##### 



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 March 31, 2004
 OR (   ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  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 March 31, 2004Common Stock-no par value
    
    36,897,706 shares




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##### 



FLORIDA EAST COAST INDUSTRIES, INC. PART I FINANCIAL INFORMATION INDEX PageNumbersItem 1.
    
    Financial StatementsConsolidated Balance Sheets -
March 31, 2004 and December 31, 2003
    
    
    2Consolidated Statements of Income -
Three Months Ended March 31, 2004 and 2003
    
    
    3Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2004 and 2003
    
    
    4Notes to Consolidated Financial Statements
    
    
    5-13Item 2.
    
    Managements Discussion and Analysis of the Consolidated
Financial Condition and Results of OperationsComparison of First Quarter 2004 versus First Quarter 2003
    
    
    14-19Changes in Financial Condition, Liquidity and Capital Resources
    
    
    19-20Other Matters
    
    
    20-22Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22PART IIOTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    22Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities
    
    
    22-23Item 5.
    
    Other Information
    
    
    23-24Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    24
 1




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##### 



FLORIDA EAST COAST INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands) March 31
    
    December 312004
    
    2003(unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    
    133,122
    
    
    
    125,057Accounts receivable (net)
    
    
    24,698
    
    
    
    23,599Materials and supplies
    
    
    3,625
    
    
    
    1,603Assets held for sale (Note 10)
    
    
    7,720
    
    
    
    7,474Deferred income taxes
    
    
    5,986
    
    
    
    5,986Other current assets
    
    
    7,389
    
    
    
    7,785Total current assets
    
    
    182,540
    
    
    
    171,504Properties, Less Accumulated Depreciation
    
    
    808,245
    
    
    
    814,683Other Assets and Deferred Charges
    
    
    22,336
    
    
    
    22,163Total Assets
    
    
    1,013,121
    
    
    
    1,008,350Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable and accrued expenses
    
    
    27,555
    
    
    
    34,027Income taxes payable
    
    
    3,484
    
    
    
    Short-term debt (Note 8)
    
    
    2,890
    
    
    
    2,838Accrued casualty and other liabilities
    
    
    1,078
    
    
    
    1,815Other accrued liabilities
    
    
    22,771
    
    
    
    28,018Total current liabilities
    
    
    57,778
    
    
    
    66,698Deferred Income Taxes
    
    
    139,592
    
    
    
    135,497Long-Term Debt, net of current portion(Note 8)
    
    
    237,563
    
    
    
    238,305Accrued Casualty and Other Liabilities
    
    
    8,988
    
    
    
    9,717Shareholders EquityCommon Stock:
    
    
    83,568
    
    
    
    77,784Common stock; no par value; 150,000,000 shares authorized; 37,881,708 shares
issued and 36,897,706 shares outstanding at March 31, 2004, and 37,701,406
shares issued and 36,717,404 shares outstanding at December 31, 2003Retained earnings
    
    
    506,554
    
    
    
    499,708Restricted stock deferred compensation
    
    
    (6,155
    )
    
    
    (4,592
    )Treasury stock at cost (984,002 shares)
    
    
    (14,767
    )
    
    
    (14,767
    )Total shareholders equity
    
    
    569,200
    
    
    
    558,133Total Liabilities and Shareholders Equity
    
    
    1,013,121
    
    
    
    1,008,350
 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 312004
    
    2003Operating revenues
    
    
    71,604
    
    
    
    75,760Operating expenses
    
    
    (60,925
    )
    
    
    (62,407
    )Operating profit
    
    
    10,679
    
    
    
    13,353Interest income
    
    
    196
    
    
    
    114Interest expense
    
    
    (3,946
    )
    
    
    (4,297
    )Other income (Note 7)
    
    
    2,697
    
    
    
    2,251(1,053
    )
    
    
    (1,932
    )Income before income taxes
    
    
    9,626
    
    
    
    11,421Provision for income taxes
    
    
    (3,706
    )
    
    
    (4,397
    )Income from continuing operations
    
    
    5,920
    
    
    
    7,024Discontinued Operations(Note 3)Income from operation of discontinued operations (net of taxes)
    
    
    99
    
    
    
    80Gain (loss) on disposition of discontinued operations (net of taxes)
    
    
    2,303
    
    
    
