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

 

Form 10-Q

 

 

 

Commission file number 1-10466

 

The St. Joe Company

(Exact name of registrant as specified in its charter)

 

 

 

 

(904) 301-4200

(Registrant’s telephone number, including area code)

 

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES o     NO o

 

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

 

(Do not check if a smaller reporting company)

 

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

 

As of October 27, 2009, there were 122,651,725 shares of common stock, no par value, issued and 92,376,009 outstanding, with 30,275,716 shares of treasury stock.

 

 

THE ST. JOE COMPANY
INDEX

 

 

 

THE ST. JOE COMPANY

 

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

 

See notes to consolidated financial statements.

THE ST. JOE COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands except per share amounts)

 

 

See notes to consolidated financial statements.

THE ST. JOE COMPANY

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)
(Dollars in thousands)

 

 

See notes to consolidated financial statements.

THE ST. JOE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(Dollars in thousands)

 

 

See notes to consolidated financial statements.

THE ST. JOE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise stated)
(Unaudited)

 

 

Description of Business

 

The St. Joe Company (the “Company”) is a real estate development company primarily engaged in residential, commercial and industrial development and rural land sales. The Company also has significant interests in timber. Most of its real estate and timber operations are within the State of Florida.

 

Basis of Presentation

 

The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, certain information and footnotes required by U.S. generally accepted accounting principles for complete financial statements are not included herein. The consolidated interim financial statements include the accounts of the Company and all of its majority-owned and controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The December 31, 2008 balance sheet amounts have been derived from the Company’s December 31, 2008 audited financial statements.

 

The statements reflect all normal recurring adjustments that, in the opinion of management, are necessary for fair presentation of the information contained herein. The consolidated interim statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The Company adheres to the same accounting policies in preparation of its interim financial statements. As permitted under generally accepted accounting principles, interim accounting for certain expenses, including income taxes, are based on full year assumptions. For interim financial reporting purposes, income taxes are recorded based upon estimated annual effective income tax rates.

 

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

 

Adoption of New Accounting Standards

 

In September 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Update 2009-01, Topic 105-Generally Accepted Accounting Principles Amendments based on Statement of Financial Accounting Standards (“SFAS”) No. 168-The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“Topic 105”). Topic 105 establishes the FASB Accounting Standards Codification (“Codification”) as the source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. Topic 105 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification superseded all existing non-SEC accounting and reporting standards. All other nongrandfathered, non-SEC accounting literature not included in the Codification became nonauthoritative. Following Topic 105, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue FASB Accounting Standards Updates (“ASU”), which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the bases for conclusions on the change(s) in the Codification. The U.S. GAAP hierarchy will be modified to include only two levels; authoritative and nonauthoritative. In the FASB’s view, the Codification will not change U.S. GAAP. The adoption of Topic 105 did not have a material impact on the Company’s financial position or results of operations. It does, however, change the references to specific U.S. GAAP contained within the consolidated financial statements, notes thereto and information contained in the Company’s filings with the SEC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

New Accounting Standards

 

In August 2009, the FASB issued ASU No. 2009-05 which provides amendments to Topic 820 — Fair Value Measurements and Disclosures (“Topic 820”) for the fair value measurement of liabilities. Topic 820 reiterates that the definition of fair value for a liability is the price that would be paid to transfer it in an orderly transaction between market participants at the measurement date. It also reiterates that a company must reflect its own nonperformance risk, including its own credit risk, in fair-value measurements of liabilities. In the absence of a quoted price in an active market for an identical liability at the measurement date, which generally would not be available because liabilities are not exchange-traded as liabilities, companies may apply approaches that use the quoted price of an investment in the identical liability or similar liabilities traded as assets or other valuation techniques consistent with the fair-value measurement principles in Topic 820. Topic 820 permits fair value measurements of liabilities that are based on the price that the Company would pay to transfer the liability to a new obligor at the measurement date, which is consistent with existing guidance. In addition, a company is permitted to measure the fair value of liabilities using an estimate of the price it would receive to enter into the liability at that date. Such measurements could be achieved using a valuation technique that is consistent with an income-approach valuation technique (e.g., a discounted-cash-flow technique) or a market approach (e.g., a recent transaction involving the issuance of a similar liability, adjusted for differences between that transaction and the liability being measured). Topic 820 is effective for interim and annual periods beginning after August 27, 2009, and applies to all fair-value measurements of liabilities required by generally accepted accounting principles. The Company is in the process of evaluating the effect, if any, the adoption of ASU No. 2009-05 will have on its financial position or results of operations.

