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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 March 31, 2005 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
    
    (IRS Employerincorporation or organization)
    
    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 March 31, 2005Common Stock-no par value
    
    32,393,174 shares




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FLORIDA EAST COAST INDUSTRIES, INC. INDEX  
 PageNumbersPART IFINANCIAL INFORMATIONItem 1.
    
    Financial
StatementsConsolidated
Balance Sheets -
March 31, 2005 and December 31, 2004
    
    
    2Consolidated
Statements of Income -
Three Months Ended March 31, 2005 and 2004
    
    
    3Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2005 and 2004
    
    
    4Notes to Consolidated Financial Statements
    
    
    5  12Item 2.
    
    Managements Discussion and Analysis of the Consolidated
Financial Condition and Results of OperationsComparison of First Quarter 2005 versus First Quarter
2004
    
    
    13  19Changes in Financial Condition, Liquidity and Capital
Resources
    
    
    20  21Other Matters
    
    
    21  23Item 3.
    
    Quantitative and Qualitative Disclosures about Market
Risk
    
    
    23Item 4.
    
    Controls and
Procedures
    
    
    23PART
II
OTHER INFORMATIONItem 1.
    
    Legal
Proceedings
    
    
    24Item 2.
    
    Unregistered Sales of Equity Securities and Use of
Proceeds
    
    
    24Item 6.
    
    Exhibits
    
    
    25EX-10(b)EX-10(c).1EX-10(c).2EX-10(c).3EX-10(c).4EX-10(e)EX-31.1EX-31.2EX-32.1




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Item 1. Financial Statements FLORIDA EAST COAST INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
 March 31
    
    
    December 312005
    
    
    2004(unaudited)AssetsCurrent Assets:Cash and cash equivalents (Note 12)
    
    
    56,173
    
    
    
    126,166Accounts receivable (net)
    
    
    31,381
    
    
    
    32,435Income tax receivable
    
    
    
    
    
    
    4,238Materials and supplies
    
    
    3,646
    
    
    
    1,822Assets held for sale (Note 9)
    
    
    6,498
    
    
    
    6,900Deferred income taxes
    
    
    1,060
    
    
    
    1,268Prepaid expenses
    
    
    5,734
    
    
    
    5,008Other current assets
    
    
    3,524
    
    
    
    3,133Total current assets
    
    
    108,016
    
    
    
    180,970Properties, Less Accumulated Depreciation
    
    
    926,406
    
    
    
    853,458Other Assets and Deferred Charges
    
    
    41,708
    
    
    
    28,765Total Assets
    
    
    1,076,130
    
    
    
    1,063,193Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable and accrued expenses
    
    
    37,609
    
    
    
    47,578Taxes payable (Note 11)
    
    
    7,606
    
    
    
    1,281Deferred revenue
    
    
    2,518
    
    
    
    3,642Short-term debt (Note 7)
    
    
    4,970
    
    
    
    4,789Accrued casualty and other liabilities
    
    
    956
    
    
    
    1,230Other accrued liabilities
    
    
    14,989
    
    
    
    11,001Total current liabilities
    
    
    68,648
    
    
    
    69,521Deferred Income Taxes
    
    
    181,076
    
    
    
    178,831Long-Term Debt, net of current portion(Note 7)
    
    
    336,687
    
    
    
    338,065Accrued Casualty and Other Liabilities
    
    
    11,521
    
    
    
    11,850Shareholders EquityCommon Stock:
    
    
    118,051
    
    
    
    105,964Common stock; no par value; 150,000,000
shares authorized; 38,836,349 shares
issued and 32,393,174 shares outstanding
at March 31, 2005 and 38,553,495 shares
issued and 32,006,968 shares outstanding
at December 31, 2004.Retained earnings
    
    
    580,264
    
    
    
    573,808Restricted stock deferred compensation
    
    
    (15,086
    )
    
    
    (6,548
    )Treasury stock at cost (6,443,175 shares at
March 31, 2005 and 6,546,527 shares at
December 31, 2004) (Note 5)
    
    
    (205,031
    )
    
    
    (208,298
    )Total shareholders equity
    
    
    478,198
    
    
    
    464,926Total Liabilities and Shareholders Equity
    
    
    1,076,130
    
    
    
    1,063,193
 (Prior years results have been reclassified to conform to current years presentation.)
See accompanying notes to consolidated financial statements (unaudited). 2




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FLORIDA EAST COAST INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
(unaudited)
 Three MonthsEnded March 312005
    
    
    2004Operating revenues:Railway operations
    
    
    56,543
    
    
    
    48,557Realty rental and services
    
    
    21,455
    
    
    
    17,818Realty sales
    
    
    4,885
    
    
    
    5,048Total revenues
    
    
    82,883
    
    
    
    71,423Operating expenses:Railway operations
    
    
    41,531
    
    
    
    37,450Realty rental and services
    
    
    16,957
    
    
    
    16,172Realty sales
    
    
    464
    
    
    
    2,199Corporate general & administrative
    
    
    12,465
    
    
    
    4,980Total expenses
    
    
    71,417
    
    
    
    60,801Operating profit
    
    
    11,466
    
    
    
    10,622Interest income
    
    
    407
    
    
    
    196Interest expense
    
    
    (4,674
    )
    
    
    (3,946
    )Other income (Note 6)
    
    
    6,252
    
    
    
    2,6971,985
    
    
    
    (1,053
    )Income before income taxes
    
    
    13,451
    
    
    
    9,569Provision for income taxes
    
    
    (5,380
    )
    
    
    (3,685
    )Income from continuing operations
    
    
    8,071
    
    
    
    5,884Discontinued Operations (Note 2)Income from operation of discontinued operations (net of taxes)
    
    
    
    
    
    
    135Gain on disposition of discontinued operations (net of taxes)
    
    
    
    
    
    
    2,303Income from discontinued operations
    
    
    
    
    
    
    2,438Net income
    
    
    8,071
    
    
    
    8,322Earnings Per ShareIncome from continuing operations  basic & diluted
    
    $
    0.25
    
    
    $
    0.16Income from operation of discontinued operations  basic & diluted
    
    
    
    
    
    
    Gain on disposition of discontinued operations  basic
    
    
    
    
    
    $
    0.07Gain on
disposition of discontinued operations  diluted
    
    
    
    
    
    $
    0.06Net income  basic
    
    $
    0.25
    
    
    $
    0.23Net income  diluted
    
    $
    0.25
    
    
    $
    0.22Average shares outstanding  basic
    
    
    31,868,687
    
    
    
    36,578,461Average shares outstanding  diluted
    
    
    32,643,728
    
    
    
