##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 2004 OR (  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ___________ to _____________ Commission File Number 001-08728 Florida East Coast Industries, Inc. 
  Florida
    
    59-2349968(State or other jurisdiction of
incorporation or organization)
    
    (IRS Employer
Identification No.)
 One Malaga Street, St. Augustine, Florida
    
    32084(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code  (904) 829-3421 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 (X) NO (  ) Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES (X) NO (  ) Indicate the number of shares outstanding of each of the issuers classes of
common stock as of the latest practicable date. Class
    
    Outstanding at June 30, 2004Common Stock-no par value
    
    36,939,088 shares




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##### 



FLORIDA EAST COAST INDUSTRIES, INC. PART I
FINANCIAL INFORMATION
INDEX  
 PageNumbersItem 1. Financial StatementsConsolidated Balance Sheets - June 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Income - Three Months and Six Months Ended June 30, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows - Six Months Ended June 30, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-15Item 2. Managements Discussion and Analysis of the Consolidated Financial Condition and Results of OperationsComparison
of Second Quarter 2004 versus Second Quarter 2003 and Six Months 2004
versus Six Months 2003
    
    
    16-25Changes in Financial Condition, Liquidity and Capital Resources
    
    
    25-26Other Matters
    
    
    27-28Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    29-30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 6. Exhibits and Reports on Form 8-K
    
    
    30-31
  2




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##### 



FLORIDA EAST COAST INDUSTRIES, INC. 
 CONSOLIDATED BALANCE SHEETS
  June 30
    
    December 312004
    
    2003(unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    
    134,675
    
    
    
    125,057Accounts receivable (net)
    
    
    27,703
    
    
    
    23,599Materials and supplies
    
    
    3,480
    
    
    
    1,603Assets held for sale (Note 10)
    
    
    11,370
    
    
    
    7,474Deferred income taxes
    
    
    3,676
    
    
    
    5,986Other current assets
    
    
    6,246
    
    
    
    7,785Total current assets
    
    
    187,150
    
    
    
    171,504Properties, Less Accumulated Depreciation
    
    
    820,095
    
    
    
    814,683Other Assets and Deferred Charges
    
    
    24,180
    
    
    
    22,163Total Assets
    
    
    1,031,425
    
    
    
    1,008,350Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable and accrued expenses
    
    
    30,797
    
    
    
    34,027Taxes payable
    
    
    14,441
    
    
    
    1,884Deferred revenue
    
    
    7,800
    
    
    
    3,000Short-term debt (Note 8)
    
    
    2,942
    
    
    
    2,838Accrued casualty and other liabilities
    
    
    1,198
    
    
    
    1,815Other accrued liabilities
    
    
    10,525
    
    
    
    23,134Total current liabilities
    
    
    67,703
    
    
    
    66,698Deferred Income Taxes
    
    
    138,368
    
    
    
    135,497Long-Term Debt, net of current portion(Note 8)
    
    
    236,807
    
    
    
    238,305Accrued Casualty and Other Liabilities
    
    
    9,334
    
    
    
    9,717Shareholders EquityCommon Stock:
    
    
    84,846
    
    
    
    77,784Common stock; no par value; 150,000,000 shares authorized; 37,923,090 shares
issued and 36,939,088 shares outstanding at June 30, 2004, and 37,701,406
shares issued and 36,717,404 shares outstanding at December 31, 2003Retained earnings
    
    
    514,923
    
    
    
    499,708Restricted stock deferred compensation
    
    
    (5,789
    )
    
    
    (4,592
    )Treasury stock at cost (984,002 shares)
    
    
    (14,767
    )
    
    
    (14,767
    )Total shareholders equity
    
    
    579,213
    
    
    
    558,133Total Liabilities and Shareholders Equity
    
    
    1,031,425
    
    
    
    1,008,350
 (Prior years results have been reclassified to conform to current years
presentation.) See accompanying notes to consolidated financial statements (unaudited). 3




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##### 



FLORIDA EAST COAST INDUSTRIES, INC. 
 CONSOLIDATED STATEMENTS OF INCOME
   Three Months
    
    Six MonthsEnded June 30
    
    Ended June 302004
    
    2003
    
    2004
    
    2003Operating revenuesRailway operations
    
    
    50,102
    
    
    
    45,227
    
    
    
    98,659
    
    
    
    89,498Realty rental and services
    
    
    17,798
    
    
    
    16,915
    
    
    
    35,615
    
    
    
    33,313Realty sales
    
    
    2,613
    
    
    
    10,228
    
    
    
    7,661
    
    
    
    25,125Total revenues
    
    
    70,513
    
    
    
    72,370
    
    
    
    141,935
    
    
    
    147,936Operating expensesRailway operations
    
    
    37,435
    
    
    
    33,999
    
    
    
    74,885
    
    
    
    69,439Realty rental and services
    
    
    15,501
    
    
    
    16,513
    
    
    
    31,671
    
    
    
    31,787Realty sales
    
    
    1,918
    
    
    
    2,586
    
    
    
    4,117
    
    
    
    11,219Corporate general & administrative
    
    
    3,753
    
    
    
    2,981
    
    
    
    8,733
    
    
    
    5,897Total expenses
    
    
    58,607
    
    
    
    56,079
    
    
    
    119,406
    
    
    
    118,342Operating profit
    
    
    11,906
    
    
    
    16,291
    
    
    
    22,529
    
    
    
    29,594Interest income
    
    
    360
    
    
    
    237
    
    
    
    556
    
    
    
    351Interest expense
    
    
    (3,773
    )
    
    
    (4,207
    )
    
    
    (7,719
    )
    
    
    (8,504
    )Other income (Note 7)
    
    
    5,090
    
    
    
    2,942
    
    
    
    7,787
    
    
    
    5,1931,677
    
    
    
    (1,028
    )
    
    
    624
    
    
    
    (2,960
    )Income before income taxes
    
    
    13,583
    
    
    
    15,263
    
    
    
    23,153
    
    
    
    26,634Provision for income taxes
    
    
    (5,229
    )
    
    
    (5,877
    )
    
    
    (8,914
    )
    
    
    (10,254
    )Income from continuing operations
    
    
    8,354
    
    
    
    9,386
    
    
    
    14,239
    
    
    
    16,380Discontinued Operations(Note 3)Income (loss) from operation of discontinued operations (net of taxes)
    
    
    30
    
    
    
    (349
    )
    
    
    164
    
    
    
    (238
    )(Loss) gain on disposition of discontinued operations (net of taxes)
    
    
    (16
    )
    
    
    215
    
    
    
    2,287
    
    
    
    27Income (loss) from discontinued operations
    
    
    14
    
    
    
    (134
    )
    
    
    2,451
    
    
    
    (211
    )Net income
    
    
    8,368
    
    
    
    9,252
    
    
    
    16,690
    
    
    
    16,169Earnings Per ShareIncome from continuing operations  basic
    
    $
    0.23
    
    
    $
    0.26
    
    
    $
    0.39
    
    
    $
    0.45Income from continuing operations  diluted
    
    $
    0.22
    
    
    $
    0.26
    
    
    $
    0.38
    
    
    $
    0.45Income (loss) from operation of discontinued operations  basic & diluted
    
    
    
    
    
    ($
    0.01
    )
    
    $
    0.01
    
    
    ($
    0.01
    )(Loss) gain on disposition of discontinued operations  basic & diluted
    
    
    
    
    
    
    
    
    
    $
    0.06
    
    
    
    Net income  - basic
    
    $
    0.23
    
    
    $
    0.25
    
    
    $
    0.46
    
    
    $
    0.44Net income - diluted
    
    $
    0.22
    
    
    $
    0.25
    
    
    $
    0.45
    
    
    $
    0.44Average shares outstanding  basic
    
    
    36,664,203
    
    
    
    36,505,016
    
    
    
    36,621,332
    
    
    
    36,496,492Average shares outstanding  diluted
    
    
    37,388,454
    
    
    
    36,800,438
    
    
    
    37,316,356
    
    
    
    36,748,713
 (Prior years results have been reclassified to conform to current years
presentation, including discontinued operations.) See accompanying notes to consolidated financial statements (unaudited). 4




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##### 



FLORIDA EAST COAST INDUSTRIES, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
   Six MonthsEnded June 302004
    
    2003Cash Flows from Operating ActivitiesNet income
    
    
    16,690
    
    
    
    16,169Adjustments to reconcile net income to cash generated by operating activities:Depreciation and amortization
    
    
    24,806
    
    
    
    24,481Gain on disposition of properties
    
    
    (7,268
    )
    
    
    (13,906
    )Deferred taxes
    
    
    5,181
    
    
    
    10,251Other
    
    
    3,278
    
    
    
    1,67642,687
    
    
    
    38,671Changes in operating assets and liabilities:Accounts receivable
    
    
    (4,104
    )
    
    
    (1,845
    )Other current assets
    
    
    (1,847
    )
    
    
    (3,580
    )Other assets and deferred charges
    
    
    (4,084
    )
    
    
    (3,789
    )Accounts payable
    
    
    (3,157
    )
    
    
    (4,912
    )Taxes payable
    
    
    12,557
    
    
    
    8,690Income tax refund
    
    
    
    
    
    
    74,572Other current liabilities
    
    
    (3,664
    )
    
    
    562Accrued casualty and other long-term liabilities
    
    
    (1,000
    )
    
    
    (627
    )(5,299
    )
    
    
    69,071Net cash generated by operating activities
    
    
    37,388
    
    
    
    107,742Cash Flows from Investing ActivitiesPurchases of properties
    
    
    (47,676
    )
    
    
    (57,109
    )Proceeds from disposition of assets
    
    
    20,261
    
    
    
    25,125Net cash used in investing activities
    
    
    (27,415
    )
    
    
    (31,984
    )Cash Flows from Financing ActivitiesPayment of mortgage debt
    
    
    (1,394
    )
    
    
    (1,297
    )Payment of line of credit
    
    
    
    
    
    
    (53,000
    )Payment of dividends
    
    
    (1,476
    )
    
    
    (2,383
    )Proceeds from exercise of options
    
    
    3,135
    
    
    
    649Other
    
    
    (620
    )
    
    
    (83
    )Net cash used in financing activities
    
    
    (355
    )
    
    
    (56,114
    )Net Increase in Cash and Cash Equivalents
    
    
    9,618
    
    
    
    19,644Cash and Cash Equivalents at Beginning of Period
    
    
    125,057
    
    
    
    83,872Cash and Cash Equivalents at End of Period
    
    
    134,675
    
    
    
    103,516Supplemental Disclosure of Cash Flow InformationCash paid (received) for income taxes
    
    
    4,700
    
    
    
    (74,551
    )Cash paid for interest
    
    
    8,905
    
    
    
    8,996
 (Prior years results have been reclassified to conform to current years
presentation.) See accompanying notes to consolidated financial statements (unaudited). 5