    (187
    )Income (loss) from discontinued operations
    
    
    2,402
    
    
    
    (107
    )Net income
    
    
    8,322
    
    
    
    6,917Earnings Per ShareIncome from continuing operations  basic and diluted
    
    
    0.16
    
    
    
    0.19Gain on disposition of discontinued operations  basic
    
    
    0.07
    
    
    
    Gain on disposition of discontinued operations  diluted
    
    
    0.06
    
    
    
    Net income   basic
    
    
    0.23
    
    
    
    0.19Net income   diluted
    
    
    0.22
    
    
    
    0.19Average shares outstanding  basic
    
    
    36,578,461
    
    
    
    36,487,969Average shares outstanding  diluted
    
    
    37,244,258
    
    
    
    36,696,988
 (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 312004
    
    2003Cash Flows from Operating ActivitiesNet income
    
    
    8,322
    
    
    
    6,917Adjustments to reconcile net income to cash generated by operating activities:Depreciation and amortization
    
    
    13,156
    
    
    
    11,860Gain on disposition of properties
    
    
    (6,598
    )
    
    
    (6,264
    )Deferred taxes
    
    
    4,096
    
    
    
    4,474Other
    
    
    2,015
    
    
    
    68120,991
    
    
    
    17,668Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,100
    )
    
    
    (1,758
    )Other current assets
    
    
    (2,581
    )
    
    
    (3,571
    )Other assets and deferred charges
    
    
    (2,123
    )
    
    
    (3,147
    )Accounts payable
    
    
    (6,435
    )
    
    
    (6,695
    )Income taxes payable
    
    
    3,484
    
    
    
    Other current liabilities
    
    
    (1,102
    )
    
    
    6,222Accrued casualty and other long-term liabilities
    
    
    (1,466
    )
    
    
    (357
    )(11,323
    )
    
    
    (9,306
    )Net cash generated by operating activities
    
    
    9,668
    
    
    
    8,362Cash Flows from Investing ActivitiesPurchases of properties
    
    
    (19,254
    )
    
    
    (35,302
    )Proceeds from disposition of assets
    
    
    17,648
    
    
    
    14,897Net cash used in investing activities
    
    
    (1,606
    )
    
    
    (20,405
    )Cash Flows from Financing ActivitiesPayment of mortgage debt
    
    
    (690
    )
    
    
    (643
    )Payment of line of credit
    
    
    
    
    
    
    (44,000
    )Payment of dividends
    
    
    (1,476
    )
    
    
    (916
    )Proceeds from exercise of options
    
    
    2,249
    
    
    
    640Other
    
    
    (80
    )
    
    
    (61
    )Net cash provided by (used in) financing activities
    
    
    3
    
    
    
    (44,980
    )Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    8,065
    
    
    
    (57,023
    )Cash and Cash Equivalents at Beginning of Period
    
    
    125,057
    
    
    
    83,872Cash and Cash Equivalents at End of Period
    
    
    133,122
    
    
    
    26,849Supplemental Disclosure of Cash Flow InformationCash paid for income tax
    
    
    1,200
    
    
    
    Cash paid for interest
    
    
    4,357
    
    
    
    4,564
 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, 2004 and December 31,
2003, and the results of operations and cash flows for the three-month periods
ended March 31, 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. 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. 5




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##### 



Three MonthsEnded March 31(dollars in thousands)
    
    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
    
    
    
    
    
    
    159Loss on disposition of discontinued operations, net of
taxes of $118 for the three months ended March 31,
2003.
    
    
    
    
    
    
    (187
    )
 As a result of the discontinuance, certain liabilities were accrued related to
this exit plan. A roll-forward of the liabilities through March 31, 2004 is as
follows: EmployeeSeverance
    
    Tractor/Trailer(dollars in thousands)
    
    Costs
    
    Disposition Costs
    
    Other
    
    TotalsAccruals @ 12/31/03
    
    
    104
    
    
    
    
    
    
    
    8
    
    
    
    112Additions & adjustments*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Utilization
    
    
    (56
    )
    
    
    
    
    
    
    (8
    )
    
    
    (64
    )Ending balance @ 3/31/04**
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    48
 *-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 as of March 31, 2004. 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, and the operations from the sale of an
industrial building and Flaglers 50% interest in three buildings held in
partnership with Duke Realty during 2003. Three MonthsEnded March 31(dollars in thousands)
    