    37,244,258
 (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). 3




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FLORIDA EAST COAST INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
 Three MonthsEnded March 312005
    
    
    2004Cash Flows from Operating ActivitiesNet income
    
    
    8,071
    
    
    
    8,322Adjustments to reconcile net income to cash generated by operating activities:Depreciation and amortization
    
    
    12,871
    
    
    
    13,156Gain on disposition of properties
    
    
    (4,421
    )
    
    
    (6,598
    )Deferred taxes
    
    
    2,453
    
    
    
    4,096Stock compensation expense
    
    
    6,316
    
    
    
    2,747Changes in operating assets and liabilities:Accounts receivable
    
    
    1,054
    
    
    
    (1,100
    )Prepaid expenses
    
    
    (726
    )
    
    
    540Other current assets
    
    
    (3,100
    )
    
    
    (3,121
    )Other assets and deferred charges
    
    
    (929
    )
    
    
    (2,123
    )Accounts payable
    
    
    (9,923
    )
    
    
    (5,859
    )Taxes payable
    
    
    7,763
    
    
    
    4,056Income tax refund
    
    
    2,800
    
    
    
    Other current liabilities
    
    
    2,864
    
    
    
    (2,250
    )Accrued casualty and other long-term liabilities
    
    
    (603
    )
    
    
    (1,466
    )Net cash generated by operating activities
    
    
    24,490
    
    
    
    10,400Cash Flows from Investing ActivitiesPurchases of properties
    
    
    (97,010
    )
    
    
    (19,254
    )Proceeds from disposition of assets
    
    
    4,885
    
    
    
    17,648Net cash used in investing activities
    
    
    (92,125
    )
    
    
    (1,606
    )Cash Flows from Financing ActivitiesPayment of mortgage debt
    
    
    (1,197
    )
    
    
    (690
    )Payment of dividends
    
    
    (1,615
    )
    
    
    (1,476
    )Purchase of common stock
    
    
    (1,461
    )
    
    
    (732
    )Proceeds from exercise of options
    
    
    2,269
    
    
    
    2,249Payment for stock repurchase
    
    
    (84
    )
    
    
    Other
    
    
    (270
    )
    
    
    (80
    )Net cash used in financing activities
    
    
    (2,358
    )
    
    
    (729
    )Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    (69,993
    )
    
    
    8,065Cash and Cash Equivalents at Beginning of Period
    
    
    126,166
    
    
    
    125,057Cash and Cash Equivalents at End of Period
    
    
    56,173
    
    
    
    133,122Supplemental Disclosure of Cash Flow InformationCash (received) paid for income taxes
    
    
    (2,800
    )
    
    
    1,200Cash paid for interest
    
    
    5,472
    
    
    
    4,357
 (Prior years results have been reclassified to conform to current years presentation.)
See accompanying notes to consolidated financial statements (unaudited). 4




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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 March 31, 2005 and December 31, 2004, and the results of operations and cash flows
for the three-month periods ended March 31, 2005 and 2004. 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, 2004 included herein has been derived from the Companys audited consolidated
financial statements for the year ended December 31, 2004. 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, 2004 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.Discontinued Operations Real Estate In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144), components of Flagler Development Company (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 for 2004 include the gains on the sales and the related operations of an
office building and an industrial building. Three MonthsEnded March 31(dollars in thousands)
    
    2005
    
    
    2004Summary of Operating Results of
Discontinued OperationsFlagler realty rental revenues
    
    
    
    
    
    
    551Flagler realty rental expenses
    
    
    
    
    
    
    332Operating income
    
    
    
    
    
    
    219Interest income
    
    
    
    
    
    
    Income before income taxes
    
    
    
    
    
    
    219Income tax
    
    
    
    
    
    
    (84
    )Income from discontinued operations
    
    
    
    
    
    
    135Gain on disposition of discontinued operations (net of
taxes of $1,446 for the three months ended March 31,
2004.)
    
    
    
    
    
    
    2,303
 Note 3.Commitments and Contingencies Florida East Coast Industries, Inc. (the Company or FECI) 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 or Railway). 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. 5




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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 be substantially completed by the end of 2005. It is possible that the remediation costs could be higher than
anticipated, however, 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. The Company 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. The settlement terminated all agreements
affecting the Company in respect to the leased premises including a claim by the city of Hollywood
for payments in-lieu of taxes. 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 are included in the 2004
second quarter operating results. Note 4.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 775,041 shares and
665,797 shares at March 31, 2005 and 2004, respectively. Out-of-the-money shares were 544,943
shares and 1,433,854 shares at March 31, 2005 and 2004, respectively. Note 5.Dividends and Stock Repurchase On February 17, 2005, the Company declared a dividend of $.05 per share on all issued and
outstanding common stock, payable March 18, 2005 to shareholders of record as of March 4, 2005. 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. On August 13, 2004, the Company purchased 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 $191
million. These repurchased shares are shown on the Consolidated Balance Sheets as Treasury Stock.
This transaction used the remaining $72 million that existed under the previous $75 million 6




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stock repurchase authorization. As a result, on August 4, 2004, the Board of Directors authorized
the expenditure of $40 million to repurchase common stock from time to time through a program of
open market purchases and/or privately negotiated transactions. As of March 31, 2005, $0.1 million
of stock had been repurchased through this program. Note 6.Other Income Three MonthsEnded March 31(dollars in thousands)
    
    2005
    
    
    2004Pipe & wire crossings/signboards
    
    
    1,695
    
    
    
    1,029Fiber lease income
    
    
    1,750
    
    
    
    1,692Air rights income
    
    
    3,049
    
    
    
    Other (net)
    
    
    (242
    )
    
    
    (24
    )6,252
    
    
    
    2,697
 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. Included in first quarter 2005 results is one-time income associated with the sale of air
rights and related surface and sub-surface easements and licenses on approximately 300 feet of the
Railways right-of-way. Note 7.Debt Flagler has issued $352 million of mortgage notes due on varying dates from 2008 through 2011. At
March 31, 2005, approximately $342 million was outstanding on these notes. The notes are
collateralized by buildings and properties having a carrying value at March 31, 2005 of $297.3
million, net of accumulated depreciation of $133.0 million. The mortgage notes carry both fixed
rates (various ranging from 5.27%  7.39%) and variable rates (1.0% over the 90 day LIBOR index 
3.91% at March 31, 2005). Repayments of principal and interest are payable monthly based upon a
thirty-year amortization schedule. The fair value of the Companys mortgage notes is estimated based on current rates available to the
Company for debt of the same remaining maturities. At March 31, 2005, the Company considers the
estimated fair market value of the mortgage notes to be $361.1 million. On February 22, 2005, the Company entered into a new unsecured $150 million, 5-year revolving
credit agreement with a syndication of banks. The new credit facility provides a more favorable
interest rate and terms and replaces the Companys previous $200 million credit agreement. The
Company will pay (quarterly) commitment fees, as applicable under the agreement, at a range of 12.5
- 25.0 basis points. The Companys new revolving credit agreement requires the maintenance of
certain financial ratios (interest coverage and leverage) and maintenance of minimum established
levels of net worth. In addition there are various established limitations (dollars and otherwise)
on certain types of liens, investments (including loans and advances) and acquisitions, limitation
on transactions with affiliates, merger and sales of all or substantially all of the assets; and
use of proceeds. Some of the above covenants provide specific exclusion of certain financing and
investing activities at Flagler. 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. At March 31, 2005, there were no borrowings outstanding on this facility. 7




