we had the opportunity to sell ARS, our wholly-owned subsidiary, at an attractive value. We completed the sale of ARS on April 17, 2002. The gain recorded on the sale was $33.7 million before taxes, or $20.7 million net of taxes. Prior to its sale, ARS generated revenues of $76.2 million, operating expenses of $71.7 million and net income of $2.3 million during 2002. During 2001, ARS generated revenues of $277.3 million, operating expenses of $252.9 million, and net income of $11.0 million.

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     Community Development.The table below sets forth the results of operations of our community development segment for the three years ended December 31, 2003.

     Our community development division develops large-scale, mixed-use communities primarily on land we have owned for a long period of time. We own large tracts of land in Northwest Florida, including significant Gulf of Mexico beach frontage and waterfront properties, and in west Florida near Tallahassee, the state capital. Our residential homebuilding in North Carolina and South Carolina is conducted through Saussy Burbank, Inc. (“Saussy Burbank”), a wholly owned subsidiary.

     Real estate sales include sales of homes and home sites and sales of land. Cost of sales includes direct costs, selling costs and other indirect costs. In 2003, the components of cost of real estate sales were $276.4 million in direct costs, $23.6 million in selling costs, and $31.3 million in other indirect costs. In 2002, the components of cost of real estate sales were $220.5 million in direct costs, $17.8 million in selling costs, and $22.5 million in other indirect costs.

     Sales of homes in 2003 totaled $348.4 million, with related cost of sales of $287.8 million, resulting in a gross profit percentage of 17%, compared to sales in 2002 of $271.3 million, with cost of sales of $226.6 million, resulting in a gross profit percentage of 17%. Cost of real estate sales for homes in 2003 consisted of $242.1 million in direct costs, $17.8 million in selling costs, and $27.9 million in indirect costs. Cost of real estate sales for homes in 2002 consisted of $193.8 million in direct costs, $12.8 million in selling costs, and $20.0 million in indirect costs. Sales of home sites in 2003 totaled $115.7 million, with related cost of sales of $43.5 million, resulting in a gross profit percentage of 62%, compared to sales in 2002 of $99.3 million, with related cost of sales of $34.2 million, resulting in a gross profit percentage of 66%. Cost of real estate sales for home sites in 2003 consisted of $34.3 million in direct costs, $5.8 million in selling costs, and $3.4 million in indirect costs. Cost of real estate sales for home sites in 2002 consisted of $26.7 million in direct costs, $5.0 million in selling costs, and $2.5 million in indirect costs. The increase in real estate sales was due to an increase in the number of units sold and higher selling prices. Cost of

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