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##### 



FLORIDA EAST COAST INDUSTRIES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1.General In the opinion of management, the accompanying unaudited consolidated financial
statements reflect all accruals and adjustments considered necessary to present
fairly the Companys financial position as of June 30, 2004 and December 31,
2003, and the results of operations and cash flows for the three-month and
six-month periods ended June 30, 2004 and 2003. Results for interim periods are
not necessarily indicative of the results to be expected for the year. The
consolidated balance sheet as of December 31, 2003 included herein has been
derived from the Companys audited consolidated financial statements for the
year ended December 31, 2003. These interim financial statements should be read
in conjunction with the Companys Annual Report on Form 10-K for the year ended
December 31, 2003 filed with the Securities and Exchange Commission. Certain prior year amounts have been reclassified to conform to the current
years presentation, including discontinued operations. Note 2.Recapitalization On February 27, 2003, FECIs Board of Directors approved the submission of a
proposal to shareholders to amend the Companys Articles of Incorporation to
eliminate the Companys dual-class structure by reclassifying the Companys
Class A common stock and Class B common stock into a new single class of common
stock on a one-for-one basis. The reclassification was subsequently approved at
the Annual Meeting of Shareholders held on May 28, 2003. On September 10, 2003,
FECI and The St. Joe Company received a favorable ruling from the U.S. Internal
Revenue Service regarding FECIs reclassification of its Class A and Class B
common stock into a single class of common stock. The letter ruling confirmed
that the proposed reclassification would not have an adverse affect on the
tax-free status of the October 2000 spin-off of St. Joes equity interest in
FECI to St. Joes shareholders. FECI filed an amendment to its Articles of
Incorporation with the Secretary of State of Florida in order to effect the
reclassification on September 22, 2003. The consolidated financial statements
reflect the reclassification for all periods presented. The single class of
common stock trades on the New York Stock Exchange under the ticker symbol
FLA. Note 3.Discontinued Operations Trucking During the third quarter of 2002, the Company adopted a plan to discontinue and
ceased operations of its regional long-haul trucking operations. The Company
largely completed its operational shut down and disposition activities for the
trucking operation during the fourth quarter of 2002. Wind-down activities were
completed during the second quarter of 2003. Accordingly, the Company reported the results of the trucking operations and
the estimated disposition loss as discontinued operations under the provisions
of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS 144), and all periods presented have been restated accordingly. 6




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##### 



Three Months
    
    Six MonthsEnded June 30
    
    Ended June 30(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Summary of Operating Results of Discontinued OperationsTrucking revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Trucking expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (259
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    259Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100
    )Income from operation of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159Gain on disposition of discontinued operations (net of
taxes of $134 for the three months ended June 30, 2003
and $17 for the six months ended June 30, 2003.)
    
    
    
    
    
    
    215
    
    
    
    
    
    
    
    27
 As a result of the discontinuance, certain liabilities were accrued related to
this exit plan. A roll-forward of the liabilities through June 30, 2004 is as
follows: EmployeeSeverance
    
    Tractor/Trailer(dollars in thousands)
    
    Costs
    
    Disposition Costs
    
    Other
    
    TotalsAccruals @ 12/31/03**
    
    
    104
    
    
    
    
    
    
    
    8
    
    
    
    112Additions & adjustments*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Utilization
    
    
    (104
    )
    
    
    
    
    
    
    (8
    )
    
    
    (112
    )Ending balance @ 6/30/04**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 *-Any additions and adjustments to the liabilities that resulted from changes
in estimates or final determinations are accounted for as gain or loss on
disposition of discontinued operations on the consolidated financial
statements. **-These amounts are included in Railways liabilities. Real Estate In accordance with SFAS 144, components of Flagler that meet certain criteria
have been accounted for as discontinued operations. Therefore, income or loss
attributable to the operations and sale of the components classified as
discontinued operations are presented in the statement of income as
discontinued operations, net of applicable income taxes. Discontinued operations include the gain on the sale and the related operations
of an office building in 2004, the operations of an industrial building held
for sale during 2004, as well as the operations of an industrial building and
Flaglers 50% interest in three buildings held in partnership with Duke Realty
disposed of during 2003. Three Months
    
    Six MonthsEnded June 30
    
    Ended June 30(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Summary of Operating Results of Discontinued OperationsFlagler realty rental revenues
    
    
    179
    
    
    
    535
    
    
    
    731
    
    
    
    1,234Flagler realty rental expenses
    
    
    133
    
    
    
    1,103
    
    
    
    465
    
    
    
    1,858Operating income (loss)
    
    
    46
    
    
    
    (568
    )
    
    
    266
    
    
    
    (624
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Income (loss) before income taxes
    
    
    46
    
    
    
    (568
    )
    
    
    266
    
    
    
    (581
    )Income tax (expense) benefit
    
    
    (16
    )
    
    
    219
    
    
    
    (102
    )
    
    
    224Income (loss) from discontinued operations
    
    
    30
    
    
    
    (349
    )
    
    
    164
    
    
    
    (357
    )(Loss) gain on disposition of discontinued operations
(net of taxes of $9 for the three months ended June
30, 2004 and $1.4 million for the six months ended
June 30, 2004.)
    
    
    (16
    )
    
    
    
    
    
    
    2,287
    
    
    
    
 Telecommunications FECI completed the sale of its wholly owned telecommunications subsidiary,
EPIK, to Odyssey Telecorp, Inc. (Odyssey), a privately held holding company
specializing in telecom network assets during the fourth 7




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##### 



quarter of 2002. In accordance with SFAS 144, EPIKs results from operations
and the estimated disposition gain have been reported as discontinued
operations for all years presented. Three Months
    
    Six MonthsEnded June 30
    
    Ended June 30(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Summary of Operating Results of Discontinued OperationsEPIK revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EPIK expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65Operating loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40
    )
 At the time of EPIKs sale, the Company accrued certain liabilities (primarily
employee severance) related to the sale. A roll-forward of the liabilities
through June 30, 2004 is as follows: EmployeeSeverance(dollars in thousands)
    
    Costs
    
    Other
    
    TotalsAccruals @ 12/31/03
    
    
    577
    
    
    
    
    
    
    
    577Additions & Adjustments**
    
    
    
    
    
    
    
    
    
    
    Utilization
    
    
    (209
    )
    
    
    
    
    
    
    (209
    )Ending Balance @ 6/30/04
    
    
    368
    
    
    
    
    
    
    
    368
 **-Any additions and adjustments to the liabilities that resulted from changes
in estimates or final determinations are accounted for as gain or loss on
disposition of discontinued operations on the consolidated financial
statements. Also, FECI is a guarantor on certain leases (primarily office space) and could
be contingently liable if EPIK were to default on certain lease obligations.
Estimates for these guarantees were approximately $2.5 million at the time of
the sale. These amounts could be subject to change in subsequent periods and
are estimated to be $0.8 million at June 30, 2004. Note 4.Commitments and Contingencies The Company is the defendant and plaintiff in various lawsuits resulting from
its operations. In the opinion of management, appropriate provision has been
made in the financial statements for the estimated liability that may result
from disposition of such matters. The Company maintains comprehensive liability
insurance for bodily injury and property claims, but is self-insured or
maintains a significant self-insured retention for these exposures,
particularly at Florida East Coast Railway, LLC (FECR). These lawsuits are related to
alleged bodily injuries sustained by Railway employees or third parties,
employment related matters such as alleged wrongful termination and commercial
or contract disputes. The Company is subject to proceedings and consent decrees arising out of its
historic disposal of fuel and oil used in the transportation business. It is
the Companys policy to accrue 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. The Company is participating, together with several other potentially
responsible parties (PRPs), in the remediation of a site in Jacksonville,
Florida, pursuant to an agreement with the United States Environmental
Protection Agency (USEPA). The site previously accepted waste oil from many
businesses. The Company has accrued $250,000, which is its estimated share of
the total estimated cleanup costs for the site. The cleanup is expected to take
approximately five years. Based upon managements evaluation of the PRPs, which
include the City of Jacksonville, CSX Transportation, Inc. and the federal
government, the Company does not expect to incur additional material amounts,
even though the Company may have joint and several liability. It is possible
that the remediation costs could be higher than anticipated, but the Company is
not aware of any facts or circumstances, which indicate that the costs are
expected to be materially higher than currently anticipated. 8




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##### 



FECR is one of several PRPs alleged to have contributed to the environmental
contamination at and near the Miami International Airport (MIA) in a lawsuit
filed on or about April 11, 2001 by Miami-Dade County in the Miami-Dade County
11th Judicial Circuit Court. In regard to FECR, Miami-Dade County generally
alleges that FECR is or was the owner of sites at or near MIA and that the past
acts of an FECR lessee or others contaminated the soil and/or groundwater at
those sites, which allegedly impacted MIA property. The County generally seeks
damages for past and future remediation costs relating to MIAs property. The
lawsuit was not served on FECR; however, in January 2003 FECR in conjunction
with a cooperating parties group made up of named PRPs filed a Notice of
Appearance with the court. At the request of those in the cooperating parties
group and Miami-Dade County, the court has issued successive orders staying all
proceedings while the parties worked to resolve the matter without further
litigation. In June 2004, FECR and Miami-Dade County entered into a Settlement
Agreement, General Release and Covenant Not to Sue whereby FECR will be
released from all claims that have been or could be asserted against FECR in
the lawsuit by Miami-Dade County, upon payment to Miami-Dade County of
approximately $100,000 and FECRs release of Miami-Dade County from FECR
related claims at MIA. The Settlement Agreement is subject to court approval
after a hearing. Whether the court order will be entered as requested by FECR
and Miami-Dade County cannot be predicted with certainty. If the Settlement
Agreement is not consummated, the Company will defend the matter vigorously.
Based on information presently available, management does not expect that
resolution of this matter will have a material adverse effect on the Companys
financial position, liquidity or results of operations. Historic railroad operations at the Companys main rail facilities have
resulted in soil and groundwater impacts. In consultation with the Florida
Department of Environmental Protection (FDEP), the Company operates and
maintains groundwater treatment systems at its primary facilities. The Company
also monitors a small number of sites leased to others, or acquired by the
Company or its subsidiaries. Based on managements ongoing review and
monitoring of the sites, and the ability to seek contribution or
indemnification from the PRPs, the Company does not expect to incur material
additional costs, if any. It is difficult to quantify future environmental costs as many issues relate to
actions by third parties or changes in environmental regulations. However,
based on information presently available, management believes that the ultimate
disposition of currently known matters will not have a material effect on the
financial position, liquidity or results of operations of the Company. On February 24, 2004, the Broward County Commission approved the negotiated
termination of a long-term ground lease between the County and the Company.
This termination agreement was subsequently executed and the transaction closed
on March 15, 2004. The ground lease covered 97 acres owned in fee by Broward County at Port
Everglades, which is located near Fort Lauderdale, Florida. The County and the
Company have now terminated the entire lease. In consideration for the early
termination, the Company (a) conveyed title to certain land improvements and a
warehouse on the leased property and (b) paid to Broward County $5.4 million
reduced by additional rental payments made by the Company from November 2003
until closing and some other minor adjustments, the net additional payment
being $3.7 million. Under the original ground lease, the Company was obligated under a related
agreement between the County, the City of Hollywood and the Company (Tri Party
Agreement) to make certain annual payments in-lieu-of taxes to the City of
Hollywood through the lease term (the amount of the payment is based on the
extent of improvements on the leased property). A dispute existed between the
Company and the City regarding the effects of the termination of the ground
lease on the in-lieu-of-tax payment obligations. The City asserted, based on
the Tri Party Agreement, it was entitled to a $10 million lump sum payment as a
consequence of the lease termination. The Company, the City and the County
entered into a Settlement Agreement pursuant to which the Company agreed to pay
the City a lump sum payment of $1.8 million in favor of a full and complete
resolution of all claims arising out of the Lease, the Tri Party Agreement and
ancillary agreements. The Settlement Agreement terminates the Tri Party
Agreement and all ancillary agreements affecting the Company in respect to the
leased premises. During the third quarter of 2003, the Company recorded a charge of $16.4
million ($10.1 million after tax), reflecting managements estimate of the cost
of terminating the ground lease. Final costs of terminating the ground lease,
including the settlement with the City, were $16.9 million. The additional
costs of $0.5 million were included in the second quarter 2004 operating results. 9