 

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets — An Amendment of SFAS 140 (“SFAS 166”). SFAS 166 amends FASB Accounting Standards Codification (“ASC”) Topic 860-Transfers and Servicing (“Topic 860”). SFAS 166 removes the concept of a qualifying special-purpose entity (“QSPE”) from Topic 860 and removes the exception from applying Topic 810 - Consolidation (“Topic 810”) to QSPEs. SFAS 166 clarifies that the objective of Topic 860 is to determine whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. That determination must consider the transferor’s continuing involvement in the transferred financial asset, including all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer. SFAS 166 modifies the financial-components approach used in Topic 860 and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. SFAS 166 defines the term participating interest to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale. If the transfer does not meet those conditions, a transferor should account for the transfer as a sale only if it transfers an entire financial asset or a group of entire financial assets and surrenders control over the entire transferred asset(s) in accordance with the conditions in Topic 860, as amended by this SFAS 166. SFAS 166 requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. Enhanced disclosures are required to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company is in the process of evaluating the effect, if any, the adoption of SFAS 166 will have on its financial position or results of operations.

 

In June 2009, the FASB issued SFAS No. 167, Amendment to Interpretation 46(R) (“SFAS 167”). SFAS 167 amends Topic 810 to replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. SFAS 167 requires an additional reconsideration event when determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment at

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. It also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS 167 amends Topic 810 to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The enhanced disclosures are required for any enterprise that holds a variable interest in a variable interest entity. SFAS 167 is effective for fiscal years beginning after November 15, 2009. The Company holds a retained interest in bankruptcy remote QSPEs established in accordance with Topic 860. The financial position and results of such QSPEs currently are not consolidated in the Company’s financial statements, but may be required to be consolidated in accordance with the provisions of SFAS 167. The Company is in the process of evaluating the effect, if any, the adoption of SFAS 167 will have on its financial position or results of operations. In the event that consolidation is required, the Company’s assets and corresponding liabilities would increase by approximately $174 million and $165 million, respectively, along with an offsetting increase to retained earnings of approximately $9 million, pretax.

 

SFAS 166 and 167 were issued prior to the adoption of Topic 105 and accordingly are pre-codification references.

 

In December 2008, the FASB issued FSP SFAS No. 132(R)-1, Employer’s Disclosures about Postretirement Benefit Plan Assets. The disclosure requirements of this FSP are included in ASC Topic 715 — Compensation-Retirement Benefits (“Topic 715”) as pending transition guidance that require the disclosure of more information about investment allocation decisions, major categories of plan assets, including concentrations of risk and fair value measurements, and the fair value techniques and inputs used to measure plan assets. The disclosures about plan assets required by Topic 715 must be provided for fiscal years ending after December 15, 2009. The Company does not believe the adoption of Topic 715 will have a material impact on its financial position or results of operations.

 

 

Stock-Based Compensation

 

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is typically recognized as expense on a straight-line basis over the vesting period.

 

Service-Based Grants

 

A summary of service-based non-vested restricted share activity as of September 30, 2009 and changes during the nine month period are presented below:

 

 

As of September 30, 2009, there was $5.9 million of unrecognized compensation cost, net of estimated forfeitures, related to non-vested stock-based compensation arrangements. This cost includes $0.3 million related to stock option grants and $5.6 million of non-vested restricted stock which will be recognized over a weighted average period of three years.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Market Condition Grants

 

In February 2009 and 2008, the Company granted to select executives and other key employees non-vested restricted stock whose vesting is based upon the achievement of certain market conditions defined as the Company’s total shareholder return as compared to the total shareholder return of certain peer groups during the performance period.