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Note 8.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 first quarter 2004 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 former Chief Executive Officer
(CEO), Robert W. Anestis. 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 per share, which was the closing price on February
27, 2004). 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 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 MonthsEnded Mach 31(dollars in thousands, except per share amounts)
    
    2005
    
    
    2004Net income  as reported
    
    
    8,071
    
    
    
    8,322Deduct: Total stock-based employee compensation expense
determined under the fair value based method for all stock
option awards (net of related tax effects)
    
    
    (110
    )
    
    
    (190
    )Pro forma net income
    
    
    7,961
    
    
    
    8,132Earnings per share:Basic  as reported
    
    $
    0.25
    
    
    $
    0.23Basic  pro forma
    
    $
    0.25
    
    
    $
    0.22Diluted  as reported
    
    $
    0.25
    
    
    $
    0.22Diluted  pro forma
    
    $
    0.24
    
    
    $
    0.22
 During the quarter, Mr. Adolfo Henriques was appointed Chairman, President, and Chief
Executive Officer of the Company succeeding Mr. Robert Anestis. Mr. Robert Anestis received
termination benefits related to the termination provisions of his employment agreement. These
benefits totaled $7.7 million in the quarter and included $4.2 million of additional equity
compensation ($1.9 million due to the accelerated vesting of equity compensation), $3.3 million of
severance payments and $0.2 million of other benefits. Mr. Adolfo Henriques received grants of
25,500 shares (immediate vesting) and 80,000 shares (3-year vesting) of stock, which were issued
from Treasury stock. Note 9.Realty Acquisitions, Land Sales, and Associated Costs Flagler utilizes Statement of Financial Accounting Standard No. 141, Business Combinations (SFAS
141) to account for the costs of acquiring buildings. This statement provides a framework for
allocating the costs of acquisition to tangible assets, financial assets, and separately
identifiable intangible assets, less acquired liabilities, using the purchase method of accounting. During the first quarter of 2005, Flagler purchased two buildings: one for $41.5 million with
approximately 240,000 rentable square feet and 5.1 acres of land and one for $19.5 million with 8




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approximately 107,000 rentable square feet and 8.0 acres of land. The majority ($50.1 million) of
acquisition costs of these buildings were allocated to various tangible assets (including land,
land improvements, building and parking decks) with the remaining costs allocated to financial
assets (e.g. above or below market value of in-place leases) and intangible assets (e.g. customer
relationship intangible). Financial assets and intangible assets are generally amortized over the
remaining life (approximately 3.5 to 8 years) of the underlying tenant leases. In accordance with Statement of Financial Accounting Standard No. 66, Accounting for Sale of Real
Estate, (SFAS 66) revenue for realty land sales is recognized upon the closing of sales contracts
and when collection of the sales proceeds is reasonably 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 March 31, 2005, a large land parcel and several small land parcels
under contract for sale 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. (SFAS 67) Note 10.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, as well as undeveloped land. 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 in the
accompanying statement of operations. In addition, 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. 9




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##### Table of Contents



Information by industry segment: Three MonthsEnded March 31(dollars in thousands)
    
    2005
    
    
    2004Operating RevenuesRailway operations
    
    
    56,543
    
    
    
    48,557Realty:Flagler realty rental and services
    
    
    20,573
    
    
    
    17,016Flagler realty sales
    
    
    200
    
    
    
    4,031Other rental
    
    
    882
    
    
    
    802Other sales
    
    
    4,685
    
    
    
    1,017Total realty
    
    
    26,340
    
    
    
    22,866Total revenues
    
    
    82,883
    
    
    
    71,423Operating ExpensesRailway operations
    
    
    41,531
    
    
    
    37,450Realty:Flagler realty rental and services
    
    
    16,574
    
    
    
    15,345Flagler realty sales
    
    
    55
    
    
    
    2,199Other rental
    
    
    383
    
    
    
    827Other sales
    
    
    409
    
    
    
    Total realty
    
    
    17,421
    
    
    
    18,371Corporate general & administrative
    
    
    12,465
    
    
    
    4,980Total expenses
    
    
    71,417
    
    
    
    60,801Operating Profit (Loss)Railway operations
    
    
    15,012
    
    
    
    11,107Realty
    
    
    8,919
    
    
    
    4,495Corporate general & administrative
    
    
    (12,465
    )
    
    
    (4,980
    )Operating profit
    
    
    11,466
    
    
    
    10,622Interest income
    
    
    407
    
    
    
    196Interest expense
    
    
    (4,674
    )
    
    
    (3,946
    )Other income
    
    
    6,252
    
    
    
    2,6971,985
    
    
    
    (1,053
    )Income before income taxes
    
    
    13,451
    
    
    
    9,569Provision for income taxes
    
    
    (5,380
    )
    
    
    (3,685
    )Income from continuing operations
    
    
    8,071
    
    
    
    5,884Discontinued OperationsIncome from operation of discontinued operations (net of taxes)
    
    
    
    
    
    
    135Gain on disposition of discontinued operations (net of taxes)
    
    
    
    
    
    
    2,303Net Income
    
    
    8,071
    
    
    
    8,322
 (Prior years results have been reclassified to conform to current years presentation,
including discontinued operations.) 10




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##### Table of Contents



Note 11.Taxes Payable (dollars in thousands)
    
    March 31, 2005
    
    
    Dec. 31, 2004Federal income tax
    
    
    1,490
    
    
    
    State income tax
    
    
    
    
    
    
    Property taxes
    
    
    5,711
    
    
    
    855Other
    
    
    405
    
    
    
    426Taxes payable
    
    
    7,606
    
    
    