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##### 



FECR committed $1.5 million to jointly fund an overpass over the Medley branch
tracks to give access to warehouse space without crossing the railway. The
landowner and a customer are also funding this project with FECRs portion to
be paid half in 2004 and half in 2005. The construction of the overpass is
contingent upon project costs not exceeding a stipulated total amount. Note 5.Earnings Per Share The diluted weighted-average number of shares includes the net shares that
would be issued upon the exercise of in-the-money stock options using the
treasury stock method. Applying the treasury stock method, the in-the-money
stock options resulted in the dilution of 695,024 shares and 252,221 shares at
June 30, 2004 and 2003, respectively. Out-of-the-money shares were 1,359,838
shares and 2,192,370 shares at June 30, 2004 and 2003, respectively. Note 6.Dividends and Stock Repurchase On June 3, 2004, the Company declared a dividend of $.05 per share on all
issued and outstanding common stock, payable July 1, 2004 to shareholders of
record June 17, 2004. The determination of the amount of future cash dividends,
if any, to be declared and paid by the Company will depend upon, among other
things, the Companys financial condition, funds from operations, level of
capital expenditures, future business prospects and other factors deemed
relevant by the Board of Directors. In addition, on August 28, 2003, the Board
of Directors authorized the expenditure of up to $75 million to repurchase the
Companys outstanding common stock through a program of open market purchases
and privately negotiated transactions. At June 30, 2004, $2.9 million of stock
had been repurchased through this program. Subsequent to June 30, 2004, the Company announced an agreement to purchase
5.5 million shares of common stock from The Alfred I. duPont
Testamentary Trust and The Nemours Foundation for $34.50 per share or approximately $190 million. The
transaction is expected to close on August 13, 2004. This transaction will exhaust the remaining $72 million
that existed under the previous $75 million stock repurchase authorization. As
a result, on August 4, 2004, the Board of Directors authorized the expenditure
of $40 million to repurchase common stock through a program of open market
purchases and privately negotiated transactions from time to time
after the closing of the repurchase from the Trust and Foundation. Note 7.Other Income Three Months
    
    Six MonthsEnded June 30
    
    Ended June 30(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Pipe & wire crossings/signboards
    
    
    3,435
    
    
    
    1,136
    
    
    
    4,464
    
    
    
    1,897Fiber lease income
    
    
    1,807
    
    
    
    1,650
    
    
    
    3,499
    
    
    
    3,295Other (net)
    
    
    (152
    )
    
    
    156
    
    
    
    (176
    )
    
    
    15,090
    
    
    
    2,942
    
    
    
    7,787
    
    
    
    5,193
 FECR generates income from the grant of licenses and leases to use railroad
property and rights-of-way for outdoor advertising, parking lots and lateral
crossings of wires and pipes by municipalities and utility and
telecommunications companies. This income is recorded in other income as pipe
and wire crossings/signboards as it is earned. FECR generates other income
from leases to telecommunications companies for the installation of fiber optic
and other facilities on the railroad right-of-way. This income is recorded in
other income as fiber lease income as it is earned. Note 8.Debt and Subsequent Event At June 30, 2004, the Company had a $200 million revolving credit agreement
with certain financial institutions, for which the Company presently pays
(quarterly) commitment fees, as applicable under the agreement, at a range of
20-50 basis points. The Companys revolving credit agreement contains various
covenants which, among other things, require the maintenance of certain
financial ratios related to fixed
charge coverage and maximum leverage; establish minimum levels of net worth;
establish limitations on indebtedness, certain types of payments, including
dividends, liens and investments; and limit the use of 10




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##### 



proceeds of asset sales.
Some of the above covenants provide specific exclusion of certain financing and
investing activities at Flagler. The Company believes the most restrictive of
such ratios is the Group Debt/EBITDA ratio (as defined in the Credit Facility
Agreement). The Credit Facility Agreement provides that at June 30, 2004, the
Companys Group Debt/EBITDA ratio shall be no greater than 2.50. At June 30,
2004, the Companys actual Group Debt/EBITDA ratio was 0.01. Pursuant to the
Credit Facility Agreement, the required Group Debt/EBITDA ratio is 2.50 for the
remainder of the agreement (March 31, 2005), all as more particularly set forth
in the Credit Facility Agreement. Although no assurances can be given as to the
Companys future compliance with the Group Debt/EBITDA ratio covenant or other
financial covenants, the Company has complied with the terms of the Credit
Facility Agreement in the past and expects to continue to comply with them in
the future. The Company plans on maintaining a revolving credit facility in
support of its general corporate needs. The Companys current intent is to
extend or renew the existing credit agreement before it matures on March 31,
2005. Borrowings under the credit agreement bear interest at variable rates linked to
the LIBOR Index. Interest on borrowings is due and payable on the rollover
date for each draw. Outstanding borrowings can be paid at any time by the
borrower, or at the conclusion of the facilitys term. On February 7, 2003, the
Company extended its revolving bank credit facility for an additional year to
March 31, 2005. In tandem with the extension, the Company and its banks made
amendments to the facility that included a reduction in the aggregate amount of
the commitments from $300 million to $200 million, the elimination of the
Global Debt to EBITDA covenant, which included the results of EPIK, an increase
in the stock repurchase and special dividend limit to $150 million (which may
be increased in 2004 to $200 million if certain financial ratio tests are met),
an increase in the non-recourse mortgage financing limit from $250 million to
$325 million, and other miscellaneous modifications. At June 30, 2004, there
were no borrowings outstanding under the facility. During 2001, Flagler issued $247 million of mortgage notes with $160 million
due July 1, 2011 and $87 million due October 1, 2008. At June 30, 2004, $239.7
million was outstanding on these notes. These notes are collateralized by
certain buildings and properties of Flagler. Blended interest and principal
repayment on the notes is payable monthly based on a fixed 7.39% and 6.95%
weighted-average interest
rate, respectively, for each note offering, on the outstanding principal amount
of the mortgage notes and assuming a thirty-year amortization period. The net
proceeds in 2001 were used to repay existing indebtedness under the Companys
revolving credit facility. At June 30, 2004, the Company considers the
estimated fair market value of the mortgage notes to be $264.2 million. Subsequent to June 30, 2004, Flagler plans to issue $105 million of seven-year
mortgage notes. These notes will be collateralized by certain buildings and
properties of Flagler. The mortgage notes will consist of a $60 million note
with a fixed rate of interest of 5.27% and a $45 million note with a floating
rate of interest based on the 90-day LIBOR Index plus 1.00%. The mortgage
financing is expected to close on August 10, 2004 and each note will have an
amortization of 30 years. The floating rate feature will allow Flagler the
flexibility to sell buildings securing the notes with minimal prepayment costs
after a six-month period. Additionally and subsequent to June 30, 2004, the Company and its banks made
amendments to the facility to accommodate an increase in the non-recourse
mortgage financing limit from $325 million to $350 million and an increase to
the stock repurchase and special dividend limit to $300 million (eliminating
the financial ratio test needed to exceed $150 million). At the time of the
signing of the amendment, the Company had issued special dividends and
repurchased stock totaling approximately $60 million against the limit. Note 9.Stock-Based Compensation The Company applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB Opinion No. 25), and related interpretations in accounting for
stock options. As such, compensation expenses would be recorded on the date of
the grant only if the current market price of the underlying stock exceeded the
exercise price. Compensation expenses for grants of restricted stock are
recognized over the applicable vesting period. In a transaction (the Transaction) initiated at the request of the Board of
Directors, the Company cancelled vested, in-the-money stock options (the
Options) to acquire 144,000 shares of the Companys 11




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##### 



common stock held by the
Companys Chief Executive Officer (CEO). The embedded value of the Options
(fair market value less strike price) was $2 million. The embedded value, less
applicable tax withholding, was paid in common stock. The CEO was issued 36,407
shares (valued at $35.06, which was the closing price on February 27, 2004).
The stock, together with applicable withholdings, represents the pre-tax
embedded value. Because the original stock option award was cancelled and the
Company replaced this award with FECI common stock, in accordance with FASB
Interpretation No. 44, the Company was required to recognize compensation
expense in the amount of $2 million with respect to the Transaction. The Board
recognized the need for the CEO to address the near-term maturity of the
Options and preferred that he do so without the current market sale of 144,000
shares and that he also increase his outright ownership in the Company. As a
part of this arrangement, the CEO has agreed, by the conclusion of 2005, to
accumulate and maintain a position of outright ownership in the Companys stock
of at least 75,000 shares. The following table illustrates the effect on net income and earnings per share
as if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123), to
stock-based employee compensation: Three Months
    
    Six MonthsEnded June 30
    
    Ended June 30(dollars in thousands, except per share amounts)
    
    2004
    
    2003
    
    2004
    
    2003Net income - as reported
    
    
    8,368
    
    
    
    9,252
    
    
    
    16,690
    
    
    
    16,169Deduct: Total stock-based employee compensation expense
determined under the fair value based method for all stock
option awards (net of related tax effects)
    
    
    (190
    )
    
    
    (557
    )
    
    
    (380
    )
    
    
    (1,115
    )Pro forma net income
    
    
    8,178
    
    
    
    8,695
    
    
    
    16,310
    
    
    
    15,054Earnings per share:Basic  as reported
    
    $
    0.23
    
    
    $
    0.25
    
    
    $
    0.46
    
    
    $
    0.44Basic  pro forma
    
    $
    0.22
    
    
    $
    0.24
    
    
    $
    0.45
    
    
    $
    0.41Diluted  as reported
    
    $
    0.22
    
    
    $
    0.25
    
    
    $
    0.45
    
    
    $
    0.44Diluted  pro forma
    
    $
    0.22
    
    
    $
    0.24
    
    
    $
    0.44
    
    
    $
    0.41
 Note 10.Realty Land Sales and Associated Cost In accordance with Statement of Financial Accounting Standard No. 66,
Accounting for Sale of Real Estate, revenue for realty land sales is
recognized upon the closing of sales contracts and when collection of the sales
proceeds is assured. During the current period, all sales proceeds were
received in cash at closing. The net book value of buildings and land is presented separately in the
Consolidated Balance Sheets when assets meet the criteria for classification as
assets held for sale in accordance with SFAS 144 (i.e., a sales contract is
executed and significant non-refundable monies are provided by the buyer.) Not
all building and land sales, particularly less significant dispositions, meet
the criteria described above. At June 30, 2004, a large land parcel and a
building are included in this category. The Company capitalizes all infrastructure costs (including costs of
infrastructure assets deeded to governmental authorities) into the basis of the
properties benefiting from such infrastructure and allocates these costs to
individual parcels on a relative fair value basis as required by Statement of
Financial Accounting Standard No. 67, Accounting for Costs and Initial Rental
Operations of Real Estate Projects. 12




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##### 



Note 11.Segment Information The Company follows Statement of Financial Accounting Standards No. 131,
Disclosure about Segments of an Enterprise and Related Information (SFAS
131). SFAS 131 provides guidance for reporting information about operating
segments and other geographic information based on a management approach. The
accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies. Under the provisions of SFAS 131,
the Company has two reportable operating segments, both within the same
geographic area. These are the railway and realty segments. The railway segment provides freight transportation along the east coast of
Florida between Jacksonville and Miami. The realty segment is engaged in the development, leasing, management,
operation and selected sale of commercial and industrial property. FECR generates other income from leases to telecommunications companies for the
installation of fiber optic and other facilities on the railroad right-of-way.
In addition, FECR generates revenues from the grant of licenses and leases to
use railroad property and rights-of-way for outdoor advertising, parking lots
and lateral crossings of wires and pipes by municipalities and utility and
telecommunications companies. These miscellaneous rents are included in other
income. Also, FECI and FECR generate revenues and expenses from the rental, leasing,
and sale of buildings and properties that are ancillary to the railroads
operations. These revenues and expenses are included in the realty segment. The Companys reportable segments are strategic business units that offer
different products and services and are managed separately. 13