 

The Company currently uses a Monte Carlo simulation pricing model to determine the fair value of its market condition awards. Such determination is affected by the stock price as well as assumptions regarding a number of other variables. These variables include expected stock price volatility over the term of the awards, the relative performance of the Company’s stock price and shareholder returns to those companies in its peer groups and a risk-free interest rate assumption. Compensation cost is recognized regardless of the achievement of the market condition, provided the requisite vesting period is met.

 

A summary of the activity for the Company’s market condition grants during the nine months ended September 30, 2009 is presented below:

 

 

As of September 30, 2009, there was $5.8 million of unrecognized compensation cost, net of estimated forfeitures, related to market condition based non-vested restricted shares which will be recognized over a weighted average period of three years.

 

Total stock-based compensation recognized in the consolidated statements of operations is as follows:

 

 

 

Earnings (Loss) Per Share

 

Basic earnings (loss) per share is calculated by dividing net income (loss) by the average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period, including all potentially dilutive shares issuable under outstanding stock options and service-based non-vested restricted stock. Stock options and non-vested restricted stock are not considered in any diluted earnings per share calculation when the Company has a loss from continuing operations. Non-vested restricted shares subject to vesting based on the achievement of market conditions are treated as contingently issuable shares and are considered outstanding only upon the satisfaction of the market conditions.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table presents a reconciliation of average shares outstanding:

 

 

Approximately 0.2 million and 0.4 million shares were excluded from the computation of diluted earnings (loss) per share during the three months ended September 30, 2009 and 2008, respectively, and 0.2 million and 0.4 million during the nine months ended September 30, 2009 and 2008, respectively, as the effect would have been antidilutive.

 

 

Notes receivable consisted of the following:

 

 

The Company evaluates the carrying value of notes receivable at each reporting date. Notes receivable balances are adjusted to net realizable value based upon a review of entity specific facts or when terms are modified. During October 2009, the Company settled its notes receivable with Saussy Burbank for less than book value and recorded a charge of $9.0 million as of September 30, 2009. As part of the settlement, the Company agreed to take back previously collateralized inventory consisting of lots and homes which were valued at current estimated sales prices, less costs to sell. For the second quarter of 2009, the Company recorded a charge of $7.4 million related to the write-off of the outstanding Advantis note receivable balance. In addition, the Company received a deed in lieu of foreclosure related to a $4.0 million builder note receivable during the second quarter of 2009 and renegotiated terms related to certain other builder notes receivable during the second and third quarters of 2009 and 2008. These events resulted in additional impairment charges of $0.1 million and $1.7 million during the three and nine month periods ending September 30, 2009, respectively, and $0.8 million during the second quarter of 2008.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

Real estate by segment includes the following:

 

 

Included in operating property are Company-owned amenities related to residential real estate, the Company’s timberlands and land and buildings developed by the Company and used for commercial rental purposes. Development property consists of residential real estate land and inventory currently under development to be sold. Investment property primarily includes the Company’s land held for future use.

 

 

The Company follows the provisions of Topic 820 for its financial and non-financial assets and liabilities. Topic 820, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Topic 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, Topic 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1. Observable inputs such as quoted prices in active markets;

 

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Level 3. Unobservable inputs in which there is little or no market data, such as internally-developed valuation models which require the reporting entity to develop its own assumptions.

 

Assets measured at fair value on a recurring basis are as follows:

 

 

The Company has recorded a retained interest with respect to the monetization of certain installment notes through the use of QSPEs, which is recorded in other assets. The retained interest is an estimate based on the present value of cash flows to be received over the life of the installment notes. The Company’s continuing involvement with the QSPEs is in the form of receipts of net interest payments, which are recorded as interest income and approximated $0.3 million during the nine months ended September 30, 2009. In addition, the Company will receive the payment of the remaining principal on the installment notes at the end of their 15-year maturity period. The Company recorded losses of $6.6 million and $8.5 million during the three and nine months ended September 30, 2008, respectively, related to the monetization of $108.4 million of notes receivable through a QSPE.