    1,281
 Note 12.Cash Deposits and §1031 Escrow Funds Cash and cash equivalents at March 31, 2005 consisted of $25.2 million held in §1031 escrow funds
for possible tax-deferred reinvestment in other property, and $31.0 million of funds on hand and
invested in money market funds and short-term securities. At December 31, 2004, $91.4 million of §1031 escrow funds were available for reinvestment. During
the first quarter of 2005, $69.6 million of these funds were used for reinvestment in replacement
property and $1.2 million expired with no qualifying replacement property purchased. The remaining
$20.6 million will be held in escrow which, unless qualifying property is purchased, will expire at
various dates through June 2005 at which time the monies will be used for general purposes of the
Company. Management currently anticipates that approximately $18 million of these funds will not be
re-invested. During the quarter, $4.6 million of land sale proceeds were added to the §1031 escrow
funds. Note 13.Engineering Study During 2003, FECR commenced an engineering and economics based study of its principal right-of-way
and equipment assets to develop a multi-year maintenance and replacement plan and associated
estimates of the assets remaining lives. The engineering studies segregated the equipment and
right-of-way assets into the following major groupings: locomotives, rolling stock and equipment
(e.g. hoppers, flatcars, auto racks, trailers, etc.), bridges, and track structure (rail, ties,
ballast, and other track material). During the third and fourth quarters of 2004, the engineering
studies (including associated estimated depreciation lives) for locomotives and rolling stock were
completed. During the first quarter of 2005, the engineering study for Bridges was finalized. The
finalization of the track structure engineering study is expected during the third quarter of 2005. The Bridge study covered FECRs 72 bridges or approximately 13,000 linear feet of bridge assets
(30% was inspected during the study). The vast majority of FECRs bridges are short spanned (i.e.
200 feet or less). FECRs bridges are generally constructed of steel (majority) and concrete
materials. The Bridge study indicated no substantive change in the depreciable lives and generally,
bridges would continue to be depreciated over a 61.5-year life. No material change in annual
depreciation is expected. The Bridge study also indicated that while FECRs bridge assets are in
acceptable operational condition based on the Companys continuing maintenance and inspection
programs, FECR is entering a 10  20 year period where based on the age and construction materials
used, certain bridges will be studied further, monitored and possibly replaced. The management team
does not expect any replacement costs for bridges to materially alter its normative annual capital
budget, however this estimate is subject to change, and such changes could be material. FECRs 2005
capital program includes $3.7 million for bridge replacement and repairs. This study did not
include the downtown Jacksonville Bridge, which will be evaluated separately (due to its scale and
design) and is expected to be finished in the second quarter of 2005. The locomotive and rolling stock study indicated no substantive change in the annual maintenance or
capital replacement programs. FECR will continue its general practice of maintaining locomotives
and rolling stock for the entirety of their useful operating life. From the locomotive engineering study, FECR identified three major sub-components of its locomotive
assets: Hulk/Chassis, Locomotive engine and Combos (i.e. wheel assemblies, electric 11




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##### Table of Contents



motors, etc.) The replacement and resulting depreciable lives for each of these sub-components is
50 years, 7 years and 3 years, respectively. Annual depreciation is expected to increase
approximately 10.6% or $0.3 million as a result of the study. These depreciable lives were
implemented in the fourth quarter of 2004. From the rolling stock and equipment engineering study, FECR identified three major sub-components
of its rolling stock assets: Hulk/Chassis, wheel assemblies (i.e. trucks), and doors. The
replacement and resulting depreciable lives for each of these sub-components is 40-50 years, 7
years and 7 years, respectively. Equipment depreciable lives are 10-20 years. Annual depreciation
is expected to increase approximately 10.6% or $0.4 million as a result of the study. These
depreciable lives were implemented in the first quarter of 2005. These studies (including those pending), their conclusions and on-going evaluations 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. Note 14.Supplemental Employee Retirement Plan Effective March 28, 2005, The Company established and adopted a Supplemental Executive Retirement
Plan (the Plan). The purpose of this Plan is to provide specified benefits to a select group of
management or highly compensated employees who contribute materially to the continued growth,
development, and future business success of the Company. This Plan shall be un-funded for tax
purposes and for purposes of Title I of ERISA. The sole participant in the Plan at this time is
Adolfo Henriques. Mr. Henriques employment agreement provides for an initial contribution to his account of
$500,000, a second contribution of $130,000 on January 1, 2006 with succeeding annual contributions
equal to 20% of his annual base salary. The balances in the account will be credited with annual
earnings equal to the product of the greater of 5%, or the applicable federal rate (based on the
long term rate for January of each year) times the account balance. Mr. Henriques will be 100%
vested in his account balance on the second anniversary of employment. Cost of the plan will be
accounted for in accordance with Statement of Financial Accounting Standard No. 87, Employers
Accounting for Pensions (SFAS 87). 12




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##### Table of Contents



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, may, 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, and other potential capital distributions, number of shares to be repurchased,
availability of cash to fund the stock repurchase, ability to reinvest (tax deferred) sales
proceeds into qualifying §1031 properties, 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 levels of preventive and
capital maintenance and 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, the settlement of future contractual obligations as estimated in time and amount
(customary to the Companys historical cost structure) including labor direct negotiations,
mediation and in one instance, mutually agreed binding arbitration 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, hurricanes, floods, earthquakes and forest fires; discretionary
government decisions affecting the use of land and delays resulting from weather conditions and
other natural occurrences, like hurricanes, 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; 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. 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 13




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##### Table of Contents



to the forward-looking statements in this Report that reflect events or circumstances after the
date hereof, or reflects the occurrence of unanticipated events. Results of Operations Consolidated ResultsFirst Quarter FECI reported consolidated revenues of $82.9 million for the first quarter of 2005 compared to
$71.4 million in the first quarter of 2004, an increase of 16.0%. The Company reported income from
continuing operations of $8.1 million and $5.9 million for the quarters ended March 31, 2005 and
2004, respectively. Consolidated revenues increased in 2005 by $11.5 million due to improved
revenues at FECR ($7.9 million) and from Flaglers realty rental and services revenue ($3.6
million). 2005 income from continuing operations increased by $2.2 million compared to 2004,
primarily as the result of the above-mentioned revenue increases, off-set by an increase ($7.5
million) in corporate general and administrative expenses, primarily transition costs associated
with the succession of the Chief Executive Officer, for the quarter. The Company reported net
income of $8.1 million, or, $0.25 per diluted share, compared with net income of $8.3 million, or
$0.22 per diluted share, in the first quarter of 2004. Net income for 2004 included a gain on
disposition of $2.3 million related to the sale of a building in March 2004. RailwayFirst Quarter FECRs traffic volume and revenues for the three months ended March 31, 2005 and 2004,
respectively, are shown below. In addition, FECRs quarterly operating expenses are presented
below. TRAFFICThree Months Ended March 31
(dollars and units in thousands) 2005
    