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##### 



Information by industry segment: Three Months
    
    Six MonthsEnded June 30
    
    Ended June 30(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Operating RevenuesRailway operations
    
    
    50,102
    
    
    
    45,227
    
    
    
    98,659
    
    
    
    89,498Realty:Flagler realty rental and services
    
    
    17,106
    
    
    
    16,133
    
    
    
    34,121
    
    
    
    31,784Flagler realty sales
    
    
    2,526
    
    
    
    9,435
    
    
    
    6,557
    
    
    
    21,694Other rental
    
    
    692
    
    
    
    782
    
    
    
    1,494
    
    
    
    1,529Other sales
    
    
    87
    
    
    
    793
    
    
    
    1,104
    
    
    
    3,431Total realty
    
    
    20,411
    
    
    
    27,143
    
    
    
    43,276
    
    
    
    58,438Total revenues*
    
    
    70,513
    
    
    
    72,370
    
    
    
    141,935
    
    
    
    147,936Operating ExpensesRailway operations
    
    
    37,435
    
    
    
    33,999
    
    
    
    74,885
    
    
    
    69,439Realty:Flagler realty rental and services
    
    
    14,442
    
    
    
    14,740
    
    
    
    29,785
    
    
    
    28,920Flagler realty sales
    
    
    1,918
    
    
    
    2,586
    
    
    
    4,117
    
    
    
    11,219Other rental
    
    
    1,059
    
    
    
    1,773
    
    
    
    1,886
    
    
    
    2,867Total realty
    
    
    17,419
    
    
    
    19,099
    
    
    
    35,788
    
    
    
    43,006Corporate general & administrative
    
    
    3,753
    
    
    
    2,981
    
    
    
    8,733
    
    
    
    5,897Total expenses*
    
    
    58,607
    
    
    
    56,079
    
    
    
    119,406
    
    
    
    118,342Operating Profit (Loss)Railway operations
    
    
    12,667
    
    
    
    11,228
    
    
    
    23,774
    
    
    
    20,059Realty
    
    
    2,992
    
    
    
    8,044
    
    
    
    7,488
    
    
    
    15,432Corporate general & administrative
    
    
    (3,753
    )
    
    
    (2,981
    )
    
    
    (8,733
    )
    
    
    (5,897
    )Operating profit
    
    
    11,906
    
    
    
    16,291
    
    
    
    22,529
    
    
    
    29,594Interest income
    
    
    360
    
    
    
    237
    
    
    
    556
    
    
    
    351Interest expense
    
    
    (3,773
    )
    
    
    (4,207
    )
    
    
    (7,719
    )
    
    
    (8,504
    )Other income
    
    
    5,090
    
    
    
    2,942
    
    
    
    7,787
    
    
    
    5,1931,677
    
    
    
    (1,028
    )
    
    
    624
    
    
    
    (2,960
    )Income before income taxes
    
    
    13,583
    
    
    
    15,263
    
    
    
    23,153
    
    
    
    26,634Provision for income taxes
    
    
    (5,229
    )
    
    
    (5,877
    )
    
    
    (8,914
    )
    
    
    (10,254
    )Income from continuing operations
    
    
    8,354
    
    
    
    9,386
    
    
    
    14,239
    
    
    
    16,380Discontinued OperationsIncome (loss) from operation of discontinued operations (net of taxes)
    
    
    30
    
    
    
    (349
    )
    
    
    164
    
    
    
    (238
    )(Loss) gain on disposition of discontinued operations (net of taxes)
    
    
    (16
    )
    
    
    215
    
    
    
    2,287
    
    
    
    27Net Income
    
    
    8,368
    
    
    
    9,252
    
    
    
    16,690
    
    
    
    16,169
 (Prior years results have been reclassified to conform to current years
presentation, including discontinued operations.) *-For the periods presented, there are no intersegment revenues and expenses. Note 12.The St. Joe Company St. Joe Company and affiliates provided certain real estate services to the
Company under service agreements, which expired in October 2003. These services
included property management, development management and construction
coordination and leasing services. Flagler now has operational responsibility
for these services. However, Codina, a St. Joe affiliate, continues to provide
development and leasing services at Flaglers South Florida properties. Amounts
paid to St. Joe and affiliates for these services for the second quarter of
2004 and 2003, respectively, were as follows: property management 14




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##### 



services of $0 million and $0.7 million, development fees of $0.2 million and
$0.1 million, construction coordination fees of $0 million and $0.1 million and
leasing commissions of $0.3 million and $1.2 million. 15




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Item 2. Managements Discussion and Analysis of the Consolidated
Financial Condition and Results of Operations Forward-Looking Statements This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
include the Companys present expectations or beliefs concerning future events.
These statements may be identified by the use of words like plan, expect,
aim, believe, project, anticipate, intend, estimate, will,
should, could, and other expressions that indicate future events and
trends. Such forward-looking statements may include, without limitation,
statements that the Company does not expect that lawsuits, review of open tax
years by the IRS, environmental costs, commitments, including future
contractual obligations, contingent liabilities, financing availability, labor
negotiations or other matters will have a material adverse effect on its
consolidated financial condition, statements concerning future capital needs
and sources of such capital funding, statements concerning future intentions
with respect to the payment of dividends, execution of a share repurchase
program, purchase of shares from the Alfred I. duPont Trust, and other
potential capital distributions, number of shares to be repurchased,
availability of cash to fund the stock repurchase, future growth potential of
the Companys lines of business, performance of the Companys product
offerings, other similar expressions concerning matters that are not historical
facts, and projections relating to the Companys financial results. The Company
cautions that such statements are necessarily based on certain assumptions,
which are subject to risks and uncertainties that could cause actual results to
materially differ from those contained in these forward-looking statements.
Important factors that could cause such differences include, but are not
limited to, the changing general economic conditions (particularly in the state
of Florida, the southeast US and the Caribbean) as they relate to economically
sensitive products in freight service and building rental activities; ability
to manage through economic recessions or downturns in customers business
cycles; industry competition; possible future changes in the Companys
structure, lines of business, business and investment strategies, and related
implementation; legislative or regulatory changes; technological changes;
volatility of fuel prices (including volatility caused by military actions);
changes in depreciation rates resulting from future railway right-of-way and
equipment life studies; changes in the ability of the Company to complete its
financing plans, changes in interest rates, settle future contractual
obligations as estimated in time and amount and conclude labor negotiations in
a satisfactory way; changes in insurance markets, including increases in
insurance premiums and deductibles; the availability and costs of attracting
and retaining qualified independent third party contractors; liability for
environmental remediation and changes in environmental laws and regulations;
the ultimate outcome of environmental investigations or proceedings and other
types of claims and litigation; natural events such as weather conditions,
floods, earthquakes and forest fires; discretionary government decisions
affecting the use of land and delays resulting from weather conditions and
other natural occurrences that may affect construction or cause damage to
assets; the ability of buyers to terminate contracts to purchase real estate
from the Company prior to the expiration of inspection periods; failure or
inability of third parties to fulfill their commitments or to perform their
obligations under agreements; costs and availability of land and construction
materials; buyers inability or unwillingness to close transactions,
particularly where buyers only forfeit deposits upon failure to close; the
Companys future taxable income and other factors that may affect the
availability and timing of utilization of the Companys deferred tax assets;
uncertainties, changes or litigation related to tax laws, regulations and the
application thereof that could limit the tax benefits of the EPIK sale or of
other possible transactions involving the Company; ability of the Company to
execute and complete a share repurchase program; the Companys ability to pay
dividends, repurchase shares or to make other distributions to shareholder(s);
and other risks inherent in the real estate and other businesses of the
Company. As a result of these and other factors, the Company may experience material
fluctuations in future operating results on a quarterly or annual basis, which
could materially and adversely affect its business, financial condition,
operating results and stock price. 16




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##### 



Readers should not place undue reliance on forward-looking statements, which
reflect managements view only as of the date thereof. The Company undertakes
no obligation to publicly release revisions to the forward-looking statements
in this Report that reflect events or circumstances after the date hereof or
reflect the occurrence of unanticipated events. 
 Results of Operations Consolidated Results Second Quarter and Six Months The Company reported consolidated revenues of $70.5 million for the second
quarter 2004, compared to $72.4 million in the second quarter 2003. The Company
reported income from continuing operations of $8.4 million and $9.4 million for
the quarters ended June 30, 2004 and 2003, respectively. The decrease in
consolidated revenues is due to two large land sales that took place during the
second quarter of 2003 (Ft. Pierce - $5.6 million and Urbieta Oil - $2.0
million) partially offset by increased 2004 Railway revenues and Flagler rental
and services revenue. The Company reported net income of $8.4 million, or $0.22
per diluted share in the second quarter 2004, compared with net income of $9.3
million, or $0.25 per diluted share in the second quarter of 2003. The decrease
in net income results from the above mentioned 2003 realty sales offset by
improved operating revenues for Railway revenues and Flagler rental and
services revenue and an increase in other income resulting from a second
quarter 2004 one-time utility wire-crossing agreement of $1.8 million. For the six months ended June 30, 2004, FECI reported consolidated revenues of
$141.9 million, compared to $147.9 million for the same period in 2003. The
Company reported income from continuing operations of $14.2 million and $16.4
million for the six months ended June 30, 2004 and 2003, respectively.
Consolidated revenues decreased for the six months ended June 30, 2004 due to
decreased land sales activity at Flagler. The six months ended June 30, 2003
contained Flagler land sales for Baptist Hospital ($9.5 million), Ft. Pierce
($5.6 million) and Urbieta Oil ($2.0 million) as well as other small parcels.
This was partially offset by revenue increases at FECR and higher Flagler
realty and rental services revenue. The Company reported net income of $16.7
million, or $0.45 per diluted share, for the six months ended June 30, 2004,
compared to net income of $16.2 million, or $0.44 per diluted share, for the
prior year period. While comparable, net income included the above mentioned
net revenue decrease plus an increase in corporate general and administrative
expenses (primarily costs associated with grants of restricted stock) offset by
an increase in other income due to income from a one-time utility wire-crossing
agreement ($1.8 million). Railway Second Quarter FECRs traffic volume and revenues for the three months ended June 30, 2004 and
2003, respectively, are shown below. Also, FECRs quarterly operating expenses
are presented below. 17




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##### 



TRAFFIC
Three Months Ended June 30
(dollars and units in thousands) 2004
    
    2003
    
    Percent
    
    2004
    
    2003
    
    PercentCommodity
    
    Units
    
    Units
    
    Variance
    
    Revenues
    
    Revenues
    
    VarianceRail CarloadsCrushed stone (aggregate)
    
    
    33.5
    
    
    
    30.4
    
    
    
    10.2
    
    
    
    15,664
    
    
    
    13,794
    
    
    
    13.6Construction materials
    
    
    1.3
    
    
    
    1.4
    
    
    
    (7.1
    )
    
    
    895
    
    
    
    795
    
    
    
    12.6Vehicles
    
    
    5.7
    
    
    
    6.0
    
    
    
    (5.0
    )
    
    
    4,498
    
    
    
    4,925
    
    
    
    (8.7
    )Foodstuffs & kindred
    
    
    3.0
    
    
    