    2004
    
    2003Summary of Operating Results of Discontinued OperationsFlagler realty rental revenues
    
    
    370
    
    
    
    505Flagler realty rental expenses
    
    
    208
    
    
    
    611Operating income (loss)
    
    
    162
    
    
    
    (106
    )Interest income
    
    
    
    
    
    
    43Income (loss) before income taxes
    
    
    162
    
    
    
    (63
    )Income tax (expense) benefit
    
    
    (63
    )
    
    
    24Income (loss) from discontinued operations
    
    
    99
    
    
    
    (39
    )Gain on disposition of discontinued operations, net of
taxes of $1,446 for the three months ended March 31,
2004.
    
    
    2,303
    
    
    
    
 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 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. 6




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##### 



Three MonthsEnded March 31(dollars in thousands)
    
    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 March 31, 2004 is as follows: EmployeeSeverance(dollars in thousands)
    
    Costs
    
    Other
    
    TotalsAccruals @ 12/31/03
    
    
    577
    
    
    
    
    
    
    
    577Additions & Adjustments**
    
    
    
    
    
    
    
    
    
    
    Utilization
    
    
    (100
    )
    
    
    
    
    
    
    (100
    )Ending Balance @ 3/31/04
    
    
    477
    
    
    
    
    
    
    
    477
 **-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 $0.9 million at March 31, 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. 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. FECR is
investigating sites where contaminants from its historic railroad operations
may have migrated off-site through the movement of groundwater or contaminated
soil. FECR, if required as a result of the investigation, will develop an
appropriate plan of remediation, with possible alternatives including natural
attenuation and groundwater pumping and 7




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##### 



treatment. 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. 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 issued an order staying all proceedings
for 120 days while the parties worked to resolve the matter without further
litigation. Successive orders extending the stay have been issued by the court
and FECR has continued during that time to work toward resolving this matter.
The Company does not currently possess sufficient information to reasonably
estimate the amount of remediation liability, if any, it may have in regard to
this matter. While the ultimate results of the claim against FECR cannot be
predicted with certainty, 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. 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.
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. 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. Management believes its
estimate is reasonable given currently applicable facts and circumstances. Under the original ground lease, the Company was obligated under a related
agreement between the County, the City of Hollywood and the Company to make
minimum annual payments of $0.2 million 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). In connection with the
termination of the ground lease, the Company has indemnified the County from
claims by the City (including defense costs) against the County relating to the
Citys entitlement to the payments in-lieu-of taxes and has secured that
indemnification with a letter of credit in the amount of $8.8 million. A
dispute exists between the Company and the City regarding the effects of the
termination of the lease on the in-lieu-of-tax payment obligations. The Company
contends that the City is not entitled to further payments upon termination and
the City contends it is entitled to a lump sum payment of $10 million upon
termination. The Company intends to defend against this claim vigorously. In
future periods, the Company may record adjustments to its reserves based on the
outcome of the dispute with the City. 8




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##### 



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 665,797 shares and 209,019 shares at
March 31, 2004 and 2003, respectively.
Out-of-the-money shares were 1,433,854
shares and 2,237,480 shares at March 31, 2004 and 2003, respectively. Note 6.Dividends and Stock Repurchase On February 26, 2004, the Company declared a dividend of $.040 per share on all
issued and outstanding common stock, payable March 25, 2004 to shareholders of
record March 11, 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 March 31, 2004, $2.9
million of stock had been repurchased through this program. Note 7.Other Income Three MonthsEnded March 31(dollars in thousands)
    
    2004
    
    2003Pipe & wire crossings/signboards
    
    
    1,029
    
    
    
    761Fiber lease income
    
    
    1,692
    
    
    
    1,645Other (net)
    
    
    (24
    )
    
    
    (155
    )2,697
    
    
    
    2,251
 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 At March 31, 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 borrowings under the credit agreement are secured by
the capital securities of FECR. 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 March 31, 2004, the Companys
Group Debt/EBITDA ratio shall be no greater than 2.50. At March 31, 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 from January
1, 2004 to 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. 9




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##### 



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 March 31, 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 March 31, 2004, $240.5
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 March 31, 2004, the Company considers the
estimated fair market value of the mortgage notes to be $273.2 million. 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 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: 10