    
    2004
    
    
    Percent
    
    
    2005
    
    
    2004
    
    
    PercentCommodity
    
    Units
    
    
    Units
    
    
    Variance
    
    
    Revenues
    
    
    Revenues
    
    
    VarianceRail CarloadsCrushed stone (aggregate)
    
    
    35.9
    
    
    
    32.3
    
    
    
    11.1
    
    
    
    17,028
    
    
    
    15,109
    
    
    
    12.7Construction materials
    
    
    1.8
    
    
    
    1.3
    
    
    
    38.5
    
    
    
    1,322
    
    
    
    800
    
    
    
    65.3Vehicles
    
    
    6.3
    
    
    
    6.1
    
    
    
    3.3
    
    
    
    4,909
    
    
    
    4,708
    
    
    
    4.3Foodstuffs & kindred
    
    
    3.5
    
    
    
    3.0
    
    
    
    16.7
    
    
    
    2,968
    
    
    
    2,306
    
    
    
    28.7Chemicals & distillants
    
    
    0.9
    
    
    
    1.0
    
    
    
    (10.0
    )
    
    
    1,100
    
    
    
    1,124
    
    
    
    (2.1
    )Paper & lumber
    
    
    1.8
    
    
    
    1.3
    
    
    
    38.5
    
    
    
    1,925
    
    
    
    1,376
    
    
    
    39.9Other
    
    
    4.4
    
    
    
    4.2
    
    
    
    4.8
    
    
    
    2,852
    
    
    
    2,531
    
    
    
    12.7Total carload
    
    
    54.6
    
    
    
    49.2
    
    
    
    11.0
    
    
    
    32,104
    
    
    
    27,954
    
    
    
    14.8Intermodal
    
    
    74.7
    
    
    
    64.9
    
    
    
    15.1
    
    
    
    23,283
    
    
    
    19,643
    
    
    
    18.5Total freight units/revenues
    
    
    129.3
    
    
    
    114.1
    
    
    
    13.3
    
    
    
    55,387
    
    
    
    47,597
    
    
    
    16.4Ancillary revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,156
    
    
    
    960
    
    
    
    20.4Railway segment revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,543
    
    
    
    48,557
    
    
    
    16.4
 14




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RAILWAY OPERATING EXPENSES THREE MONTHS ENDEDMARCH 31(dollars in thousands)
    
    2005
    
    
    2004Compensation & benefits
    
    
    15,216
    
    
    
    13,363Fuel
    
    
    5,357
    
    
    
    3,713Equipment rents (net)
    
    
    1,120
    
    
    
    830Car hire (net)
    
    
    (893
    )
    
    
    (308
    )Depreciation
    
    
    5,371
    
    
    
    5,022Purchased services
    
    
    2,460
    
    
    
    2,497Repairs to/by others (net)
    
    
    (810
    )
    
    
    (554
    )Load/unload
    
    
    2,226
    
    
    
    1,930Casualty & insurance
    
    
    1,055
    
    
    
    1,497Property taxes
    
    
    1,535
    
    
    
    1,431Materials
    
    
    3,076
    
    
    
    2,784General & administrative expenses
    
    
    2,027
    
    
    
    2,267Outside contractor delivery costs
    
    
    3,109
    
    
    
    2,426Other
    
    
    682
    
    
    
    552Total operating expenses
    
    
    41,531
    
    
    
    37,450
 (Prior years results have been reclassified to conform to current years presentation.) Operating Revenues grew $7.9 million to $56.5 million compared to $48.6 million in 2004.
Carload revenues increased $4.2 million in first quarter 2005 over 2004, an increase of 14.8%. FECR
continues to transport record levels of aggregate business, increasing revenues $1.9 million or
12.7% in first quarter 2005 over 2004 due primarily to our two largest customers. Hurricane relief
products continued to be shipped on our lines as evidenced by increased revenues ($0.5 million and
$0.5 million) in both Construction Materials and Paper and Lumber commodities, respectively.
Foodstuffs and Kindred products increased $0.7 million due to base growth in existing customers as
well as the addition of a new customer. Intermodal revenues experienced its seventh consecutive
quarter-over-quarter growth as revenues increased $3.7 million to $23.3 million from $19.6 million
in first quarter 2004, an increase of 18.5%. The majority of this increase was from FECRs local
intermodal, which continued its strong growth with increasing levels of business from our
international and motor carriers segments. Drayage revenues also experienced growth as intermodal
traffic increased in the first quarter of 2005. Included in the 2005 and 2004 revenues,
respectively is $2.0 million and $0.6 million in fuel surcharges for increased fuel prices. Operating expenses increased $4.0 million to $41.5 million compared to $37.5 million in first
quarter 2004. Compensation and benefit expenses increased $1.9 million due primarily to general
wage increases and variable compensation expenses (stock compensation costs and bonus). Diesel fuel
increased $1.6 million due to an increase in fuel price of $1.4 million, which is mostly offset by
fuel surcharges in revenue. Outside contracted drayage expenses increased $0.7 million in first
quarter 2005 over 2004 due to the increased business and increased costs for driver services. First
quarter 2005 car hire net expenses decreased approximately $0.6 million from the first quarter of
2004. During the first quarter 2005, FECR entered into an additional long-term agreement whereby
FECR will receive car hire rents for cars owned by outside parties but managed by FECR.
Additionally, certain FECR equipment rates increased in the first quarter contributing to this
favorable variance. As of March 31, 2005, the Railway had made forward purchases of fuel commitments for 4.5 million
gallons for delivery from April 1, 2005 through March 31, 2006 for an average purchase price of
$1.222 per gallon before taxes and freight. This represents 35.3% of the estimated consumption for
the nine months ending December 31, 2005 for an average purchase price of $1.196 and represents
13.6% of the estimated consumption for the three months ending March 31, 2006 for an average
purchase price of $1.4332. 15