    3.1
    
    
    
    (3.2
    )
    
    
    2,347
    
    
    
    2,306
    
    
    
    1.8Chemicals & distillants
    
    
    1.0
    
    
    
    0.9
    
    
    
    11.1
    
    
    
    1,166
    
    
    
    1,085
    
    
    
    7.5Paper & lumber
    
    
    1.3
    
    
    
    1.8
    
    
    
    (27.8
    )
    
    
    1,517
    
    
    
    1,707
    
    
    
    (11.1
    )Other
    
    
    3.1
    
    
    
    3.8
    
    
    
    (18.4
    )
    
    
    2,101
    
    
    
    2,255
    
    
    
    (6.8
    )Total carload
    
    
    48.9
    
    
    
    47.4
    
    
    
    3.2
    
    
    
    28,188
    
    
    
    26,867
    
    
    
    4.9Intermodal
    
    
    69.1
    
    
    
    61.8
    
    
    
    11.8
    
    
    
    21,195
    
    
    
    17,630
    
    
    
    20.2Total freight units/revenues
    
    
    118.0
    
    
    
    109.2
    
    
    
    8.1
    
    
    
    49,383
    
    
    
    44,497
    
    
    
    11.0Ancillary revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    719
    
    
    
    730
    
    
    
    (1.5
    )Railway segment revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,102
    
    
    
    45,227
    
    
    
    10.8
 (Prior years results have been reclassified to conform to current years
presentation. Previously, drayage revenues were shown separately but are now
classified for all periods in intermodal revenues, given their integrated
relationship.) RAILWAY OPERATING EXPENSES Three Months
    
    Three MonthsEnded June 30
    
    Ended June 30(dollars in thousands)
    
    2004
    
    2003Compensation & benefits
    
    
    13,899
    
    
    
    12,635Fuel
    
    
    3,736
    
    
    
    3,361Equipment rents (net)
    
    
    778
    
    
    
    717Car hire (net)
    
    
    (552
    )
    
    
    (538
    )Depreciation
    
    
    4,962
    
    
    
    4,890Purchased services
    
    
    2,162
    
    
    
    1,886Repairs to/by others (net)
    
    
    (663
    )
    
    
    (871
    )Load/unload
    
    
    2,001
    
    
    
    1,839Casualty & insurance
    
    
    1,460
    
    
    
    1,566Property taxes
    
    
    1,431
    
    
    
    1,244Materials
    
    
    2,688
    
    
    
    2,343General & administrative expenses
    
    
    2,167
    
    
    
    2,381Outside contractor delivery costs
    
    
    2,793
    
    
    
    1,963Other
    
    
    573
    
    
    
    583Total operating expenses
    
    
    37,435
    
    
    
    33,999
 (Prior years results have been reclassified to conform to current years
presentation. Previously,
drayage expenses were shown separately but are now classified for all
periods in their related
natural category expense item.) Railway segment revenues increased $4.9 million to $50.1 million in second
quarter 2004 from $45.2 million in second quarter 2003. Carload revenues
increased $1.3 million in second quarter 2004 over 2003. FECR continues to
transport record levels of aggregate business increasing revenues $1.9 million
in 2004 over second quarter 2003. Coal revenues (included in paper and lumber)
decreased $0.2 million due to the loss of a coal contract in third quarter 2003
that was regained at a lower volume level in July 2004. Vehicle revenues
decreased $0.4 million in 2004 over 2003 primarily due to a shift in the rental
buyback program to later in 2004 and a one-time National Guard move relating to
the Iraq war in 2003. Carload haulage revenues decreased $0.1 million due to
decreases with a connecting carrier. After several years of decline in
intermodal revenue, the second quarter of 2004 marked its fourth consecutive
quarter of year-to-year growth, ending the quarter with $21.2 million in
revenue, for an increase of $3.6 18




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##### 



million over second quarter 2003. Leading the
way was a resurgence in the parcel/LTL, domestic truckload segments and
international loads, as well as continued strength in our integrated product
and our Hurricane Train service, an Atlanta-based intermodal service
introduced in 2001. Offsetting these intermodal increases were declines in
intermodal traffic received from one of FECRs connecting
carriers. Operating expenses increased $3.4 million in second quarter 2004 over 2003.
Compensation and benefits increased $1.3 million due to general wage increases,
increased costs of health care, stock compensation expense (associated with
annual bonuses and restricted stock grants) and increased labor for new
business. Outside contracted delivery service expenses to move product from the
customers to the rail ramp increased $0.8 million in second quarter 2004 over
2003 due to higher volumes. Purchased services increased $0.3 million to $2.2
million in 2004 due to additional work on our facilities. Fuel expense
increased $0.4 million due to increases in price per gallon and additional
volume. Railway forward purchases fuel to manage the risk of fuel price increases. As
of June 30, 2004, the Railway had forward purchase contracts of 6.0 million
gallons for delivery from July 2004 to June 2005 for an average purchase price
of $0.9305 per gallon before taxes and freight. This represents 53% of the
estimated consumption for the six months ended December 31, 2004 for an average
purchase price of $0.9223 and represents 33% of the estimated consumption for
the six months ending June 30, 2005 for an average purchase price of $0.9446. During 2003, FECR commenced an engineering- and economics-based study of its
principal right-of-way and equipment assets to develop a multi-year preventive
maintenance and replacement plan and associated estimates of the assets
remaining lives. The study is expected to be completed in 2004 and may result
in material changes in FECRs maintenance and capital spending and in the
estimated remaining useful lives of its property, plant and equipment, which
may affect future depreciation rates and expense. Six Months FECRs traffic volume and revenues for the six months ended June 30, 2004 and
2003, respectively, are shown below. Also, FECRs six month operating expenses
are presented below. TRAFFIC
Six Months Ended June 30
(dollars and units in thousands) 2004
    
    2003
    
    Percent
    
    2004
    
    2003
    
    PercentCommodity
    
    Units
    
    Units
    
    Variance
    
    Revenues
    
    Revenues
    
    VarianceRail CarloadsCrushed stone (aggregate)
    
    
    65.8
    
    
    
    59.3
    
    
    
    11.0
    
    
    
    30,773
    
    
    
    26,518
    
    
    
    16.0Construction materials
    
    
    2.6
    
    
    
    2.7
    
    
    
    (3.7
    )
    
    
    1,695
    
    
    
    1,531
    
    
    
    10.7Vehicles
    
    
    11.8
    
    
    
    12.2
    
    
    
    (3.3
    )
    
    
    9,206
    
    
    
    9,812
    
    
    
    (6.2
    )Foodstuffs & kindred
    
    
    6.0
    
    
    
    6.1
    
    
    
    (1.6
    )
    
    
    4,653
    
    
    
    4,459
    
    
    
    4.4Chemicals & distillants
    
    
    2.0
    
    
    
    1.8
    
    
    
    11.1
    
    
    
    2,290
    
    
    
    2,054
    
    
    
    11.5Paper & lumber
    
    
    2.6
    
    
    
    3.9
    
    
    
    (33.3
    )
    
    
    2,893
    
    
    
    3,757
    
    
    
    (23.0
    )Other
    
    
    7.3
    
    
    
    8.0
    
    
    
    (8.8
    )
    
    
    4,632
    
    
    
    4,692
    
    
    
    (1.3
    )Total carload
    
    
    98.1
    
    
    
    94.0
    
    
    
    4.4
    
    
    
    56,142
    
    
    
    52,823
    
    
    
    6.3Intermodal
    
    
    134.0
    
    
    
    124.0
    
    
    
    8.1
    
    
    
    40,838
    
    
    
    35,046
    
    
    
    16.5Total freight units/revenues
    
    
    232.1
    
    
    
    218.0
    
    
    
    6.5
    
    
    
    96,980
    
    
    
    87,869
    
    
    
    10.4Ancillary revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,679
    
    
    
    1,629
    
    
    
    3.1Railway segment revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,659
    
    
    
    89,498
    
    
    
    10.2
 (Prior years results have been reclassified to conform to current years
presentation. Previously, drayage revenues were shown separately but are now
classified for all periods in intermodal revenues, given their integrated
relationship.) 19




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##### 



RAILWAY OPERATING EXPENSES Six Months
    
    Six MonthsEnded June 30
    
    Ended June 30(dollars in thousands)
    
    2004
    
    2003Compensation & benefits
    
    
    27,262
    
    
    
    25,691Fuel
    
    
    7,449
    
    
    
    6,934Equipment rents (net)
    
    
    1,608
    
    
    
    1,475Car hire (net)
    
    
    (860
    )
    
    
    (809
    )Depreciation
    
    
    9,984
    
    
    
    9,734Purchased services
    
    
    4,645
    
    
    
    4,160Repairs to/by others (net)
    
    
    (1,217
    )
    
    
    (1,389
    )Load/unload
    
    
    3,931
    
    
    
    3,619Casualty & insurance
    
    
    2,957
    
    
    
    3,051Property taxes
    
    
    2,862
    
    
    
    2,488Materials
    
    
    5,472
    
    
    
    4,648General & administrative expenses
    
    
    4,688
    
    
    
    5,043Outside contractor delivery costs
    
    
    4,988
    
    
    
    3,609Other
    
    
    1,116
    
    
    
    1,185Total operating expenses
    
    
    74,885
    
    
    
    69,439
 (Prior years results have been reclassified to conform to current years
presentation. Previously,
drayage expenses were shown separately but are now classified for all
periods in their related
natural category expense item.) Railway segment revenues increased $9.2 million to $98.7 million through June
30, 2004 from $89.5 million through June 30, 2003. Carload revenues increased
$3.3 million over 2003 levels which is driven by record levels of aggregate
business increasing revenue $4.3 million in 2004 over 2003. Coal revenues
(included in paper and lumber) decreased $0.5 million due to the loss of a coal
contract in third quarter 2003 that was regained at a lower volume level in
July 2004. Vehicle revenues decreased $0.6 million in 2004 over 2003 primarily
due to a shift in the rental buyback program to later in 2004 and a one-time
National Guard move relating to the Iraq war in 2003. Intermodal revenues increased $5.8 million for the first six months in 2004
over the same period 2003. Leading the way was a resurgence in the parcel/LTL,
domestic truckload segments and international loads, as well as continued
strength in our integrated product. Offsetting these increases were declines in
intermodal traffic received from one of the Railways connecting carriers. Operating expenses increased $5.5 million to $74.9 million for the six months
ended June 2004, compared with $69.4 million for same period 2003.
Compensation and benefits increased $1.6 million due to general wage increases,
increased labor for new business and restricted stock and bonus compensation.
Materials and supplies increased $0.8 million due to additional repairs to the
locomotives and freight cars. Fuel expense increased $0.5 million due to volume
and the increased price for diesel fuel. Purchased services increased $0.5
million over 2003 due to an increase of scheduled events in the Engineering
department and work performed at our facilities. Depreciation increased $0.3
million in 2004 over 2003 reflecting recent increases in capital programs.
Property taxes increased $0.4 million for 2004 due to an increase in the
property assessment. 20




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##### 



Realty Second Quarter Flaglers quarterly revenues and operating expenses for the three months ended
June 30, 2004 and 2003, respectively, are presented below. REALTY SEGMENT REVENUES Three Months
    
    Three MonthsEnded June 30
    
    Ended June 30(dollars in thousands)
    
    2004
    
    2003Rental revenues  Flagler
    
    
    14,791
    
    
    
    13,327Rental income  straight-line rent adjustments
    
    
    766
    
    
    
    1,140Operating expense recoveries
    
    
    929
    
    
    