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##### 



Three MonthsEnded March 31(dollars in thousands, except per share amounts)
    
    2004
    
    2003Net income  as reported
    
    
    8,322
    
    
    
    6,917Deduct: Total stock-based employee compensation expense
determined under the fair value based method for all
stock option awards, net of related tax effects
    
    
    (190
    )
    
    
    (558
    )Pro forma net income
    
    
    8,132
    
    
    
    6,359Earnings per share:Basic  as reported
    
    
    0.23
    
    
    
    0.19Basic  pro forma
    
    
    0.22
    
    
    
    0.17Diluted  as reported
    
    
    0.22
    
    
    
    0.19Diluted  pro forma
    
    
    0.22
    
    
    
    0.17
 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 book basis of pending building and land sales is classified as assets held
for sale in the Consolidated Balance Sheets when a sale is considered probable
and expected to close within one year (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, 2004, a large land parcel is 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. 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. 11




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##### 



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. Information by industry segment: Three MonthsEnded March 31(dollars in thousands)
    
    2004
    
    2003Operating RevenuesRailway operations
    
    
    48,557
    
    
    
    44,271Realty:Flagler realty rental and services
    
    
    17,197
    
    
    
    15,845Flagler realty sales
    
    
    4,031
    
    
    
    12,259Other rental
    
    
    802
    
    
    
    747Other sales
    
    
    1,017
    
    
    
    2,638Total realty
    
    
    23,047
    
    
    
    31,489Total revenues*
    
    
    71,604
    
    
    
    75,760Operating ExpensesRailway operations
    
    
    37,450
    
    
    
    35,440Realty:Flagler realty rental and services
    
    
    15,469
    
    
    
    14,324Flagler realty sales
    
    
    2,199
    
    
    
    8,633Other rental
    
    
    827
    
    
    
    1,094Total realty
    
    
    18,495
    
    
    
    24,051Corporate general & administrative
    
    
    4,980
    
    
    
    2,916Total expenses*
    
    
    60,925
    
    
    
    62,407Operating Profit (Loss)Railway operations
    
    
    11,107
    
    
    
    8,831Realty
    
    
    4,552
    
    
    
    7,438Corporate general & administrative
    
    
    (4,980
    )
    
    
    (2,916
    )Operating profit
    
    
    10,679
    
    
    
    13,353Interest income
    
    
    196
    
    
    
    114Interest expense
    
    
    (3,946
    )
    
    
    (4,297
    )Other income
    
    
    2,697
    
    
    
    2,251(1,053
    )
    
    
    (1,932
    )Income before income taxes
    
    
    9,626
    
    
    
    11,421Provision for income taxes
    
    
    (3,706
    )
    
    
    (4,397
    )Income from continuing operations
    
    
    5,920
    
    
    
    7,024Discontinued OperationsIncome from discontinued operations (net of taxes)
    
    
    99
    
    
    
    80Gain (loss) on disposition of discontinued operations (net of taxes)
    
    
    2,303
    
    
    
    (187
    )Net Income
    
    
    8,322
    
    
    
    6,917
 (Prior years results have been reclassified to conform to current
years presentation, including discontinued operations.) *-For the years presented, there are no intersegment revenues and
expenses. 12




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##### 



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 three months ended
March 31, 2004 and 2003, respectively, were as follows: property management
services of $0 million and $0.7 million, development fees of $0.2 million and
$0 million, construction coordination fees of $0 million and $0.1 million and
leasing commissions of $0.1 million and $0.8 million. 13




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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 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 inability of the Company to resolve or successfully defend
litigation, including the claims asserted by the City of Hollywood; 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 shareholders;
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. 14




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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
First Quarter FECI reported consolidated revenues of $71.6 million for the first quarter of
2004 compared to $75.8 million in the first quarter of 2003, a decrease of
5.5%. The Company reported income from continuing operations of $5.9 million
and $7.0 million for the quarters ended March 31, 2004 and 2003, respectively.
Consolidated revenues decreased in 2004 by $4.2 million due to decreased land
sales ($9.8 million) in 2004 (the decrease primarily results from the sale of a
large parcel at Flagler Center in 2003) offset by improved revenues at FECR
($4.3 million) and from Flaglers realty rental and services revenue ($1.4
million). 2004 income from continuing operations decreased by $1.1 million compared to
2003, primarily as the result of the above-mentioned revenue net decrease plus
an increase ($2.1 million) in corporate general and administrative expenses
(specifically stock-based compensation costs) for the quarter. The Company
reported net income of $8.3 million, or $0.22 per diluted share, compared with
net income of $6.9 million, or $0.19 per diluted share, in the first quarter of
2003. Net income for 2004 included a gain on disposition of $2.3 million
related to the sale of a building in March 2004. Railway
First Quarter FECRs traffic volume and revenues for the three months ended March 31, 2004
and 2003, respectively, are shown below. Also, FECRs quarterly operating
expenses are presented below. TRAFFIC
Three Months Ended March 31
(dollars and units in thousands) 2004
    