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##### Table of Contents



During 2003, FECR commenced an engineering and economics based study of its principal right-of-way
and equipment assets, to develop a multi-year maintenance and replacement plan and associated
estimates of the assets remaining lives. The engineering studies segregated the equipment and
right-of-way assets into the following major groupings: locomotives, rolling stock and equipment
(e.g. hoppers, flatcars, auto racks, trailers, etc.), bridges, and track structure (rail, ties,
ballast, and other track material). During the third and fourth quarters of 2004, the engineering
studies (including associated estimated depreciation lives) for locomotives and rolling stock were
completed. During the first quarter of 2005, the engineering study for Bridges was finalized. The
finalization of the track structure engineering study is expected during the third quarter of 2005. The locomotive and rolling stock studies generally indicated no significant changes in capital
maintenance or replacement programs. Annual depreciation is anticipated to increase $0.3 million
for locomotives and $0.4 million for rolling stock and equipment as a result of the studies. The
Bridge study indicated no substantive change in the depreciable lives and generally, bridges would
continue to be depreciated over a 61.5-year life. No material change in annual depreciation is
expected. The Bridge study also indicated that while FECRs bridge assets are in acceptable
operational condition based on the Companys continuing maintenance and inspection programs, FECR
is entering a 10  20 year period where based on the age
and construction materials used, certain
bridges will be studied further, monitored and possibly replaced. The management team does not
expect any replacement costs for bridges to materially alter its normative annual capital budget,
however this estimate is subject to change, and such changes could be material. FECRs 2005 capital
program includes $3.7 million for bridge replacement and repairs. This study did not include the
Jacksonville Bridge, which will be evaluated separately and is expected to be finished in the
second quarter of 2005. (See also Note 13 of the Financial Statements in Part 1, Item 1 of this
report). FECR is a party to Collective Bargaining Agreements (CBAs) with three national labor unions. All
agreements are currently amendable. The Company is in various stages of negotiations with
collective bargaining representatives of these unions, including direct negotiations, mediation and
in one instance, mutually agreed binding arbitration, which was held in April 2005 with a decision
expected in June 2005. The Company anticipates a satisfactory resolution of these negotiations and
proceedings. RealtyFirst Quarter REALTY SEGMENT REVENUES Three MonthsEnded March 31(dollars in thousands)
    
    2005
    
    
    2004Rental revenues  Flagler
    
    
    16,164
    
    
    
    14,323Services fee revenues
    
    
    29
    
    
    
    31Rental income  straight-line rent adjustments
    
    
    2,058
    
    
    
    1,116Operating expense recoveries
    
    
    2,015
    
    
    
    1,308Rental revenues  undeveloped land
    
    
    260
    
    
    
    218Other
    
    
    47
    
    
    
    20Total rental revenue  Flagler properties
    
    
    20,573
    
    
    
    17,016Rental revenues  other realty operations
    
    
    882
    
    
    
    802Total rental revenues
    
    
    21,455
    
    
    
    17,818Building and land sales  Flagler
    
    
    200
    
    
    
    4,031Building and land sales  other realty operations
    
    
    4,685
    
    
    
    1,017Total building and land sales revenues
    
    
    4,885
    
    
    
    5,048Total realty segment revenues
    
    
    26,340
    
    
    
    22,866
 (Prior years results have been reclassified to conform to current years presentation, including discontinued operations.) 16




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REALTY SEGMENT EXPENSES Three MonthsEnded March 31(dollars in thousands)
    
    2005
    
    
    2004Real estate taxes  developed
    
    
    2,368
    
    
    
    2,098Repairs & maintenance  recoverable
    
    
    671
    
    
    
    548Services, utilities, management costs
    
    
    3,921
    
    
    
    2,987Total expenses subject to recovery  Flagler properties
    
    
    6,960
    
    
    
    5,633Real estate taxes  Flagler undeveloped land
    
    
    917
    
    
    
    1,005Repairs & maintenance  non-recoverable
    
    
    195
    
    
    
    298Depreciation & amortization  (operating prop  Flagler)
    
    
    6,035
    
    
    
    6,741Depreciation & amortization  (non-operating prop  Flagler)
    
    
    1,005
    
    
    
    518SG&A  non-recoverable  Flagler
    
    
    1,462
    
    
    
    1,150Total  non-recoverable expenses  Flagler properties
    
    
    9,614
    
    
    
    9,712Total rental expenses  Flagler properties
    
    
    16,574
    
    
    
    15,345Real estate taxes  other undeveloped land
    
    
    67
    
    
    
    64Depreciation & amortization  other
    
    
    10
    
    
    
    38SG&A  non-recoverable  other
    
    
    306
    
    
    
    725Total rental expenses  other realty operations
    
    
    383
    
    
    
    827Total rental expenses
    
    
    16,957
    
    
    
    16,172Realty sales expenses  Flagler
    
    
    55
    
    
    
    2,199Realty sales expenses  Other realty operations
    
    
    409
    
    
    
    Total realty sales
    
    
    464
    
    
    
    2,199Total operating expenses
    
    
    17,421
    
    
    
    18,371
 (Prior years results have been reclassified to conform to current years
presentation, including discontinued operations.) Results from Continuing Operations Flagler rental revenues increased $3.6 million or 20.9% from $17.0 million in 2004 to $20.6 million
in 2005. Operating properties revenue increased $3.4 million compared to first quarter 2004. Same
store occupancy increased to 96% at March 31, 2005 compared to March 31, 2004 occupancy of 89%.
Same store revenues increased $1.1 million compared to the prior year. Properties beginning
operations in 2004 contributed an additional $0.9 million during first quarter 2005. One
build-to-suit property completed in first quarter 2005 generated first quarter revenues of $0.7
million and properties acquired in 2005 contributed an additional $0.8 million. Income from land
rents remained consistent year-over-year. For all leases renewed during the twelve month period ending March 31, 2005, beginning cash rental
rates decreased by approximately 4% on a weighted average basis compared to the ending rate of the
expiring leases. Straight-line rental rates over the new lease term increased approximately 2% on a
weighted average basis compared to straight-line rental rates of the expiring leases. Flagler held 63 finished buildings with 7.2 million square feet and occupancy of 94% at March 31,
2005. Same store properties include 6.4 million square feet at 96% occupancy at March 31, 2005
compared to 89% at March 31, 2004. Flagler sales revenue decreased to $0.2 million in 2005 from $4.0 million in 2004. Prior year sales
included the sale of two parcels of land. 17