 

In accordance with ASC Topic 325, Investments — Other, Subtopic 40 — Beneficial Interests in Securitized Financial Assets, the Company recognizes interest income over the life of the retained interest using the effective yield method. This income adjustment is being recorded as an offset to loss on monetization of notes over the life of the installment notes. In addition, fair value may be adjusted at each reporting date when, based on management’s assessment of current information and events, there is a favorable or adverse change in estimated cash flows from cash flows previously projected. The Company did not record any impairment adjustments as a result of changes in previously projected cash flows during the third quarter 2009.

 

The following is a reconciliation of the Company’s retained interest in QSPEs:

 

 

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Homes and homesites substantially completed and ready for sale are measured at lower of carrying value or fair value less costs to sell. The fair value of homes and homesites is determined based upon final sales prices of inventory sold during the period (level 2 inputs). For inventory held for sale, estimates of selling prices based on current market data are utilized (level 3 inputs). For projects under development, an estimate of future cash flows on an undiscounted basis is performed using estimated future expenditures necessary to maintain and complete the existing project and using management’s best estimates about future sales prices and holding periods (level 3 inputs).

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company’s assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded valuation adjustments and write-offs during the current period. The assets measured at fair value on a nonrecurring basis are as follows:

 

 

In accordance with the Impairment or Disposal of Long-Lived Assets Subsections of ASC Topic 360, long-lived assets sold or held for sale with a carrying amount of $4.8 million were written down to their fair value of $3.9 million, resulting in a loss of $0.9 million, which was included in impairment losses for the three months ended September 30, 2009, compared to impairment charges of $1.3 million during the three months ended September 30, 2008. Impairment charges on investment in real estate were $13.3 million and $3.8 million during the nine months ended September 30, 2009 and 2008, respectively.

 

 

In August 2009, the Company implemented an additional restructuring plan designed to further align employee headcount with the Company’s projected workload. The charges associated with the Company’s 2006-2009 restructuring and reorganization programs by segment are as follows:

 

 

 

 

Termination benefits are comprised of severance-related payments for all employees terminated in connection with the restructuring.

 

At September 30, 2009, the accrued liability associated with the restructuring consisted of the following:

 

 

 

On February 27, 2009, the Company sold its remaining inventory and equipment assets related to its Sunshine State Cypress mill and mulch plant for a sale price of $1.6 million. The sale agreement also included a long-term lease of a building facility. The Company received proceeds of $1.3 million and a note receivable of $0.3 million in

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

connection with the sale. Assets and liabilities classified as “held for sale” at December 31, 2008, which were not subsequently sold have been reclassified as held for use in the consolidated balance sheet at September 30, 2009 (and previously at June 30, 2009). In addition, the operating results associated with assets not sold have been recorded within continuing operations since the first quarter of 2009. These reclassifications did not have a material impact on the Company’s financial position or operating results.

 

On April 30, 2007, the Company entered into a Purchase and Sale Agreement for the sale of the Company’s office building portfolio, consisting of 17 buildings. During 2007, the Company recorded a deferred gain of $3.3 million on a sale-leaseback arrangement with three of the properties. The amortization of gain associated with these three properties has been included in continuing operations due to the Company’s continuing involvement as a lessee. The Company expects to incur continuing cash outflows related to these three properties over the next three years.

 

Discontinued operations presented on the consolidated statements of operations for the three and nine months ended September 30 included the following:

 

 

 

Debt consists of the following:

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The aggregate scheduled maturities of debt subsequent to September 30, 2009 are as follows (a):

 

 

 

 

On September 19, 2008, the Company entered into a $100 million revolving Credit Agreement (the “Credit Agreement”) with Branch Banking and Trust Company (“BB&T”). On October 15, 2009, the Company amended the Credit Agreement to extend the term by one year to September 19, 2012, and lower its required minimum tangible net worth amount to $800 million. In addition, the amendment modified pricing terms to reflect current market pricing. The interest on borrowings under the Credit Agreement will be based on either LIBOR rates or certain base rates established by the Credit Agreement. The applicable interest rate for LIBOR rate loans will now be based on the higher of (a) an adjusted LIBOR rate plus the applicable interest margin (ranging from 2.00% to 2.75%), determined based on the ratio of the Company’s total indebtedness to total asset value, or (b) 4.00%. The applicable interest rate for base rate loans will now be based on the higher of (a) the prime rate or (b) the federal funds rate plus 0.5%, plus the applicable interest margin (ranging from 1.00% to 1.75%). The amendment also replaces the existing facility fee based on the amount of lender commitments with an unused commitment fee payable quarterly at an annual rate of 0.50%.