    2003
    
    Percent
    
    2004
    
    2003
    
    PercentCommodity
    
    Units
    
    Units
    
    Variance
    
    Revenues
    
    Revenues
    
    VarianceRail CarloadsCrushed stone (aggregate)
    
    
    32.3
    
    
    
    28.9
    
    
    
    11.8
    
    
    
    15,109
    
    
    
    12,724
    
    
    
    18.7Construction materials
    
    
    1.3
    
    
    
    1.3
    
    
    
    
    
    
    
    800
    
    
    
    736
    
    
    
    8.7Vehicles
    
    
    6.1
    
    
    
    6.2
    
    
    
    (1.6
    )
    
    
    4,708
    
    
    
    4,887
    
    
    
    (3.7
    )Foodstuffs & kindred
    
    
    3.0
    
    
    
    3.0
    
    
    
    
    
    
    
    2,306
    
    
    
    2,153
    
    
    
    7.1Chemicals & distillants
    
    
    1.0
    
    
    
    0.9
    
    
    
    11.1
    
    
    
    1,124
    
    
    
    969
    
    
    
    16.0Paper & lumber
    
    
    1.3
    
    
    
    2.1
    
    
    
    (38.1
    )
    
    
    1,376
    
    
    
    2,050
    
    
    
    (32.9
    )Other
    
    
    4.2
    
    
    
    4.2
    
    
    
    
    
    
    
    2,531
    
    
    
    2,437
    
    
    
    3.9Total carload
    
    
    49.2
    
    
    
    46.6
    
    
    
    5.6
    
    
    
    27,954
    
    
    
    25,956
    
    
    
    7.7Intermodal
    
    
    64.9
    
    
    
    62.2
    
    
    
    4.3
    
    
    
    19,643
    
    
    
    17,416
    
    
    
    12.8Total freight units/revenues
    
    
    114.1
    
    
    
    108.8
    
    
    
    4.9
    
    
    
    47,597
    
    
    
    43,372
    
    
    
    9.7Ancillary revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960
    
    
    
    899
    
    
    
    6.8
 (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.) 15




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##### 



RAILWAY OPERATING EXPENSES THREE MONTHSENDED MARCH 31(dollars in thousands)
    
    2004
    
    2003Compensation & benefits
    
    
    13,363
    
    
    
    13,056Fuel
    
    
    3,713
    
    
    
    3,573Equipment rents (net)
    
    
    830
    
    
    
    758Car hire (net)
    
    
    (308
    )
    
    
    (271
    )Depreciation
    
    
    5,022
    
    
    
    4,844Purchased services
    
    
    2,483
    
    
    
    2,274Repairs to/by others (net)
    
    
    (554
    )
    
    
    (518
    )Load/unload
    
    
    1,930
    
    
    
    1,780Casualty & insurance
    
    
    1,497
    
    
    
    1,485Property taxes
    
    
    1,431
    
    
    
    1,244Materials
    
    
    2,784
    
    
    
    2,305General & administrative expenses
    
    
    2,521
    
    
    
    2,662Outside contractor delivery costs
    
    
    2,195
    
    
    
    1,646Other
    
    
    543
    
    
    
    602Total operating expenses
    
    
    37,450
    
    
    
    35,440
 (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.) FECRs management team continued its focus on improving profitability during
the first quarter 2004. Carload revenues increased $2.0 million in first
quarter 2004 over 2003, an increase of 7.7%. FECR continues to transport record
levels of aggregate business, increasing revenues 18.7% or $2.4 million in 2004
over first quarter 2003. Foodstuff and kindred revenues increased $0.2 million
or 7.1% in first quarter 2004 over 2003 due to additional production from one
key customer. After several years of decline in intermodal revenue, the first
quarter of 2004 continued to show growth as the third consecutive quarter with
year-to-year growth, with the first quarter having $19.6 million in revenue, an
increase of $2.2 million or 12.8%. Leading the way was a resurgence in the
parcel/LTL and domestic truckload segments, new customers, improved pricing, as
well as continued strength on the Hurricane Train service, an Atlanta-based
intermodal service introduced in 2001. During second quarter 2003, south- and
northbound moves, which had been priced separately for a certain interchange
carrier, were combined under a single unit move. This pricing change is
reflected in first quarter 2004s intermodal revenues and units as a single
unit move. In the first quarter 2004, FECR, in conjunction with CSX, announced
the Nighthawk, a new intermodal service from North Bergen, NJ and Baltimore,
MD to Miami. This service extends FECRs reach by partnering with its
connecting carriers in these important transportation corridors. Operating expenses increased $2.0 million in the first quarter of 2004 over
2003. Labor expenses increased $0.3 million due to general wage increases and
increased costs of health care. Outside contractor delivery costs to move
product from the customers facilities to the rail ramp increased $0.5 million
in first quarter of 2004 due to higher volumes. Materials and supplies
increased $0.5 million due to additional repairs to the locomotives, freight
cars and cranes. Depreciation increased $0.2 million in 2004. FECR forward purchases fuel to manage the risk of fuel price increases. As of
March 31, 2004, FECR had forward purchase contracts of 3.8 million gallons for
delivery from April 2004 to February 2005, for an average purchase price of
$0.7611 per gallon before taxes and freight. This represents 27% of the
estimated consumption for the remainder of 2004, at an average purchase price
of $0.7514 and represents 18% of the estimated consumption for the first two
months of 2005, for an average purchase price of $0.8250. 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 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. 16




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##### 



Realty
First Quarter REALTY SEGMENT REVENUES Three MonthsEnded March 31(dollars in thousands)
    
    2004
    
    2003Rental revenues  Flagler
    
    
    14,456
    
    
    
    12,960Rental income  straight-line rent adjustments
    
    
    1,106
    
    
    
    1,066Operating expense recoveries
    
    
    1,116
    
    
    
    1,216Rental revenues  undeveloped land
    
    
    218
    
    
    
    302Equity pickups
    
    
    
    
    
    
    62Other rental revenues
    
    
    301
    
    
    
    239Total rental revenue  Flagler properties
    
    
    17,197
    
    
    
    15,845Realty revenues  other realty operations
    
    
    802
    
    
    
    747Total rental revenues
    
    
    17,999
    
    
    
    16,592Building and land sales  Flagler
    
    
    4,031
    
    
    
    12,259Building and land sales  other realty operations
    
    
    1,017
    
    
    
    2,638Total building and land sales revenues
    
    
    5,048
    
    
    
    14,897Total realty segment revenues
    
    
    23,047
    
    
    
    31,489
 (Prior years results have been reclassified to conform to current years
presentation.) REALTY SEGMENT EXPENSES Three MonthsEnded March 31(dollars in thousands)
    
    2004
    
    2003Real estate taxes  developed
    
    
    2,129
    
    
    
    2,109Repairs & maintenance  recoverable
    
    
    571
    
    
    
    593Services, utilities, management costs
    
    
    3,000
    
    
    
    2,884Total expenses subject to recovery  Flagler properties
    
    
    5,700
    
    
    
    5,586Real estate taxes  Flagler undeveloped land
    
    
    1,005
    
    
    
    994Repairs & maintenance  non-recoverable
    
    
    299
    
    
    
    150Depreciation & amortization  Flagler
    
    
    7,316
    
    
    
    5,977SG&A  non-recoverable  Flagler
    
    
    1,149
    
    
    
    1,617Total  non-recoverable expenses  Flagler properties
    
    
    9,769
    
    
    
    8,738Total rental expenses  Flagler properties
    
    
    15,469
    
    
    
    14,324Real estate taxes  other undeveloped land
    
    
    64
    
    
    
    116Depreciation & amortization  other
    
    
    38
    
    
    
    10SG&A  non-recoverable  other
    
    
    725
    
    
    
    968Total rental expenses  other realty operations
    
    
    827
    
    
    
    1,094Total rental expenses
    
    
    16,296
    
    
    
    15,418Realty sales expenses
    
    
    2,199
    
    
    
    8,633Total operating expenses
    
    
    18,495
    
    
    
    24,051
 (Prior years results have been reclassified to conform to current years
presentation.) Results from Continuing Operations Flaglers rental revenues increased $1.4 million or 8.5% from $15.8 million in
2003 to $17.2 million in 2004. Revenues from operating properties increased
$1.5 million. Same store occupancy increased to 88% at first quarter-end 2004,
compared to 2003 quarter-end occupancy of 85%. Same store revenues increased
$0.9 million over the prior year, which includes the impact of a $0.4 million
net termination fee 17




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##### 



received in 2004. Revenues generated by properties acquired in 2003 increased
$0.2 million. Deerwood North 300, which opened in January 2004, contributed an
additional $0.3 million in new store revenue in 2004. Flagler held 59 finished buildings with 6.5 million square feet and occupancy
of 89% at March 31, 2004. Same store properties include 5.9 million square
feet and 88% occupancy at quarter-end 2004, compared to 85% at quarter-end
2003. Flagler has seven projects with 1,057,000 sq. ft. in various stages of
development (113,000 sq. ft. in the lease-up phase; 490,000 sq. ft. under
construction; 454,000 sq. ft. in pre-development) at quarter end. Projects
under construction include a 239,000-sq. ft. build-to-suit. Flaglers sales revenue decreased from $12.3 million in 2003 to $4.0 million in
2004. First quarter of 2003 included the sale of the Baptist Hospital site in
Flagler Center for $9.5 million. Other sales decreased $1.6 million
quarter-over-quarter due to decreased land sales activity at FECR. Flaglers operating expenses increased $1.2 million or 8.0% from $14.3 million
to $15.5 million year-over-year. Repairs and maintenance increased $0.2 million
mainly associated with building repair work at Flagler Station. Depreciation
and amortization expense increased $1.3 million in 2004 (same store  $0.8
million, new in 2003  $0.1 million, Deerwood North 300  $0.1 million,
corporate  $0.3 million). The increase in same store depreciation and
amortization includes a $1.4 million write-off of net book value related to the
renovation of Flaglers Class A office properties at duPont Center in
Jacksonville, FL. Overhead expenses decreased by $0.4 million during 2004.
Other rental expenses decreased from $1.1 million in first quarter 2003 to $0.8
million in first quarter 2004 due to reduced expenses associated with the Port
Everglades land lease. Flaglers cost of land sales decreased $6.4 million from $8.6 million to $2.2
million due to related land sale activity. 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 during 2003. On March 31, 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 operating results of
these properties, as well as the gain on sale are included in discontinued
operations for all periods presented. Three MonthsEnded March 31(dollars in thousands)
    
    2004
    
    2003Summary of Operating Results of Discontinued OperationsFlagler realty rental revenues
    
    
    370
    
    
    
    505Flagler realty rental expenses
    
    
    208
    
    
    
    611Operating income (loss)
    
    
    162
    
    
    
    (106
    )Interest income
    
    
    
    
    
    
    43Income (loss) before income taxes
    
    
    162
    
    
    
    (63
    )Income tax (expense) benefit
    
    
    (63
    )
    
    
    24Income (loss) from discontinued operations
    
    
    99
    
    
    
    (39
    )Gain on disposition of discontinued operations, net of
taxes of $1,446 for the three months ended March 31,
2004.
    
    
    2,303
    
    
    
    
 Corporate Expenses Corporate general and administrative expenses were $5.0 million and $2.9
million for the first quarters of 2004 and 2003, respectively. Increases
primarily relate to costs associated with increased stock compensation expense.
In a transaction (the Transaction) initiated at the request of the Board of 18




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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 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 Interest expense for the quarter was $3.9 million compared to $4.3 million in
the first quarter of 2003. The lower interest expense resulted primarily from
no borrowings on the revolver during 2004. Other Income Other income was $2.7 million and $2.3 million for the first quarters of 2004
and 2003, respectively. The quarter-over-quarter increase resulted from
additional utility crossing agreements. Income Tax Income tax expenses represent an effective rate of 38.5% for the first quarters
2004 and 2003, respectively. Financial Condition, Liquidity and Capital Resources Net cash generated by operating activities was $9.7 million and $8.4 million in
the three months ended March 31, 2004 and 2003, respectively. The year-to-year
fluctuation in net cash generated by operating activities primarily reflects
increased net income and depreciation offset by normal changes in operating
assets and liabilities. During the three months ended March 31, 2004 and 2003, respectively, the
Company invested approximately $13 million and $32 million at Flagler. 2003
included the purchase of three buildings previously held in a joint partnership
for $23.3 million. For the three months ended March 31, 2004 and 2003, the
Companys capital investments at FECR were approximately $6 million and $3
million. Proceeds from disposition of assets were $17.6 million and $14.9 million for
the quarters ended March 31, 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 quarters, respectively. Net cash used in financing activities was $45.0 million for the quarter ended
March 31, 2003. Financing activities for the quarter ended March 31, 2004
provided minimal cash. Finance activities during 2003 included, primarily,
repayments ($44.0 million) for borrowings on the line of credit. At March 31, 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 borrowings under the credit agreement are secured by
the capital securities of FECR. 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 19




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##### 



that at March 31, 2004, the Companys Group Debt/EBITDA ratio shall be no
greater than 2.50. At March 31, 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 from January 1, 2004 to 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 March 31, 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 March 31, 2004, $240.5
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 March 31, 2004, the Company considers the
estimated fair market value of the mortgage notes to be $273.2 million. 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 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 March 31, 2004, FECI had $7.4 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. 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 March 31, 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. 20




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Income Tax Provisions  FECIs net deferred tax liability was $133.6 million at
March 31, 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 March 31, 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 March 31, 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 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 $13.5
million at March 31, 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 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 21




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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 March 31,
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
first fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Registrants internal control over financial reporting. 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. 22




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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 March 31, 2004: Total Number of
    
    Maximum Amount ofShares Purchased as
    
    Value that may yetPart of Publicly
    
    be Purchased underTotal Number of
    
    Average Price
    
    Announced Plans or
    
    the Plans orShares Purchased
    
    Paid Per Share
    
    Programs
    
    Programs(000's)January
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    72,083February
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    72,083March
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    72,083
 Item 5. OTHER INFORMATION Selection of Director Candidates In May 2003, the Board of Directors of the Company created a Nominating and
Corporate Governance Committee. The directors who serve on the Committee are
all independent for purposes of the New York Stock Exchange listing
standards. Among other things, the Committee is responsible for developing a
slate of director nominees for full board approval. The Committees goal is to
assemble a board that brings to the Company a collection of skills and
experience, which is qualified to develop and execute the strategy and business
of the Company. The Committee oversees an evaluation of current members of the
board in light of the needs of the Companys business and considers the
appropriate size of the board. The Committee strives to balance the benefits of
continuity of knowledge, skills and experience derived from current board
members with periodic injection of new talent and perspectives. The Committee may utilize a search firm to help identify candidates who meet
the qualifications. The Committee may also receive suggestions from other board
members and management. Additionally, the Committee considers qualified
candidates for directors suggested by shareholders, including nominations made
pursuant to the Companys Articles of Incorporation. Shareholders may suggest
qualified 23




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##### 



candidates for director by writing to the Chair of the Committee or the
Corporate Secretary at Florida East Coast Industries, Inc., One Malaga Street,
St. Augustine, FL 32084. 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 February 11, 2004, under Item 9 on Form 8-K, the Registrant furnished
information about the Companys real estate holdings that were made available
in a document entitled Supplemental Real Estate Information Package on the
Companys website http://www.feci.com. 2. On February 11, 2004, under Item 12 on Form 8-K, the Registrant furnished
information concerning the Companys results of operations for its fourth
quarter and year ended December 31, 2003. A copy of the press release was
attached as Exhibit 99 to this report. 3. On February 12, 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 make presentations to
various investors at the Deutsche Bank Global Transportation Conference and to
Morgan Keegan representatives on February 12 and 13, 2004, highlighting the
Companys consolidated and subsidiaries business accomplishments. 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: April 29, 2004
    
    /s/ Mark A. Leininger

Mark A. Leininger, Vice President and ControllerDate: April 29, 2004
    
    /s/ Daniel H. Popky

Daniel H. Popky, Executive Vice President and
Chief Financial Officer
 24




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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)
    
    ####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. ##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. 25