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##### Table of Contents



Flagler operating expenses increased $1.3 million or 8.0% to $16.6 million for the three months
ended March 31, 2005 compared to $15.3 million during the three months ended March 31, 2004.
Properties acquired in 2005 contributed $0.8 million in expenses for the quarter. One build-to-suit
property completed during the first quarter contributed $0.1 million in expenses. Existing
properties operating expenses experienced a net decrease of $0.4 million during first quarter. This
net decrease is comprised of a $1.3 million increase primarily in leasing related operating
expenses mainly related to occupancy improvements, offset by a $1.1 million decrease in
depreciation expense associated with the write-off of $1.5 million in tenant improvements during
2004. Unallocated overhead expenses increased by $0.2 million compared to prior year. Depreciation
expense related to infrastructure increased by $0.5 million. Flaglers cost of land sales decreased from $2.2 million in 2004 to $0.1 million in 2005, as there
was a small sale of land during the quarter. Operating profit from operating properties increased $3.0 million to $7.2 million in the first
quarter of 2005 compared to $4.2 million in the first quarter of 2004. This includes the impact of
$1.5 million in tenant improvement write-offs in 2004. Same store operating profits increased $2.1
million quarter over quarter also including the impact of the 2004 write-off. Properties that began
operations during 2004 generated an additional $0.3 million in operating profits. Properties
completed and acquired in 2005 generated $0.6 million in operating profit during first quarter
2005. Results from Discontinued Operations In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
(SFAS 144) 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. In March 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. The gain on the sale of
this property, as well as the operating results of this and an office building sold in the third
quarter of 2004, are included in discontinued operations for the three months ended March 31, 2004. Three MonthsEnded March 31(dollars in thousands)
    
    2005
    
    
    2004Summary of Operating Results of
Discontinued OperationsFlagler realty rental revenues
    
    
    
    
    
    
    551Flagler realty rental expenses
    
    
    
    
    
    
    332Operating income
    
    
    
    
    
    
    219Interest income
    
    
    
    
    
    
    Income before income taxes
    
    
    
    
    
    
    219Income tax
    
    
    
    
    
    
    (84
    )Income from discontinued operations
    
    
    
    
    
    
    135Gain on disposition of discontinued operations (net of
taxes of $1,446 for the three months ended March 31,
2004.)
    
    
    
    
    
    
    2,303
 Corporate Expenses Corporate expenses for the quarters ended March 31, 2005 and 2004 were $12.5 million and $5.0
million, respectively. The increase primarily relates to expenses associated with the appointment
of Mr. Adolfo Henriques as Chairman, President, and Chief Executive Officer and termination
benefits provided to Mr. Robert W. Anestis. These expenses totaled $9.1 million in the quarter and
included $5.3 million of additional equity compensation ($1.9 million due to the accelerated
vesting of equity compensation), $3.3 million of severance payments and $0.5 million of other
benefits. The employment and separation agreements are attached as exhibits. 18




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##### Table of Contents



In a first quarter 2004 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 former Chief Executive Officer
(CEO), Robert W. Anestis. 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 per
share, which was the closing price on February 27, 2004). 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. Interest Expense Interest expense for the quarter was $4.7 million compared to $3.9 million in the first quarter of
2004. The higher interest expense resulted primarily from increased levels of mortgage notes at
Flagler. Cash paid for interest was $5.5 million for the quarter ended March 31, 2005. Other Income Other income was $6.3 million and $2.7 million for the first quarters of 2005 and 2004,
respectively. Included in first quarter 2005 results is one-time income associated with the sale of
air rights related surface and sub-surface easements and licenses on approximately 300 feet of the
Railways right-of-way. The first quarter of 2005 also included a one-time wire crossing agreement
with a utility company. Income Tax Income tax expenses represent an effective rate of 40% for the first quarter 2005 and 38.5% for the
first quarter of 2004, respectively. 2005s increase in effective rate reflects certain
non-deductible section 162(m) compensation over $1 million for Mr. Adolfo Henriques. 19




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##### Table of Contents



Financial Condition, Liquidity and Capital Resources The statements of Cash Flows have been included below to support the Companys discussion of cash
flows for the three months ended March 31, 2005 and 2004. FLORIDA EAST COAST INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited) Three MonthsEnded March 312005
    
    
    2004Cash Flows from Operating ActivitiesNet income
    
    
    8,071
    
    
    
    8,322Adjustments to reconcile net income to cash generated by operating activities:Depreciation and amortization
    
    
    12,871
    
    
    
    13,156Gain on disposition of properties
    
    
    (4,421
    )
    
    
    (6,598
    )Deferred taxes
    
    
    2,453
    
    
    
    4,096Stock compensation expense
    
    
    6,316
    
    
    
    2,747Changes in operating assets and liabilities:Accounts receivable
    
    
    1,054
    
    
    
    (1,100
    )Prepaid expenses
    
    
    (726
    )
    
    
    540Other current assets
    
    
    (3,100
    )
    
    
    (3,121
    )Other assets and deferred charges
    
    
    (929
    )
    
    
    (2,123
    )Accounts payable
    
    
    (9,923
    )
    
    
    (5,859
    )Taxes payable
    
    
    7,763
    
    
    
    4,056Income tax refund
    
    
    2,800
    
    
    
    Other current liabilities
    
    
    2,864
    
    
    
    (2,250
    )Accrued casualty and other long-term liabilities
    
    
    (603
    )
    
    
    (1,466
    )Net cash generated by operating activities
    
    
    24,490
    
    
    
    10,400Cash Flows from Investing ActivitiesPurchases of properties
    
    
    (97,010
    )
    
    
    (19,254
    )Proceeds from disposition of assets
    
    
    4,885
    
    
    
    17,648Net cash used in investing activities
    
    
    (92,125
    )
    
    
    (1,606
    )Cash Flows from Financing ActivitiesPayment of mortgage debt
    
    
    (1,197
    )
    
    
    (690
    )Payment of dividends
    
    
    (1,615
    )
    
    
    (1,476
    )Purchase of common stock
    
    
    (1,461
    )
    
    
    (732
    )Proceeds from exercise of options
    
    
    2,269
    
    
    
    2,249Payment for stock repurchase
    
    
    (84
    )
    
    
    Other
    
    
    (270
    )
    
    
    (80
    )Net cash used in financing activities
    
    
    (2,358
    )
    
    
    (729
    )Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    (69,993
    )
    
    
    8,065Cash and Cash Equivalents at Beginning of Period
    
    
    126,166
    
    
    
    125,057Cash and Cash Equivalents at End of Period
    
    
    56,173
    
    
    
    133,122Supplemental Disclosure of Cash Flow InformationCash (received) paid for income taxes
    
    
    (2,800
    )
    
    
    1,200Cash paid for interest
    
    
    5,472
    
    
    
    4,357
 (Prior years results have been reclassified to conform to current years presentation.)
See accompanying notes to consolidated financial statements (unaudited). 20