 

The Credit Agreement contains covenants relating to leverage, unencumbered asset value, net worth, liquidity and additional debt. The Credit Agreement does not contain a fixed charge coverage covenant. The Credit Agreement also contains various restrictive covenants pertaining to acquisitions, investments, capital expenditures, dividends, share repurchases, asset dispositions and liens. The following includes a summary of the Company’s more significant financial covenants:

 

 

The Company was in compliance with its debt covenants at September 30, 2009.

 

The Credit Agreement contains customary events of default. If any event of default occurs, lenders holding two-thirds of the commitments may terminate the Company’s right to borrow and accelerate amounts due under the Credit Agreement. In the event of bankruptcy, all amounts outstanding would automatically become due and payable and the commitments would automatically terminate.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

The Company sponsors a cash balance defined benefit pension plan that covers substantially all of its salaried employees. A summary of the net periodic benefit expense (credit) follows:

 

 

On June 18, 2009, the Company, as plan sponsor of the pension plan, signed a commitment for the pension plan to purchase a group annuity contract from Massachusetts Mutual Life Insurance Company for the benefit of the retired participants and certain other former employee participants in the pension plan. Current employees and former employees with cash balances in the pension plan are not affected by the transaction. The purchase price of the group annuity contract was approximately $101 million, which was funded from the assets of the pension plan on June 25, 2009. The transaction resulted in the transfer and settlement of pension benefit obligations of approximately $93 million. In addition, the Company recorded a non-cash pre-tax settlement charge to earnings during the second quarter of 2009 of $44.7 million. The Company also recorded a pre-tax credit in the amount of $44.7 million in Accumulated Other Comprehensive Income on its Consolidated Balance Sheet offsetting the non-cash charge to earnings. As a result of this transaction, the Company was able to significantly increase the funded status ratio thereby reducing the potential for future funding requirements.

 

 

The Company had approximately $1.4 million of total unrecognized tax benefits as of September 30, 2009 and December 31, 2008, none of which, if recognized, would materially affect the effective income tax rate. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company had accrued interest of $0.4 million and $0.3 million (net of tax benefit) at September 30, 2009 and December 31, 2008, respectively, related to uncertain tax positions. There were no significant changes to unrecognized tax benefits including interest and penalties during the third quarter of 2009, and the Company does not expect any significant changes to its unrecognized tax benefits during the next twelve months.

 

The current income tax receivable was $27.9 million at September 30, 2009 and $32.3 million at December 31, 2008. The Company received $32.3 million in federal income tax refunds during the third quarter of 2009 related to the December 31, 2008 tax receivable balance.

 

 

The Company conducts primarily all of its business in four reportable operating segments: residential real estate, commercial real estate, rural land sales and forestry. The residential real estate segment generates revenues from club and resort operations and the development and sale of homesites and, to a lesser extent due to the Company’s exit from homebuilding, homes. The commercial real estate segment sells developed and undeveloped land. The rural land sales segment sells parcels of land included in the Company’s holdings of timberlands. The forestry segment produces and sells pine pulpwood, timber and other forest products.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company uses income from continuing operations before equity in income of unconsolidated affiliates, income taxes and noncontrolling interest for purposes of making decisions about allocating resources to each segment and assessing each segment’s performance, which the Company 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 herein and in our Form 10-K. Total revenues represent sales to unaffiliated customers, as reported in the Company’s consolidated statements of operations. All intercompany transactions have been eliminated. The caption entitled “Other” consists of general and administrative expenses, net of investment income.