    1,175Rental revenues  undeveloped land
    
    
    210
    
    
    
    286Other
    
    
    410
    
    
    
    205Total rental revenue  Flagler properties
    
    
    17,106
    
    
    
    16,133Rental revenues  other realty operations
    
    
    692
    
    
    
    782Total rental revenues
    
    
    17,798
    
    
    
    16,915Building and land sales  Flagler
    
    
    2,526
    
    
    
    9,435Building and land sales  other realty operations
    
    
    87
    
    
    
    793Total building and land sales revenues
    
    
    2,613
    
    
    
    10,228Total realty segment revenues
    
    
    20,411
    
    
    
    27,143
 (Prior years results have been reclassified to conform to current years
presentation, including discontinued operations.) REALTY SEGMENT EXPENSES Three Months
    
    Three MonthsEnded June 30
    
    Ended June 30(dollars in thousands)
    
    2004
    
    2003Real estate taxes  developed
    
    
    2,070
    
    
    
    2,090Repairs & maintenance  recoverable
    
    
    711
    
    
    
    619Services, utilities, management costs
    
    
    3,102
    
    
    
    2,962Total expenses subject to recovery  Flagler properties
    
    
    5,883
    
    
    
    5,671Real estate taxes  Flagler undeveloped land
    
    
    900
    
    
    
    906Repairs & maintenance  non-recoverable
    
    
    253
    
    
    
    197Depreciation & amortization  Flagler
    
    
    6,026
    
    
    
    6,217SG&A  non-recoverable  Flagler
    
    
    1,380
    
    
    
    1,749Total  non-recoverable expenses  Flagler properties
    
    
    8,559
    
    
    
    9,069Total rental expenses  Flagler properties
    
    
    14,442
    
    
    
    14,740Real estate taxes  other undeveloped land
    
    
    64
    
    
    
    153Depreciation & amortization  other
    
    
    10
    
    
    
    28SG&A  non-recoverable  other
    
    
    985
    
    
    
    1,592Total rental expenses  other realty operations
    
    
    1,059
    
    
    
    1,773Total rental expenses
    
    
    15,501
    
    
    
    16,513Realty sales expenses
    
    
    1,918
    
    
    
    2,586Total operating expenses
    
    
    17,419
    
    
    
    19,099
 (Prior years results have been reclassified to conform to current years
presentation, including discontinued operations.) Results from Continuing Operations Flaglers rental revenues increased $1.0 million or 6.0% from $16.1 million in
the second quarter of 2003 21




---



##### 



to $17.1 million in the second quarter of 2004.
Revenues from operating properties increased $1.0 million quarter-over-quarter.
Same store revenues increased $0.5 million over the prior year quarter.
Revenues generated by properties acquired in 2003 increased $0.1 million, which
included a $0.2 million net termination fee received during the quarter ended
June 30, 2004. Deerwood North 300, which began operations in January 2004,
contributed $0.3 million in new in 2004 revenue during the second quarter
2004. Flagler held 58 finished buildings with 6.4 million square feet and overall
occupancy of 91% at June 30, 2004. Same store properties include 5.8 million
square feet and 90% occupancy at the end of the second quarter 2004, compared
to 86% at the end of second quarter 2003. Flagler has eight projects with
1,170,000 sq. ft. in various stages of development (113,000 sq. ft. in the
lease-up phase; 490,000 sq. ft. under construction; 567,000 sq. ft. in
pre-development) at June 30, 2004. Projects under construction include a
239,000-sq. ft. build-to-suit project. Flaglers building and land sales revenue decreased from $9.4 million during
the second quarter 2003 to $2.5 million in the second quarter 2004. Sales
during the quarter ended June 30, 2003 included the Ft. Pierce sale ($5.6
million), and the Urbieta Oil sales ($2.0 million). Other sales decreased $0.7
million quarter-over-quarter due to decreased land sales activity at the
Railway. Flaglers operating expenses decreased $0.3 million or 2.0% from $14.7 million
during the quarter ended June 30, 2003 to $14.4 million during the quarter
ended June 30, 2004. Depreciation and amortization expense decreased $0.2
million during second quarter 2004 compared to the prior year (same store 
$0.7 million decrease, new in 2003  $0.1 million decrease, new in 2004 - $0.2
million increase, infrastructure/corporate - $0.4 million increase) and
overhead expenses decreased by $0.4 million quarter-over-quarter. These
operating expense decreases were partially offset by increased recoverable
administrative costs and owners association fees ($0.2 million) and increased
recoverable repairs and maintenance costs ($0.1 million). Other rental expenses
decreased from $1.8 million in second quarter 2003 to $1.1 million in second
quarter 2004 due to reduced expenses associated primarily with the Port
Everglades land lease. Flaglers cost of land sales decreased $0.7 million from $2.6 million to $1.9
million for the quarters ended June 30, 2003 and 2004, respectively, due to
decreased land sale activity. Six Months Flaglers revenues and operating expenses for the six months ended June 30,
2004 and 2003, respectively, are presented below. REALTY SEGMENT REVENUES Six Months
    
    Six MonthsEnded June 30
    
    Ended June 30(dollars in thousands)
    
    2004
    
    2003Rental revenues  Flagler
    
    
    29,114
    
    
    
    26,159Rental income  straight-line rent adjustments
    
    
    1,882
    
    
    
    2,211Operating expense recoveries
    
    
    1,987
    
    
    
    2,322Rental revenues  undeveloped land
    
    
    428
    
    
    
    588Equity pickup
    
    
    
    
    
    
    62Other
    
    
    710
    
    
    
    442Total rental revenue  Flagler properties
    
    
    34,121
    
    
    
    31,784Rental revenues  other realty operations
    
    
    1,494
    
    
    
    1,529Total rental revenues
    
    
    35,615
    
    
    
    33,313Building and land sales  Flagler
    
    
    6,557
    
    
    
    21,694Building and land sales  other realty operations
    
    
    1,104
    
    
    
    3,431Total building and land sales revenues
    
    
    7,661
    
    
    
    25,125Total realty segment revenues
    
    
    43,276
    
    
    
    58,438
 (Prior years results have been reclassified to conform to current years
presentation, including discontinued operations.) 22




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##### 



REALTY SEGMENT EXPENSES Six Months
    
    Six MonthsEnded June 30
    
    Ended June 30(dollars in thousands)
    
    2004
    
    2003Real estate taxes  developed
    
    
    4,168
    
    
    
    4,165Repairs & maintenance  recoverable
    
    
    1,280
    
    
    
    1,208Services, utilities, management costs
    
    
    6,067
    
    
    
    5,797Total expenses subject to recovery  Flagler properties
    
    
    11,515
    
    
    
    11,170Real estate taxes  Flagler undeveloped land
    
    
    1,905
    
    
    
    1,900Repairs & maintenance  non-recoverable
    
    
    551
    
    
    
    347Depreciation & amortization  Flagler
    
    
    13,286
    
    
    
    12,138SG&A - non-recoverable  Flagler
    
    
    2,528
    
    
    
    3,365Total  non-recoverable expenses  Flagler properties
    
    
    18,270
    
    
    
    17,750Total rental expenses  Flagler properties
    
    
    29,785
    
    
    
    28,920Real estate taxes  other undeveloped land
    
    
    128
    
    
    
    269Depreciation & amortization  other
    
    
    48
    
    
    
    38SG&A - non-recoverable  other
    
    
    1,710
    
    
    
    2,560Total rental expenses  other realty operations
    
    
    1,886
    
    
    
    2,867Total rental expenses
    
    
    31,671
    
    
    
    31,787Realty sales expenses
    
    
    4,117
    
    
    
    11,219Total operating expenses
    
    
    35,788
    
    
    
    43,006
 (Prior years results have been reclassified to conform to current years
presentation, including discontinued operations.) Results from Continuing Operations Flaglers rental revenues increased $2.3 million or 7.4% from $31.8 million
during the six months ended June 30, 2003 to $34.1 million during the six
months ended June 30, 2004. Revenues from operating properties increased $2.5
million during 2004. Same store revenues increased $1.5 million over the prior
year, which included a net termination fee increase of $0.3 million, with same
store occupancy increasing to 90% compared to same store occupancy of 86% in
the prior year. Revenues from properties acquired in 2003 increased by $0.4
million, which included a net termination fee increase of $0.2 million.
Property placed in service in 2004 contributed $0.6 million in revenues.
Income from land rents decreased $0.1 million year-over-year due to the sale of
certain parcels. Income from equity investments decreased $0.1 million
year-over-year, due to Flaglers January 2003 acquisition of the remaining 50%
interest in three buildings at Beacon Station previously held in partnership
with Duke Realty, for which the operating results subsequent to the acquisition
date are consolidated as new in 2003 properties. Flaglers realty sales revenues decreased from $21.7 million in 2003 to $6.6
million for the six months ended June 30, 2004. Flaglers operating expenses increased $0.9 million or 3.0% to $29.8 million
from $28.9 million for the six months ended June 30, 2004 and 2003,
respectively. Depreciation and amortization expense increased $1.1 million
(same store - $0.1 million increase; new in 2004 properties - $0.3 million
increase; infrastructure/corporate - $0.7 million increase). The increase in
depreciation and amortization during the six months ended June 30, 2004
includes a $1.4 million write-off of net book value related to the renovation
of Flaglers class A office buildings at duPont Center in Jacksonville, FL.
Other 2004 operating expense increases include owners association fees ($0.2
million), recoverable repairs and maintenance ($0.1 million) and other
recoverable expense increases ($0.3 million). These operating expense increases
were partially offset by decreased overhead and leasing costs ($0.8 million)
during the six months ended June 30, 2004 compared to the prior year period. 23




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##### 



Flaglers cost of land sales decreased $7.1 million year-over-year, from $11.2
million to $4.1 million due to lower land sales revenues. Other realty rental expenses decreased by $1.0 million due to reduced expenses
associated with the Port Everglades land lease. Results from Discontinued Operations In accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, effective for financial statements issued for fiscal years
beginning after December 15, 2001, components of Flagler that meet certain
criteria have been accounted for as discontinued operations. Therefore, income
or loss attributable to the operations and sale of the components classified as
discontinued operations are presented in the summary of operating results as
discontinued operations, net of applicable income taxes. Discontinued operations include the operations of an industrial building sold
in 2003, and Flaglers 50% interest in three buildings held in partnership with
Duke Realty disposed of during 2003. During 2004, Flagler sold a 60,000-sq. ft.
build-to-suit office building for $12.6 million for a pre-tax gain of $3.7
million, or $2.3 million, net of applicable taxes, and classified a 147,000-sq.
ft. industrial building as an asset held for sale. The operating results of
these properties, as well as the gain on sale are included in discontinued
operations for all periods presented. Three Months
    
    Six MonthsEnded June 30
    
    Ended June 30(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Summary of Operating Results of Discontinued OperationsFlagler realty rental revenues
    
    
    179
    
    
    
    535
    
    
    
    731
    
    
    
    1,234Flagler realty rental expenses
    
    
    133
    
    
    
    1,103
    
    
    
    465
    
    
    
    1,858Operating income (loss)
    
    
    46
    
    
    
    (568
    )
    
    
    266
    
    
    
    (624
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Income (loss) before income taxes
    
    
    46
    
    
    
    (568
    )
    
    
    266
    
    
    
    (581
    )Income tax (expense) benefit
    
    
    (16
    )
    
    
    219
    
    
    
    (102
    )
    
    
    224Income (loss) from discontinued operations
    
    
    30
    
    
    
    (349
    )
    
    
    164
    
    
    
    (357
    )(Loss) gain on disposition of discontinued operations
(net of taxes of $9 for the three months ended June
30, 2004 and $1.4 million for the six months ended
June 30, 2004.)
    
    
    (16
    )
    
    
    
    
    
    
    2,287
    
    
    
    
 Corporate Expenses Second Quarter and Six Months Corporate general and administrative expenses were $3.8 million and $3.0
million for the second quarters of 2004 and 2003, respectively. The
quarter-over-quarter increase ($0.8 million) relates primarily to increased
incentive-based compensation (i.e. annual bonuses) ($0.3 million), general wage
increases ($0.1 million), a one-time relocation expense ($0.1 million), and
increased professional services related to public company costs ($0.2 million). Corporate expenses for the six months ended June 30, 2004 and 2003 were $8.7
million and $5.9 million, respectively. Increases primarily relate to costs
associated with increased incentive-based compensation (i.e. restricted stock
and annual bonuses) expense. In a transaction (the Transaction) initiated at
the request of the Board of Directors, the Company cancelled vested,
in-the-money stock options (the Options) to acquire 144,000 shares of the
Companys common stock held by the Companys Chief Executive Officer (CEO).
The embedded value of the Options (fair market value less strike price) was $2
million. The embedded value, less applicable tax withholding, was paid in
common stock. The CEO was issued 36,407 shares (valued at $35.06, which was the
closing price on February 27, 2004). The stock, together with applicable
withholdings, represents the pre-tax embedded value. Because the original stock
option award was cancelled and the Company replaced this award with FECI common
stock, in accordance with FASB Interpretation No. 44, the Company was required
to recognize compensation expense in the amount of $2 million with respect to
the Transaction. The Board recognized the need for
the CEO to address the near- term maturity of the Options and preferred that he
do so without the current market sale of 144,000 shares and that he also
increase his outright ownership in the Company. As a part 24




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of this arrangement,
the CEO has agreed, by the conclusion of 2005, to accumulate and maintain a
position of outright ownership in the Companys stock of at least 75,000
shares. Interest Expense Second Quarter and Six Months Interest expense for the second quarter and first six months of 2004 was $3.8
million and $7.7 million, respectively. This compares with interest expense of
$4.2 million and $8.5 million for the second quarter and first six months of
2003, respectively. The lower interest expense resulted primarily from no
borrowings on the revolver during 2004. Other Income Second Quarter and Six Months Other income for the second quarter and first six months of 2004 was $5.1
million and $7.8 million, respectively, compared to $2.9 million and $5.2
million for the second quarter and first six months of 2003, respectively. Pipe
and wire crossing income for the second quarter and six months of 2004 included
$1.8 million of income from a one-time utility wire crossing agreement. Income Tax Income tax expenses represent
an effective rate of 38.5% for the second quarters
and six months of 2004 and 2003, respectively. 
 Financial Condition, Liquidity and Capital Resources Net cash generated by operating activities was $37.4 million and $107.7 million
for the six months ended June 30, 2004 and 2003, respectively. The year-to-year
fluctuation in net cash generated by operating activities is primarily the
result of a $74.6 million income tax refund received during the second quarter
2003. During the six months ended June 30, 2004 and 2003, respectively, the Company
invested approximately $35 million and $48 million at Flagler. Included in the
six months ended June 30, 2003 Flagler investment is the purchase of the
remaining 50% interest in three buildings previously held in partnership with
Duke Realty for $23.3 million. For the six months ended June 30, 2004 and 2003,
the Companys capital investments at FECR were approximately $12 million and $9
million. Proceeds from disposition of assets were $20.3 million and $25.1 million for
the six months ended June 30, 2004 and 2003, respectively. The majority of
these proceeds were from the sale of a building and a large parcel of land by
Flagler in the periods, respectively. Net cash used in financing activities was $56.1 million for the six months
ended June 30, 2003. Financing activities for the six months ended June 30,
2004 used minimal cash. Finance activities during 2003 included, primarily,
repayments ($53.0 million) for borrowings on the line of credit. At June 30, 2004, the Company had a $200 million revolving credit agreement
with certain financial institutions, for which the Company presently pays
(quarterly) commitment fees, as applicable under the agreement, at a range of
20-50 basis points. The Companys revolving credit agreement contains various
covenants which, among other things, require the maintenance of certain
financial ratios related to fixed charge coverage and maximum leverage;
establish minimum levels of net worth; establish limitations on indebtedness,
certain types of payments, including dividends, liens and investments; and
limit the use of proceeds of asset sales. Some of the above covenants provide
specific exclusion of certain financing and investing activities at Flagler.
The Company believes the most restrictive of such ratios is the Group
Debt/EBITDA ratio (as defined in the Credit Facility Agreement). The Credit
Facility Agreement provides
that at June 30, 2004, the Companys Group Debt/EBITDA ratio shall be no
greater than 2.50. At June 30, 2004, the Companys actual Group Debt/EBITDA
ratio was 0.01. Pursuant to the Credit Facility 25




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Agreement, the required Group
Debt/EBITDA ratio is 2.50 for the remainder of the agreement (March 31, 2005),
all as more particularly set forth in the Credit Facility Agreement. Although
no assurances can be given as to the Companys future compliance with the Group
Debt/EBITDA ratio covenant or other financial covenants, the Company has
complied with the terms of the Credit Facility Agreement in the past and
expects to continue to comply with them in the future. Borrowings under the credit agreement bear interest at variable rates linked to
the LIBOR Index. Interest on borrowings is due and payable on the rollover
date for each draw. Outstanding borrowings can be paid at any time by the
borrower, or at the conclusion of the facilitys term. On February 7, 2003, the
Company extended its revolving bank credit facility for an additional year to
March 31, 2005. In tandem with the extension, the Company and its banks made
amendments to the facility that included a reduction in the aggregate amount of
the commitments from $300 million to $200 million, the elimination of the
Global Debt to EBITDA covenant, which included the results of EPIK, an increase
in the stock repurchase and special dividend limit to $150 million (which may
be increased in 2004 to $200 million if certain financial ratio tests are met),
an increase in the non-recourse mortgage financing limit from $250 million to
$325 million, and other miscellaneous modifications. At June 30 2004, there
were no borrowings outstanding under the facility. During 2001, Flagler issued $247 million of mortgage notes with $160 million
due July 1, 2011 and $87 million due October 1, 2008. At June 30, 2004, $239.7
million was outstanding on these notes. These notes are collateralized by
certain buildings and properties of Flagler. Blended interest and principal
repayment on the notes is payable monthly based on a fixed 7.39% and 6.95%
weighted-average interest
rate, respectively, for each note offering, on the outstanding principal amount
of the mortgage notes and assuming a thirty-year amortization period. The net
proceeds in 2001 were used to repay existing indebtedness under the Companys
revolving credit facility. At June 30, 2004, the Company considers the
estimated fair market value of the mortgage notes to be $264.2 million. Subsequent to June 30, 2004, Flagler plans to issue $105 million of seven-year
mortgage notes. These notes will be collateralized by certain buildings and
properties of Flagler. The mortgage notes will consist of a $60 million note
with a fixed rate of interest of 5.27% and a $45 million note with a floating
rate of interest based on the 90-day LIBOR Index plus 1.00%. The issuance of
the notes will optimize Flaglers capital structure, reduce the overall cost of
capital and take advantage of historically low interest rates. The mortgage
financing is expected to close on August 10, 2004 and each note will have an
amortization of 30 years. The floating rate feature will allow Flagler the
flexibility to sell buildings securing the notes with minimal prepayment costs
after a six-month period. The net proceeds from the issuance of the mortgage
notes, and a portion of the cash on hand, will be used to purchase $190 million
of Company stock from The Alfred I. duPont Testamentary Trust and The
Nemours Foundation expected to close
in late August. Additionally and subsequent to June 30, 2004, the Company and its banks made
amendments to the facility to accommodate an increase in the non-recourse
mortgage financing limit from $325 million to $350 million and an increase to
the stock repurchase and special dividend limit to $300 million (eliminating
the financial ratio test needed to exceed $150 million). At the time of the
signing of the amendment, the Company had issued special dividends and
repurchased stock totaling approximately $60 million against the limit. The Company believes its access to liquidity, via cash generated from
operations and the existing Credit Agreement and/or external financing, will be
sufficient to support normative cash needs in future years. The Company plans
on maintaining a revolving credit facility in support of its general corporate
needs. The Companys current intent is to extend or renew the existing credit
agreement before it matures on March 31, 2005. At June 30, 2004, FECI had $10.7 million of deposits and escrowed funds
included in cash and cash equivalents related to pending land sales and
potential real estate 1031 like-kind exchanges. 26




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##### 



OTHER MATTERS Critical Accounting Policies The Company has reviewed its accounting policies to identify those that are
very important to the portrayal of the Companys financial condition and
results, and that require managements most difficult, subjective or complex
judgments (the Critical Accounting Policies). The Company has determined that
its accounting policies governing impairment of long-lived assets, income tax
provisions, realty rental revenue recognition, real estate infrastructure costs
and contingencies may be considered Critical Accounting Policies. Impairment of Long-lived Assets  The Company reviews the carrying value of its
property, plant and equipment for impairment whenever events or changes in
circumstances indicate the carrying value of an asset or asset grouping may not
be recoverable from the undiscounted future net cash flows expected to be
generated over its remaining useful life. Detecting these events or changes in
circumstances can be difficult. At June 30, 2004, management had not identified
indicators of an impairment of value for any significant asset group of the
Companys. However, events or changes in circumstances could develop or occur
that would cause the Company to evaluate the recovery of its long-lived assets
and potentially record an impairment, the amount of which could be material.
Assets that are deemed impaired are recorded at the lower of carrying amount or
fair value. Income Tax Provisions  FECIs net deferred tax liability was $134.7 million at
June 30, 2004 and $129.5 million at December 31, 2003, respectively. In 2002,
the Company had a federal deferred tax asset of approximately $38 million
associated with net operating loss carry forwards. During the course of 2003,
all of the federal net operating loss was utilized; however, at December 31,
2003, the Company estimated a $2.0 million alternative minimum tax (AMT)
liability for the 2003 tax year that will produce an AMT credit carry forward
which is expected to offset future federal tax liabilities. At December 31,
2002, the Company had a state deferred tax asset of approximately $11 million
relating to net operating loss carry forwards. This state deferred tax asset
was partially utilized during 2003, with approximately $8 million remaining at
December 31, 2003. The net deferred tax liability is estimated based on the
expected future tax consequences of items recognized in the financial
statements. Management must use judgment when estimating the future timing and
deductibility of expenses, loss and credit carry forwards in the Companys tax
returns. A valuation allowance is required to be recorded if management expects
that it is more likely than not that its deferred tax assets will not be
realized. As of June 30, 2004 and December 31, 2003, FECI has no valuation
allowance since it expects to realize its deferred tax assets. This expectation
is primarily based upon FECIs expectation that future operations will be
sufficiently profitable to utilize the operating loss carry forwards, as well
as the existence of various tax, business and other planning strategies
available to the Company. However, the Company cannot guarantee that it will
realize this tax asset or that future valuation allowances will not be
required. Failure to utilize the tax asset could materially affect the
Companys financial results and financial position. Federal tax years through
1999 have been closed with the Internal Revenue Service (IRS). Federal tax
years 2000-2002 are currently under review by the IRS. Management believes its
income tax provision reserves at June 30, 2004 to be adequate for the
settlement, if any, of disputed tax positions taken by the Company for these
years. Historically, settlements for disputed tax positions that have effected
the total tax provision provided for in the income statement has been primarily
interest charges on timing differences between years. Revenue Recognition 
Realty Rental Revenues  Revenues from realty rentals are
primarily contractual base rentals from leases of commercial property. The
Company recognizes revenues from these base rents evenly over the lease term in
accordance with SFAS 13, Accounting for Leases (SFAS 13). SFAS 13 requires
rental income from an operating lease be recognized on a straight-line basis
over the non-cancelable lease term. Accordingly, total contractual minimum
lease payments, including scheduled rent increases, are recognized as rental
revenue evenly over the lease term. Accrued revenues from contractually
scheduled rent increases in excess of amounts currently due amounted to $14.1
million at June 30, 2004 and $12.8 million at December 31, 2003, which is
reported in other assets. The Company monitors this asset for collection risk
and establishes reserves for any amounts deemed not collectible. However,
amounts collected in future periods may vary from the Companys expectations. Real Estate Infrastructure Costs  The Company periodically constructs road,
road structures and general infrastructure related to the development of
commercial real estate. Certain of these infrastructure assets 27




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##### 



may be deeded,
upon completion, to applicable governmental authorities. The Company believes
these deeded items (e.g., roads) benefit and increase the value of the parcels
within and adjacent to the related commercial real estate developments. The
Company capitalizes all infrastructure costs (including costs of infrastructure
assets deeded to governmental authorities) into the basis of its commercial
real estate developments, and allocates these costs to the individual parcels
within the park on a relative fair value basis in accordance with SFAS No. 67,
Accounting for Costs and Initial Rental Operations of Real Estate Projects
(SFAS 67). In connection with infrastructure assets constructed by the Company and deeded
to governmental authorities, certain governmental authorities may agree to
reimburse the Company certain of its construction costs for the deeded assets
based on and to the extent of annual incremental taxes (such as property taxes)
as may be collected by the governmental authority from the applicable
properties over a stipulated period of time. Prior to and at the date of
deeding the infrastructure asset to the governmental authority, reimbursements
are accounted for as a reduction in the allocated costs described above to the
extent the Companys receipt of such reimbursements has become fixed and
determinable, based upon the related incremental taxes having been assessed and
being, therefore, payable. The Company does not recognize expected future tax
reimbursements even though they may be probable and estimable, until they
become fixed and determinable. Contingencies  It is the Companys policy to reserve for certain contingencies
consisting primarily of various claims and lawsuits resulting from its
operations. In the opinion of management, appropriate reserves have been made
for the estimated liability that may result from disposition of such matters.
Managements opinion and ultimately the reserve recorded in the financial
statements are based on known facts and circumstances. In certain
circumstances, management uses the services of outside counsel to help evaluate
the facts and circumstances and gives consideration to their professional
judgment in establishing the appropriate reserve. The ultimate resolution of
these contingencies may be for an amount greater or less than the amount
estimated by management. 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change to the disclosures made under the heading
Quantitative and Qualitative Disclosures about Market Risk on pages 38 and 39
of the Companys 2003 Annual Report on Form 10-K. 
 Item 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of the Companys Chief
Executive Officer (CEO) and the Chief Financial Officer (CFO), management has
evaluated the effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the CEO and CFO concluded that the
Companys disclosure controls and procedures were effective as of June 30,
2004. Changes in Internal Control over Financial Reporting There were no changes in the Registrants internal control over financial
reporting identified in connection with the evaluation required by paragraph
(d) of Exchange Act Rules 13a or 15d-15 that occurred during the Registrants
second fiscal quarter that have materially affected, or are reasonably likely
to materially affect, the Registrants internal control over financial
reporting. 28




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##### 



PART II 
 Item 1. LEGAL PROCEEDINGS There are no new legal or regulatory proceedings pending or known to be
contemplated which, in managements opinion, are other than normal and
incidental to the kinds of businesses conducted by the Company. 
 Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND
ISSUER PURCHASES OF EQUITY SECURITIES Effective September 22, 2003, the Company amended its Articles of Incorporation
to reclassify its Class A common stock and Class B common stock into a single
class of common stock. Prior to the reclassification, the holders of Class A
common stock elected 20% of the members of the Companys board of directors,
and the holders of Class B common stock elected 80% of the members of the
Companys board of directors. The holders of Class A common stock and the
holders of Class B common stock are now holders of a single class of common
stock and vote together for the election of all directors. Prior to the reclassification, directors could only be removed by the holders
of the class of common stock that appointed such director. A director may now
be removed by a vote of shareholders voting as a single class. As to all other matters on which shareholders are entitled to vote, the
reclassification had no impact on the voting power of holders of common stock. Prior to the reclassification, the Articles of Incorporation required that the
size of the board be in multiples of five. The size of the board of directors
shall be fixed from time to time by the board of directors in accordance with
the Companys By-Laws. In addition, the Shareholder Rights Agreement was amended to make the rights
applicable to the new common stock and to delete references to the Class A
common stock and the Class B common stock.
Each new share of common stock includes an identical associated preferred stock
purchase right that will trade with each share. These rights will become
exercisable upon the acquisition by a person or affiliated group of 39% or more
of the outstanding shares of new common stock, or upon the commencement or
announcement of a tender offer which, if consummated, would result in the
acquisition of 39% or more of the outstanding shares of the new common stock. Holders of a majority of the outstanding shares of Class A common stock and
Class B common stock each voting separately as a class and together, approved
the reclassification on May 28, 2003. On August 28, 2003, the Board of Directors authorized the expenditure of up to
$75 million to repurchase the Companys outstanding common stock through a
program of open market purchases and privately negotiated transactions. The
following table sets forth the repurchases (which were zero shares) made during
the three months ended June 30, 2004: 29




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##### 



Maximum AmountTotal Number of Shares
    
    of Value that mayPurchased as Part of
    
    yet be PurchasedTotal Number of
    
    Average Price
    
    Publicly Announced
    
    under the Plans orShares Purchased
    
    Paid Per Share
    
    Plans or Programs
    
    Programs(000s)April
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    72,083May
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    72,083June
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    72,083
 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders was held on June 3, 2004. There were
36,902,066 shares of common stock outstanding as of the record date, April 16,
2004. Of this amount, there were 35,275,623 shares of common stock represented
in person or by proxy. Proposal 1: The election of twelve directors to hold office until the Annual
Meeting of Shareholders in 2005, or until their successors are elected and
qualified: Number of Votes CastCommon Class
    
    Votes For
    
    Votes WithheldRobert W. Anestis
    
    
    29,458,582
    
    
    
    7,196,826Robert D. Fagan
    
    
    34,780,329
    
    
    
    369,859David M. Foster
    
    
    34,725,991
    
    
    
    424,197Allen C. Harper
    
    
    34,781,059
    
    
    
    369,129Adolfo Henriques
    
    
    27,245,538
    
    
    
    7,904,650James E. Jordan
    
    
    34,779,171
    
    
    
    371,017Gilbert H. Lamphere
    
    
    34,743,585
    
    
    
    406,603John S. Lord
    
    
    34,782,805
    
    
    
    367,383Joseph Nemec
    
    
    27,261,317
    
    
    
    7,888,871Herbert H. Peyton
    
    
    34,781,069
    
    
    
    369,119James J. Pieczynski
    
    
    34,779,295
    
    
    
    370,893Winfred L. Thornton
    
    
    32,335,260
    
    
    
    2,814,928
 
 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The Exhibits listed on the accompanying Index to Exhibits are filed as part of
this Report or furnished with this Report. (b) Reports on Form 8-K 1. On April 29, 2004, under Item 12 on Form 8-K, the Registrant furnished
information concerning the Companys results of operations for its first
quarter ended March 31, 2004. A copy of the press release was attached as
Exhibit 99 to this report. 2. On May 14, 2004, under Item 9 on Form 8-K, the Registrant furnished
information that Mr. Robert W. Anestis, Chairman, President and Chief Executive
Officer of Florida East Coast Industries, Inc. would 30




---



##### 



make presentations to various
investors in and around Boston, Massachusetts on May
14, 2004, highlighting the Companys consolidated and subsidiaries business
accomplishments, as well as (but not limited to) business opportunities,
markets and certain financial results. The presentation is available on the
Companys website http://www.feci.com. 31




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##### 



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. FLORIDA EAST COAST INDUSTRIES, INC.
(Registrant)Date: August 6, 2004
    /s/ Mark A. LeiningerMark A. Leininger,Vice President and Controller Date: August 6, 2004
    /s/ Daniel H. PopkyDaniel H. Popky,Executive Vice President and
Chief Financial Officer 
 INDEX TO EXHIBITS PAGES-K ITEM 601
    
    DOCUMENTS
    
    NUMBERS3.(i)
    
    Second Amended and Restated Articles of Incorporation
    
    
    *3.(ii)
    
    Amended and Restated By-Laws of FECI through February
26, 2004
    
    
    #3.(iii)
    
    Amended and Restated Articles of Amendment Relating to
Designation of Series A Participating Cumulative Preferred
Stock
    
    
    **4
    
    Amended and Restated Rights Agreement dated as of
September 22, 2003
    
    
    **10 (a)
    
    Employment Agreement, Change in Control Agreement
and Restricted Stock Agreement dated February 18, 2004
between FECI and Daniel H. Popky
    
    
    ##10 (b)
    
    Amendment Number Two, made as of February 26,
2004, to the Employment Agreement dated October 30,
1998, as amended on March 6, 2003, between FECI
and Robert W. Anestis
    
    
    ###10 (c)
    
    Representative Amendment, made as of February 26, 2004,
to the Employment Agreements dated February 2, 1999
between FECI and certain Executive Officers (Vice Chairman,
Executive Vice President-Rail Operations and Executive Vice
President, General Counsel and Secretary)
    
    
    ####10 (d)
    
    Third Amendment dated as of
July 15, 2004 to Credit Agreement
dated March 22, 2001 between Florida East Coast Industries,
Inc., Bank of America, N.A., Wachovia Bank, N.A., SunTrust Bank,
Union Planters Bank, Fleet National Bank, LaSalle Bank National
Association, and BNP Paribas
    
    
    ***10 (e)
    
    Stock Purchase Agreement dated
as of August 4, 2004 between Florida East Coast Industries, Inc. and Alfred
I. duPont Testamentary Trust and The Nemours Foundation
    
    
    ***31.1  31.2
    
    Section 302 Certifications
    
    
    34-3532.1
    
    Section 906 Certification
    
    
    36
 *Amended and Restated Articles of Incorporation and Amendment and Restated
By-Laws of the Registrant, incorporated by reference to Appendices D and E,
respectively, to the definitive Proxy Statement on Schedule 14A, filed with
the Securities and Exchange Commission on February 4, 2000 (Registration No.
001-08728). 32




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#This document, as amended through February 26, 2004, is filed as an exhibit
to Form 10-Q with the Securities and Exchange Commission on April 29, 2004. **These documents, dated effective as of September 22, 2003, were filed as
exhibits to Form 8-A/A with the Securities and Exchange Commission on
September 22, 2003. ##These documents, dated February 18, 2004, are filed as exhibits to Form
10-Q with the Securities and Exchange Commission on April 29, 2004. ###This document, dated February 26, 2004, is filed as an exhibit to Form
10-Q with the Securities and Exchange Commission on April 29, 2004. ####This document, dated February 26, 2004, is filed as an exhibit to Form
10-Q with the Securities and Exchange Commission on April 29, 2004. ***These documents, dated
August 4, 2004, are filed as exhibits to Form 10-Q with the
Securities and Exchange Commission on August 9, 2004. 33