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##### Table of Contents



Net cash generated by operating activities was $24.5 million and $10.4 million in the three
months ended March 31, 2005 and 2004, respectively. The year-to-year fluctuation in net cash
generated by operating activities primarily reflects the receipt of an income tax refund of $2.8
million and working capital changes. During the three months ended March 31, 2005 and 2004, respectively, the Company invested
approximately $90 million and $13 million at Flagler. The increase quarter over quarter primarily
relates to three large purchases by Flagler using §1031 proceeds, totaling $69.6 million. For the
three months ended March 31, 2005 and 2004, the Companys capital investments at FECR were
approximately $7 million and $6 million. Proceeds from disposition of assets were $4.9 million and $17.6 million for the quarters ended
March 31, 2005 and 2004, respectively. The majority of these proceeds were from the sale of a
building (Flagler-2004) and parcels of land by Flagler and FECR in the quarters. Net cash used in financing activities was $2.4 million and $0.7 million for the quarters ended
March 31, 2005 and 2004, respectively. Financing activities for the quarter ended March 31, 2005
included increased payments for the purchase of common stock, for mortgage debt due to the
increased level of mortgage debt at Flagler, and increased dividend payments. On February 22, 2005, the Company entered into a new unsecured $150 million, 5-year revolving
credit agreement with a syndication of banks. The new credit facility provides a more favorable
interest rate and terms and replaces the Companys existing $200 million credit agreement. The
Company will pay (quarterly) commitment fees, as applicable under the agreement, at a range of 12.5
- 25.0 basis points. The Companys new revolving credit agreement requires the maintenance of
certain financial ratios (interest coverage and leverage) and maintenance of minimum established
levels of net worth. In addition there are various established limitations (dollars and otherwise)
on certain types of liens, investments (including loans and advances) and acquisitions, limitation
on transactions with affiliates, merger and sales of all or substantially all of the assets; and
use of proceeds. Some of the above covenants provide specific exclusion of certain financing and
investing activities at Flagler. 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. 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 needs in future years. The
Company plans on maintaining its revolving credit facility in support of its general corporate
needs. At March 31, 2005, FECI had $25.2 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,
respectively. 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. Real Estate Allocation of Acquisition Costs  Flagler utilizes Statement of Financial
Accounting Standard No. 141, Business Combinations (SFAS 141) to account for the costs of
acquiring Buildings. This statement provides a framework for allocating the costs of acquisition to
tangible 21




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##### Table of Contents



assets, financial assets, and separately identifiable intangible assets, less acquired liabilities,
using the purchase method of accounting. During the first quarter of 2005, Flagler purchased two buildings: one for $41.5 million with
approximately 240,000 rentable square feet and 5.1 acres of land and one for $19.5 million with
approximately 107,000 rentable square feet and 8.0 acres of land. The majority ($50.1 million) of
acquisition costs of these buildings were allocated to various tangible assets (including land,
land improvements, building and parking decks) with the remaining costs allocated to financial
assets (e.g. above or below market value of in-place leases) and intangible assets (e.g. customer
relationship intangible). Financial assets and intangible assets are generally amortized over the
remaining life (approximately 3.5 to 8 years) of the underlying tenant leases. 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 March 31, 2005, management had not identified
indicators of an impairment of value for any significant asset group of the Company. 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 $180.0 million at March 31,
2005 and $177.6 million at December 31, 2004, respectively. At December 31, 2004, the Company had a
state deferred tax asset of approximately $7.0 million relating to net operating loss carry
forwards. 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 and loss and credit carry forwards in the Companys tax
returns. A valuation allowance is required to be recorded if management expects that it be more
likely than not that its deferred tax assets will not be realized. As of March 31, 2005, 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 March 31, 2005 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 rents 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 $17.7 million at March 31, 2005 and $15.7 million at December 31, 2004, which is
reported in other assets and deferred charges. 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 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 22




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##### Table of Contents



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, any current 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
considers 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 35 and 36 of the Companys 2004 Annual Report
on Form 10-K. The fair value of the Companys mortgage notes is estimated based on current rates available to the
Company for debt of the same remaining maturities. At March 31, 2005, the Company considers the
estimated fair market value of the mortgage notes to be $361.1 million. 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 March 31, 2005. 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-15 or 15d-15
that occurred during the Registrants last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Registrants internal control over financial reporting. 23




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##### Table of Contents



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.UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS
 The Company has a repurchase program for up to $40 million of common stock through a program of
open market purchases and privately negotiated transactions, from time to time. During the first
quarter of 2005, two thousand shares were purchased. The following table sets forth the total repurchases, including those made and not made pursuant to
the $40 million repurchase program, for the three months ended March 31, 2005: Total Number of
    
    Maximum AmountShares Purchased
    
    of Value that mayas Part of
    
    yet be PurchasedTotal Number of
    
    Average Price
    
    Publicly Announced
    
    under theShares Purchased
    
    Paid Per Share
    
    Plans or Programs
    
    Plans or ProgramsJanuary
    
    550*
    
    $
    45.07
    
    
    
    
    
    
    $
    40,000,000February
    
    13,516*
    
    $
    42.01
    
    
    
    
    
    
    $
    40,000,000March
    
    25,136*
    
    $
    43.40
    
    
    
    2,000
    
    
    $
    39,916,506
 * Shares purchased represent shares surrendered to the Company for federal withholding
obligations related to employees vesting on previously restricted stock 24




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##### Table of Contents



Item 6.EXHIBITS
 (a) Exhibits The Exhibits listed on the accompanying Index to Exhibits are filed as part of this Report or
furnished with this Report. 25




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##### Table of Contents



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. Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized on April 22, 2005. FLORIDA EAST COAST INDUSTRIES, INC.(Registrant)Dated: April 22, 2005
    
    /s/ Mark A. LeiningerMark A. Leininger
     Vice President and ControllerDated: April 22, 2005
    
    /s/ Daniel H. PopkyDaniel H. Popky, Executive Vice President
     and Chief Financial Officer
 26




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##### Table of Contents



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)
    
    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 (b)
    
    Termination Agreement, made as of February 10, 2005 between
FECI and Robert W. Anestis.10 (c).1 
10 (c).4
    
    Employment and Change in Control Agreements dated February
10, 2005, effective March 28, 2005, and Restricted Stock and
Supplemental Employee Retirement Plan (SERP) Participant
Agreements, dated March 28, 2005 between FECI and Adolfo Henriques10 (d)
    
    $150 million Unsecured Revolving Credit Agreement with a
5-year term between FECI and a syndication of financial
institutions with Bank of America, N.A. as Lead Arranger
    
    ***10 (e)
    
    Supplemental Employee Retirement Plan (SERP) dated as of
March 28, 2005.31.1  31.2
    
    Section 302 Certifications32.1
    
    Section 906 Certification
 *
    
    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).#
    
    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.##
    
    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 22, 2005, is filed as an exhibit to form 8-K with
the Securities and Exchange Commission on February 24, 2005.
 27