 

Information by business segment, adjusted as a result of discontinued operations, follows:

 

 

 

 

 

 

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, including potential claims resulting from construction defects.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

When appropriate, the Company establishes estimated accruals for litigation matters which meet the provisions of ASC Topic 450 — Contingencies. Although in the opinion of management none of our litigation matters is expected to have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity, it is possible that the actual amounts of liabilities resulting from such matters could be material.

 

The Company has retained certain self-insurance risks with respect to losses for third party liability, workers’ compensation, property damage and other types of insurance.

 

At September 30, 2009 and December 31, 2008, the Company was party to surety bonds of $41.2 million and $51.3 million, respectively, and standby letters of credit in the amount of $2.8 million which may potentially result in liability to the Company if certain obligations of the Company are not met.

 

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 are reviewed and adjusted, if necessary, as additional information becomes available.

 

The Company’s former paper mill site in Gulf County and certain adjacent property are subject to various Consent Agreements, Brownfield Site Rehabilitation Agreements and voluntary agreements with the Florida Department of Environmental Protection. The paper mill site has been rehabilitated by Smurfit-Stone Container Corporation in accordance with these agreements. The Company is in the process of assessing and rehabilitating certain adjacent properties. Management is unable to quantify the rehabilitation costs at this time.

 

Other proceedings involving environmental matters 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, management believes that the ultimate disposition of currently known matters will not have a material effect on the Company’s consolidated financial position.

 

Aggregate environmental-related accruals were $1.7 million at September 30, 2009 and $1.8 million at December 31, 2008.

 

 

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, notes receivable and retained interests. The Company deposits and invests excess cash with major financial institutions in the United States. Balances may exceed the amount of insurance provided on such deposits.

 

The majority of notes receivable is from homebuilders and other entities associated with the real estate industry. As with many entities in the real estate industry, revenues have contracted for these companies, and they may be increasingly dependent on their lenders’ continued willingness to provide funding to maintain ongoing liquidity. The Company evaluates the need for an allowance for doubtful notes receivable at each reporting date. During October 2009, the Company settled its notes receivable with Saussy Burbank for less than book value. Accordingly, the Company recorded a charge of $9.0 million related to the settlement as of September 30, 2009.

 

There are not any other entity specific facts which currently cause the Company to believe that the remaining notes receivable will be realized at amounts below their carrying values; however, due to the collapse of real estate markets and tightened credit conditions, the collectability of these receivables represents a significant risk to the Company and changes in the likelihood of collectability could adversely impact the accompanying financial statements.

 

In the event of a failure and liquidation of the financial institution involved in our installment sales, the Company could be required to write-off the remaining retained interest recorded on its balance sheet in connection with the installment sale monetization transactions, which would have an adverse effect on the Company’s results of operations and balance sheet.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company’s real estate investments are concentrated in the State of Florida. Uncertainty of the duration of the prolonged real estate and economic slump could have an adverse impact on the Company’s real estate values.

 

 

The Company has evaluated events occurring subsequent to the September 30, 2009 reporting date through the financial statement issue date of November 3, 2009. During October 2009, the Company settled its notes receivable with Saussy Burbank for less than book value. Accordingly, the Company recorded a charge of $9.0 million related to the settlement as of September 30, 2009.

 

On October 21, 2009, the Company entered into a strategic alliance agreement with Southwest Airlines to facilitate the commencement of low-fare air service in May 2010 to the new international airport under construction in Northwest Florida. As part of the agreement, the Company has agreed to reimburse Southwest Airlines if it incurs losses on its service at the new airport during the first three years of service. It also provides that Southwest’s profits from the air service during the term of the agreement will be shared with the Company up to the maximum amount of the Company’s prior break even payments.

 

The term of the agreement extends for a period of three years after the commencement of Southwest’s air service at the new airport. The agreement may be terminated by the Company if the payments to Southwest exceed $14 million in the first year of air service or $12 million in the second year. The Company may also terminate the agreement if Southwest has not commenced air service to the new airport within 90 days of its opening. Southwest may terminate the agreement if its actual annual revenues attributable to the air service at the new airport are less than certain minimum annual amounts established in the agreement.The Company is currently evaluating the accounting impact this standby guarantee will have on its fourth quarter financial position and results of operations. At this time the Company believes it may record a liability and associated expense during the fourth quarter related to this standby guarantee, but has not yet quantified this liability or expense.

 

No other events have occurred through the financial statement issue date which would have a material impact on the Company’s financial statements.

 

Forward-Looking Statements

 

We make forward-looking statements in this Report, particularly in this Management’s Discussion and Analysis, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements in this Report that are not historical facts are forward-looking statements. You can find many of these forward-looking statements by looking for words such as “intend”, “anticipate”, “believe”, “estimate”, “expect”, “plan”, “should”, “forecast”, or similar expressions. In particular, forward-looking statements include, among others, statements about the following:

 

 

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 this Report. 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 on Form 10-K for the year ended December 31, 2008 and our quarterly reports on Form 10-Q, as well as, among others, the following:

 

 

 

Overview

 

The majority of our land is located in Northwest Florida and has a very low cost basis. In order to optimize the value of these core real estate assets, we seek to reposition portions of our substantial timberland holdings for higher and better uses. We seek to create value in our land by securing entitlements for higher and better land-uses, facilitating infrastructure improvements, developing community amenities, undertaking strategic and expert land planning and development, parceling our land holdings in creative ways, performing land restoration and enhancement and promoting economic development.

 

We have four operating segments: residential real estate, commercial real estate, rural land sales and forestry.

 

Our residential real estate segment generates revenues from:

 

 

Our commercial real estate segment generates revenues from the sale of developed and undeveloped land for retail, multi-family, office and industrial uses. Our rural land sales segment generates revenues from the sale of parcels of undeveloped land and rural land with limited development. Our forestry segment generates revenues from the sale of pulpwood, timber and forest products and conservation land management services.

 

Our business continues to be negatively affected by the continuing economic recession and adverse real estate conditions. We have, however, a large inventory of rural land, virtually no debt and significant cash reserves. We have also greatly reduced our capital expenditures and general and administrative expenses. As a result, we believe that we are well positioned to withstand the current challenging environment.

 

Meanwhile, we continue to develop strategic relationships which we believe will benefit our business when the economy and our markets recover. On October 21, 2009, we entered into a strategic alliance agreement with Southwest Airlines to facilitate the commencement of low-fare air service to the new international airport in Northwest Florida in May 2010. We believe that the introduction of this air service to Northwest Florida will make the region more accessible to a broader market and significantly enhance the value of our lands surrounding the new airport, as well as our other properties in Northwest Florida. We intend to aggressively leverage Southwest’s service to drive tourism, economic development and job growth in the region and real estate absorption in our projects across Northwest Florida.

 

Southwest has agreed that service at the new airport will consist of at least two daily nonstop flights from Northwest Florida to each of four destinations for a total of eight daily nonstop flights. We have agreed to reimburse Southwest if it incurs losses at the new airport during the first three years of service. The agreement also provides for any profit from the air service during the term of the agreement to be shared with us up to the amount of our prior payments.

 

Critical Accounting Estimates

 

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on historical experience, available current market information 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 on Form 10-K for the year ended December 31, 2008. Except for the required adoption of certain accounting pronouncements described elsewhere herein, there have been no significant changes in these policies during the first nine months of 2009.

 

Recently Issued Accounting Standards

 

See Note 1 to our unaudited consolidated financial statements included in this Report for recently adopted and/or issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements.

 

Results of Operations

 

Net loss decreased $(4.8) million to a loss of $(14.4) million, or $(0.16) per share, in the third quarter of 2009, compared to a net loss of $(19.2) million, or $(0.21) per share, for the third quarter of 2008. Included in our results for the three months ended September 30 are the following significant charges:

 

2009:

 

 

2008:

 

 

Net loss increased $(62.7) million to a loss of $(70.7) million, or $(0.77) per share, in the first nine months of 2009, compared to $(8.0) million, or $(0.09) per share, for the first nine months of 2008. Included in our results for the nine months ended September 30 are the following significant charges:

 

2009:

 

 

2008: