##### 



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
 September 30, 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
    
    (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 September 30, 2004Common Stock-no par value
    
    31,768,012 shares




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##### 



FLORIDA EAST COAST INDUSTRIES, INC. PART I FINANCIAL INFORMATION INDEX PageNumbersItem 1.
    
    Financial StatementsConsolidated Balance Sheets -
September 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Income -
Three Months and Nine Months Ended September 30, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-15Item 2.
    

Managements Discussion and Analysis of the Consolidated
Financial Condition and Results of OperationsComparison of Third Quarter 2004 versus Third Quarter 2003
and Nine Months 2004 versus Nine Months 2003
    
    
    16-26Changes in Financial Condition, Liquidity and Capital Resources
    
    
    26-29Other Matters
    
    
    29-30Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    31
 PART II OTHER INFORMATION Item 1.
    
    Legal Proceedings
    
    
    32Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities
    
    
    32-33Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    33
 2




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##### 



FLORIDA EAST COAST INDUSTRIES, INC. 
 CONSOLIDATED BALANCE SHEETS
  September 30
    
    December 312004
    
    2003(unaudited)AssetsCurrent Assets:Cash and
cash equivalents (Note 14)
    
    
    60,843
    
    
    
    125,057Accounts receivable (net)
    
    
    24,005
    
    
    
    23,599Materials and supplies
    
    
    3,552
    
    
    
    1,603Assets held for sale (Note 10)
    
    
    7,731
    
    
    
    7,474Deferred income taxes
    
    
    3,610
    
    
    
    5,986Prepaid expenses
    
    
    6,066
    
    
    
    5,214Other current assets
    
    
    2,865
    
    
    
    2,571Total current assets
    
    
    108,672
    
    
    
    171,504Properties, Less Accumulated Depreciation
    
    
    832,724
    
    
    
    814,683Other Assets and Deferred Charges
    
    
    26,302
    
    
    
    22,163Total Assets
    
    
    967,698
    
    
    
    1,008,350Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable and accrued expenses
    
    
    30,732
    
    
    
    34,027Taxes payable (Note 13)
    
    
    21,534
    
    
    
    5,378Deferred revenue
    
    
    7,800
    
    
    
    3,000Short-term debt (Note 8)
    
    
    4,824
    
    
    
    2,838Accrued casualty and other liabilities
    
    
    1,094
    
    
    
    1,815Other accrued liabilities
    
    
    9,321
    
    
    
    19,640Total current liabilities
    
    
    75,305
    
    
    
    66,698Deferred Income Taxes
    
    
    141,919
    
    
    
    135,497Long-Term Debt, net of current portion(Note 8)
    
    
    339,209
    
    
    
    238,305Accrued Casualty and Other Liabilities
    
    
    9,159
    
    
    
    9,717Shareholders EquityCommon Stock:
    
    
    95,656
    
    
    
    77,784Common stock; no par value; 150,000,000 shares authorized; 38,314,539 shares
issued and 31,768,012 shares outstanding at September 30, 2004, and 37,701,406
shares issued and 36,717,404 shares outstanding at December 31, 2003Retained earnings
    
    
    521,969
    
    
    
    499,708Restricted stock deferred compensation
    
    
    (7,221
    )
    
    
    (4,592
    )Treasury stock at cost (6,546,527 shares at September 30, 2004 and 984,002
shares at December 31, 2003) (Note 6)
    
    
    (208,298
    )
    
    
    (14,767
    )Total shareholders equity
    
    
    402,106
    
    
    
    558,133Total Liabilities and Shareholders Equity
    
    
    967,698
    
    
    
    1,008,350(Prior years results have been reclassified to conform to current years
presentation.)
 See accompanying notes to consolidated financial statements (unaudited). 3




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##### 



FLORIDA EAST COAST INDUSTRIES, INC. 
 CONSOLIDATED STATEMENTS OF INCOME
   Three Months
    
    Nine MonthsEnded September 30
    
    Ended September 302004
    
    2003
    
    2004
    
    2003Operating revenuesRailway operations
    
    
    46,261
    
    
    
    44,729
    
    
    
    144,920
    
    
    
    134,227Realty rental and services
    
    
    18,196
    
    
    
    16,808
    
    
    
    53,811
    
    
    
    50,164Realty sales
    
    
    12,327
    
    
    
    25,298
    
    
    
    19,988
    
    
    
    50,423Total revenues
    
    
    76,784
    
    
    
    86,835
    
    
    
    218,719
    
    
    
    234,814Operating expensesRailway operations
    
    
    38,439
    
    
    
    33,969
    
    
    
    113,324
    
    
    
    103,408Realty rental and services
    
    
    15,761
    
    
    
    32,027
    
    
    
    47,432
    
    
    
    63,815Realty sales
    
    
    1,898
    
    
    
    16,260
    
    
    
    6,015
    
    
    
    27,479Corporate general & administrative
    
    
    2,915
    
    
    
    3,388
    
    
    
    11,648
    
    
    
    9,285Total expenses
    
    
    59,013
    
    
    
    85,644
    
    
    
    178,419
    
    
    
    203,987Operating profit
    
    
    17,771
    
    
    
    1,191
    
    
    
    40,300
    
    
    
    30,827Interest income
    
    
    263
    
    
    
    365
    
    
    
    819
    
    
    
    716Interest expense
    
    
    (4,214
    )
    
    
    (4,137
    )
    
    
    (11,933
    )
    
    
    (12,641
    )Other income (Note 7)
    
    
    3,027
    
    
    
    2,224
    
    
    
    10,814
    
    
    
    7,417(924
    )
    
    
    (1,548
    )
    
    
    (300
    )
    
    
    (4,508
    )Income (loss) before income taxes
    
    
    16,847
    
    
    
    (357
    )
    
    
    40,000
    
    
    
    26,319Provision for income taxes
    
    
    (6,487
    )
    
    
    138
    
    
    
    (15,401
    )
    
    
    (10,132
    )Income (loss) from continuing operations
    
    
    10,360
    
    
    
    (219
    )
    
    
    24,599
    
    
    
    16,187Discontinued Operations (Note 3)(Loss) income from operation of discontinued operations (net of
taxes)
    
    
    (60
    )
    
    
    (36
    )
    
    
    104
    
    
    
    (300
    )Gain on disposition of discontinued operations (net of taxes)
    
    
    170
    
    
    
    1,301
    
    
    
    2,457
    
    
    
    1,328Income from discontinued operations
    
    
    110
    
    
    
    1,265
    
    
    
    2,561
    
    
    
    1,028Net income
    
    
    10,470
    
    
    
    1,046
    
    
    
    27,160
    
    
    
    17,215Earnings Per ShareIncome
(loss) from continuing operations  basic
    
    $
    0.31
    
    
    ($
    0.01
    )
    
    $
    0.69
    
    
    $
    0.44Income
(loss) from continuing operations  diluted
    
    $
    0.31
    
    
    ($
    0.01
    )
    
    $
    0.68
    
    
    $
    0.44(Loss)
income from operation of discontinued operations  basic
    
    ($
    0.00
    )
    
    ($
    0.00
    )
    
    $
    0.01
    
    
    ($
    0.01
    )(Loss)
income from operation of discontinued operations  diluted
    
    ($
    0.00
    )
    
    ($
    0.00
    )
    
    $
    0.00
    
    
    ($
    0.01
    )Gain on
disposition of discontinued operations - basic
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    0.04Gain on
disposition of discontinued operations  diluted
    
    $
    0.00
    
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    0.04Net income
- basic
    
    $
    0.32
    
    
    $
    0.03
    
    
    $
    0.77
    
    
    $
    0.47Net income
- diluted
    
    $
    0.31
    
    
    $
    0.03
    
    
    $
    0.75
    
    
    $
    0.47Average
shares outstanding  basic
    
    
    33,161,016
    
    
    
    36,509,557
    
    
    
    35,467,893
    
    
    
    36,500,847Average
shares outstanding  diluted
    
    
    33,864,172
    
    
    
    36,509,557
    
    
    
    36,165,628
    
    
    
    36,810,584
 (Prior years results have been reclassified to conform to current years
presentation, including discontinued operations.) See accompanying notes to consolidated financial statements (unaudited). 4




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##### 



FLORIDA EAST COAST INDUSTRIES, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
   Nine MonthsEnded September 302004
    
    2003Cash Flows from Operating ActivitiesNet income
    
    
    27,160
    
    
    
    17,215Adjustments to reconcile net income to cash generated by operating activities:Depreciation and amortization
    
    
    36,668
    
    
    
    35,931Gain on disposition of properties
    
    
    (17,973
    )
    
    
    (25,827
    )Deferred taxes
    
    
    8,798
    
    
    
    10,576Other
    
    
    4,146
    
    
    
    2,36058,799
    
    
    
    40,255Changes in operating assets and liabilities:Accounts receivable
    
    
    (406
    )
    
    
    (5,873
    )Prepaid expenses
    
    
    (852
    )
    
    
    (1,536
    )Other current assets
    
    
    (4,336
    )
    
    
    (3,708
    )Other assets and deferred charges
    
    
    (6,468
    )
    
    
    715Accounts payable
    
    
    (3,180
    )
    
    
    (1,042
    )Taxes payable
    
    
    16,156
    
    
    
    12,963Income tax refund
    
    
    
    
    
    
    74,572Other current liabilities
    
    
    (1,374
    )
    
    
    10,030Accrued casualty and other long-term liabilities
    
    
    (1,279
    )
    
    
    (860
    )(1,739
    )
    
    
    85,261Net cash generated by operating activities
    
    
    57,060
    
    
    
    125,516Cash Flows from Investing ActivitiesPurchases of properties
    
    
    (73,429
    )
    
    
    (77,349
    )Proceeds from disposition of assets
    
    
    36,713
    
    
    
    72,980Net cash used in investing activities
    
    
    (36,716
    )
    
    
    (4,369
    )Cash Flows from Financing ActivitiesReceipt from mortgage debt (Note 8)
    
    
    105,000
    
    
    
    Payment of mortgage debt
    
    
    (2,110
    )
    
    
    (1,963
    )Payment of line of credit
    
    
    
    
    
    
    (53,000
    )Payment of dividends
    
    
    (4,899
    )
    
    
    (58,985
    )Payment for stock repurchase (Note 6)
    
    
    (191,126
    )
    
    
    Proceeds from exercise of options
    
    
    10,416
    
    
    
    1,564Other
    
    
    (1,839
    )
    
    
    (668
    )Net cash used in financing activities
    
    
    (84,558
    )
    
    
    (113,052
    )Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    (64,214
    )
    
    
    8,095Cash and Cash Equivalents at Beginning of Period
    
    
    125,057
    
    
    
    83,872Cash and Cash Equivalents at End of Period
    
    
    60,843
    
    
    
    91,967Supplemental Disclosure of Cash Flow InformationCash paid (received) for income taxes
    
    
    4,700
    
    
    
    (74,216
    )Cash paid for interest
    
    
    15,718
    
    
    
    13,386
 (Prior years results have been reclassified to conform to current years
presentation.) See accompanying notes to consolidated financial statements (unaudited). 5




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##### 



FLORIDA EAST COAST INDUSTRIES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1.General In the opinion of management, the accompanying unaudited consolidated financial
statements reflect all accruals and adjustments considered necessary to present
fairly the Companys financial position as of September 30, 2004 and December
31, 2003, and the results of operations and cash flows for the three-month and
nine-month periods ended September 30, 2004 and 2003. Results for interim
periods are not necessarily indicative of the results to be expected for the
year. The consolidated balance sheet as of December 31, 2003 included herein
has been derived from the Companys audited consolidated financial statements
for the year ended December 31, 2003. These interim financial statements should
be read in conjunction with the Companys Annual Report on Form 10-K for the
year ended December 31, 2003 filed with the Securities and Exchange Commission. Certain prior year amounts have been reclassified to conform to the current
years presentation, including discontinued operations. Note 2.Recapitalization On February 27, 2003, FECIs Board of Directors approved the submission of a
proposal to shareholders to amend the Companys Articles of Incorporation to
eliminate the Companys dual-class structure by reclassifying the Companys
Class A common stock and Class B common stock into a new single class of common
stock on a one-for-one basis. The reclassification was subsequently approved at
the Annual Meeting of Shareholders held on May 28, 2003. On September 10, 2003,
FECI and The St. Joe Company received a favorable ruling from the U.S. Internal
Revenue Service regarding FECIs reclassification of its Class A and Class B
common stock into a single class of common stock. The letter ruling confirmed
that the proposed reclassification would not have an adverse affect on the
tax-free status of the October 2000 spin-off of St. Joes equity interest in
FECI to St. Joes shareholders. FECI filed an amendment to its Articles of
Incorporation with the Secretary of State of Florida in order to effect the
reclassification on September 22, 2003. The consolidated financial statements
reflect the reclassification for all periods presented. The single class of
common stock trades on the New York Stock Exchange under the ticker symbol
FLA. Note 3.Discontinued Operations Real Estate In accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (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 for 2004 include the gains on the sales and the related
operations of an office building and an industrial building. Discontinued
operations for 2003 include the operations of the above mentioned properties,
as well as the operations of an industrial building sold during 2003 and the
gain on the sale and related operations of Flaglers 50% interest in three
buildings held in partnership with Duke Realty. 6




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##### 



Three Months
    
    Nine MonthsEnded Sept. 30
    
    Ended Sept. 30(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Summary of Operating Results of Discontinued OperationsFlagler realty rental revenues
    
    
    8
    
    
    
    344
    
    
    
    739
    
    
    
    1,535Flagler realty rental expenses
    
    
    104
    
    
    
    403
    
    
    
    569
    
    
    
    2,260Operating (loss) income
    
    
    (96
    )
    
    
    (59
    )
    
    
    170
    
    
    
    (725
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43(Loss) income before income taxes
    
    
    (96
    )
    
    
    (59
    )
    
    
    170
    
    
    
    (682
    )Income tax benefit (expense)
    
    
    36
    
    
    
    23
    
    
    
    (66
    )
    
    
    263(Loss) income from discontinued operations
    
    
    (60
    )
    
    
    (36
    )
    
    
    104
    
    
    
    (419
    )Gain on disposition of discontinued operations (net of
taxes of $0.1 million and $1.1 million for the three
months ended September 30, 2004 and 2003,
respectively, and $1.5 million and $1.1 million for
the nine months ended September 30, 2004 and 2003,
respectively.)
    
    
    170
    
    
    
    1,763
    
    
    
    2,457
    
    
    
    1,763
 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. Three Months
    
    Nine MonthsEnded Sept. 30
    
    Ended Sept. 30(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Summary of Operating Results of Discontinued OperationsEPIK revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EPIK expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40
    )Loss on disposition of discontinued operations (net of
taxes of $0.3 million for the three months and nine
months ended September 30, 2003, respectively)
    
    
    
    
    
    
    (462
    )
    
    
    
    
    
    
    (462
    )
 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 September 30, 2004 is as follows: EmployeeSeverance(dollars in thousands)
    
    Costs
    
    Other
    
    TotalsAccruals @ 12/31/03
    
    
    577
    
    
    
    
    
    
    
    577Additions & adjustments**
    
    
    
    
    
    
    
    
    
    
    Utilization
    
    
    (301
    )
    
    
    
    
    
    
    (301
    )Ending balance @ 9/30/04
    
    
    276
    
    
    
    
    
    
    
    276
 **-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 $0.7 million at September 30, 2004. 7




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##### 



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, and all periods presented have been restated accordingly. Three Months
    
    Nine MonthsEnded Sept. 30
    
    Ended Sept. 30(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Summary of Operating Results of Discontinued OperationsTrucking revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Trucking expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (259
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    259Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100
    )Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159Gain on disposition of discontinued operations (net of
taxes of $17 for the nine months ended September 30,
2003.)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27
 As a result of the discontinuance, certain liabilities were accrued related to
this exit plan. A roll-forward of the liabilities through September 30, 2004 is
as follows: EmployeeSeverance
    
    Tractor/Trailer(dollars in thousands)
    
    Costs
    
    Disposition Costs
    
    Other
    
    TotalsAccruals @ 12/31/03**
    
    
    104
    
    
    
    
    
    
    
    8
    
    
    
    112Additions & adjustments*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Utilization
    
    
    (104
    )
    
    
    
    
    
    
    (8
    )
    
    
    (112
    )Ending balance @ 9/30/04**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 *-Any additions and adjustments to the liabilities that resulted from changes
in estimates or final determinations are accounted for as gain or loss on
disposition of discontinued operations on the consolidated financial
statements. **-These amounts are included in Railways liabilities. Note 4.Commitments and Contingencies The Company is the defendant and plaintiff in various lawsuits resulting from
its operations. In the opinion of management, appropriate provision has been
made in the financial statements for the estimated liability that may result
from disposition of such matters. The Company maintains comprehensive liability
insurance for bodily injury and property claims, but is self-insured or
maintains a significant self-insured retention for these exposures,
particularly at Florida East Coast Railway, LLC (FECR 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. 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 8




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##### 



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




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##### 



FECR committed $1.5 million to jointly fund an overpass over the Medley branch
tracks to give access to warehouse space without crossing the railway. The
landowner and a customer are also funding this project with FECRs portion to
be paid half in 2004 and half in 2005. The construction of the overpass is
contingent upon project costs not exceeding a stipulated total amount. Note 5.Earnings Per Share The diluted weighted-average number of shares includes the net shares that
would be issued upon the exercise of in-the-money stock options using the
treasury stock method. Applying the treasury stock method, the in-the-money
stock options resulted in the dilution of 697,735 shares and 309,737 shares at
September 30, 2004 and 2003, respectively. Out-of-the-money shares were
994,338 shares and 2,147,569 shares at September 30, 2004 and 2003,
respectively. Note 6.Dividends and Stock Repurchase On August 26, 2004, the Company declared a dividend of $.05 per share on all
issued and outstanding common stock, payable September 23, 2004 to shareholders
of record as of September 9, 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. 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 $190 million. These repurchased shares are
now shown on the Consolidated Balance Sheets as Treasury Stock. This
transaction exhausted the remaining $72 million that existed under the previous
$75 million stock repurchase authorization. As a result, on August 4, 2004, the
Board of Directors authorized the expenditure of $40 million to repurchase
common stock from time to time through a program of open market purchases
and/or privately negotiated transactions. Note 7.Other Income Three Months
    
    Nine MonthsEnded Sept. 30
    
    Ended Sept. 30(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Pipe & wire crossings/signboards
    
    
    1,460
    
    
    
    640
    
    
    
    5,924
    
    
    
    2,517Fiber lease income
    
    
    1,612
    
    
    
    1,686
    
    
    
    5,111
    
    
    
    4,981Other (net)
    
    
    (45
    )
    
    
    (102
    )
    
    
    (221
    )
    
    
    (81
    )3,027
    
    
    
    2,224
    
    
    
    10,814
    
    
    
    7,417
 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 September 30, 2004, the Company had a $200 million revolving credit
agreement with certain financial institutions, for which the Company presently
pays (quarterly) commitment fees, as applicable under the agreement, at a range
of 20-50 basis points. The Companys revolving credit agreement contains
various covenants which, among other things, require the maintenance of certain
financial ratios related to fixed charge coverage and maximum leverage;
establish minimum levels of net worth; establish limitations on indebtedness,
certain types of payments, including dividends, liens and investments; and
limit the use of 10




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##### 



proceeds of asset sales. Some of the above covenants provide specific exclusion
of certain financing and investing activities at Flagler. The Company believes
the most restrictive of such ratios is the Group Debt/EBITDA ratio (as defined
in the Credit Facility Agreement). The Credit Facility Agreement provides that
at September 30, 2004, the Companys Group Debt/EBITDA ratio shall be no
greater than 2.50. At September 30, 2004, the Companys actual Group
Debt/EBITDA ratio was 0.00. Pursuant to the Credit Facility Agreement, the
required Group Debt/EBITDA ratio is 2.50 for the remainder of the agreement,
which expires on March 31, 2005. Although no assurances can be given as to the
Companys future compliance with the Group Debt/EBITDA ratio covenant or other
financial covenants, the Company has complied with the terms of the Credit
Facility Agreement in the past and expects to continue to comply with them in
the future. The Company plans on maintaining a revolving credit facility in
support of its general corporate needs. The Companys current intent is to
extend or renew the existing credit agreement before it matures on March 31,
2005. Borrowings under the credit agreement bear interest at variable rates linked to
the LIBOR Index. Interest on borrowings is due and payable on the rollover
date for each draw. Outstanding borrowings can be paid at any time by the
borrower, or at the conclusion of the facilitys term. On February 7, 2003, the
Company extended its revolving bank credit facility for an additional year to
March 31, 2005. In tandem with the extension, the Company and its banks made
amendments to the facility that included a reduction in the aggregate amount of
the commitments from $300 million to $200 million, the elimination of the
Global Debt to EBITDA covenant, which included the results of EPIK, an increase
in the stock repurchase and special dividend limit to $150 million (which also,
allowed and subsequently was increased in 2004 to $200 million if certain
financial ratio tests were met), an increase in the non-recourse mortgage
financing limit from $250 million to $325 million, and other miscellaneous
modifications. At September 30, 2004, there were no borrowings outstanding
under the facility. During 2001, Flagler issued $247 million of mortgage notes with $160 million
due July 1, 2011 and $87 million due October 1, 2008. At September 30, 2004,
$239 million was outstanding on these notes. Certain buildings and properties
of Flagler collateralize these notes. Interest and principal repayments on the
notes are 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 assuming a thirty-year amortization
period. The net proceeds in 2001 were used to repay existing indebtedness under
the Companys revolving credit facility. On August 10, 2004, Flagler issued $105 million of seven-year mortgage notes.
Certain buildings and properties of Flagler collateralize these notes. The
mortgage notes consist of a $60 million note with a fixed rate of interest of
5.27% and a $45 million note with a floating rate of interest based on the
90-day LIBOR Index plus 1.00% (2.71% at September 30, 2004). Repayments of
principal and interest are payable monthly based upon a thirty-year
amortization schedule. At September 30, 2004, the Company considers the
estimated fair market value of the mortgage notes to be $374.3 million. On July 15, 2004, the Company and its banks made amendments to the facility to
accommodate upcoming anticipated transactions. The Company increased the
non-recourse mortgage financing limit from $325 million to $350 million to
allow for the issuance of the $105 million of seven-year notes mentioned in the
previous paragraph and increased the stock repurchase and special dividend
limit to $300 million (eliminating the financial ratio test needed to exceed
$150 million) to allow for the $190 million repurchase from the Trust and
Foundation and $40 million stock repurchase program. At September 30, 2004, the
Company had $46 million remaining under the $300 million stock repurchase and
special dividend limit. Note 9.Stock-Based Compensation The Company applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB Opinion No. 25), and related interpretations in accounting for
stock options. As such, compensation expenses would be recorded on the date of
the grant only if the current market price of the underlying stock exceeded the
exercise price. Compensation expenses for grants of restricted stock are
recognized over the applicable vesting period. 11




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##### 



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: Three Months
    
    Nine MonthsEnded Sept. 30
    
    Ended Sept. 30(dollars in thousands, except per share amounts)
    
    2004
    
    2003
    
    2004
    
    2003Net income  as reported
    
    
    10,470
    
    
    
    1,046
    
    
    
    27,160
    
    
    
    17,215Deduct: Total stock-based employee compensation expense
determined under the fair value based method for all stock
option awards (net of related tax effects)
    
    
    (189
    )
    
    
    (778
    )
    
    
    (569
    )
    
    
    (1,893
    )Pro forma net income
    
    
    10,281
    
    
    
    268
    
    
    
    26,591
    
    
    
    15,322Earnings per share:Basic  as reported
    
    $
    0.32
    
    
    $
    0.03
    
    
    $
    0.77
    
    
    $
    0.47Basic  pro forma
    
    $
    0.31
    
    
    $
    0.01
    
    
    $
    0.75
    
    
    $
    0.42Diluted  as reported
    
    $
    0.31
    
    
    $
    0.03
    
    
    $
    0.75
    
    
    $
    0.47Diluted  pro forma
    
    $
    0.30
    
    
    $
    0.01
    
    
    $
    0.74
    
    
    $
    0.42
 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 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 September 30, 2004, a large land parcel under
contract for sale 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 12




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##### 



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. Also, FECI and FECR generate revenues and expenses from the rental, leasing,
and sale of buildings and properties that are ancillary to the railroads
operations. These revenues and expenses are included in the realty segment. The Companys reportable segments are strategic business units that offer
different products and services and are managed separately. 13




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##### 



Information by industry segment: Three Months
    
    Nine MonthsEnded Sept. 30
    
    Ended Sept. 30(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Operating RevenuesRailway operations
    
    
    46,261
    
    
    
    44,729
    
    
    
    144,920
    
    
    
    134,227Realty:Flagler realty rental and services
    
    
    17,369
    
    
    
    15,931
    
    
    
    51,490
    
    
    
    47,758Flagler realty sales
    
    
    11,154
    
    
    
    19,028
    
    
    
    17,711
    
    
    
    40,722Other rental
    
    
    827
    
    
    
    877
    
    
    
    2,321
    
    
    
    2,406Other sales
    
    
    1,173
    
    
    
    6,270
    
    
    
    2,277
    
    
    
    9,701Total realty
    
    
    30,523
    
    
    
    42,106
    
    
    
    73,799
    
    
    
    100,587Total revenues*
    
    
    76,784
    
    
    
    86,835
    
    
    
    218,719
    
    
    
    234,814Operating ExpensesRailway operations
    
    
    38,439
    
    
    
    33,969
    
    
    
    113,324
    
    
    
    103,408Realty:Flagler realty rental and services
    
    
    15,134
    
    
    
    13,120
    
    
    
    44,919
    
    
    
    42,041Flagler realty sales
    
    
    1,898
    
    
    
    16,260
    
    
    
    6,015
    
    
    
    27,479Other rental
    
    
    627
    
    
    
    18,907
    
    
    
    2,513
    
    
    
    21,774Total realty
    
    
    17,659
    
    
    
    48,287
    
    
    
    53,447
    
    
    
    91,294Corporate general & administrative
    
    
    2,915
    
    
    
    3,388
    
    
    
    11,648
    
    
    
    9,285Total expenses*
    
    
    59,013
    
    
    
    85,644
    
    
    
    178,419
    
    
    
    203,987Operating Profit (Loss)Railway operations
    
    
    7,822
    
    
    
    10,760
    
    
    
    31,596
    
    
    
    30,819Realty
    
    
    12,864
    
    
    
    (6,181
    )
    
    
    20,352
    
    
    
    9,293Corporate general & administrative
    
    
    (2,915
    )
    
    
    (3,388
    )
    
    
    (11,648
    )
    
    
    (9,285
    )Operating profit
    
    
    17,771
    
    
    
    1,191
    
    
    
    40,300
    
    
    
    30,827Interest income
    
    
    263
    
    
    
    365
    
    
    
    819
    
    
    
    716Interest expense
    
    
    (4,214
    )
    
    
    (4,137
    )
    
    
    (11,933
    )
    
    
    (12,641
    )Other income
    
    
    3,027
    
    
    
    2,224
    
    
    
    10,814
    
    
    
    7,417(924
    )
    
    
    (1,548
    )
    
    
    (300
    )
    
    
    (4,508
    )Income (loss) before income taxes
    
    
    16,847
    
    
    
    (357
    )
    
    
    40,000
    
    
    
    26,319Provision for income taxes
    
    
    (6,487
    )
    
    
    138
    
    
    
    (15,401
    )
    
    
    (10,132
    )Income (loss) from continuing operations
    
    
    10,360
    
    
    
    (219
    )
    
    
    24,599
    
    
    
    16,187Discontinued Operations(Loss) income from operation of discontinued operations (net of taxes)
    
    
    (60
    )
    
    
    (36
    )
    
    
    104
    
    
    
    (300
    )Gain on disposition of discontinued operations (net of taxes)
    
    
    170
    
    
    
    1,301
    
    
    
    2,457
    
    
    
    1,328Net Income
    
    
    10,470
    
    
    
    1,046
    
    
    
    27,160
    
    
    
    17,215
 (Prior years results have been reclassified to conform to current years
presentation, including discontinued operations.)  *-For the periods presented, there are no intersegment revenues and expenses. Note 12.The St. Joe Company St. Joe Company and affiliates provided certain real estate services to the
Company under service agreements, which expired in October 2003. These services
included property management, development management and construction
coordination and leasing services. Flagler now has operational responsibility
for these services. However, Codina, a St. Joe affiliate, continues to provide
development and leasing services at Flaglers South Florida properties. Amounts
paid to St. Joe and affiliates for these services for the third quarter of 2004
and 2003, respectively, were as follows: property management 14




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##### 



services of $0 million and $0.5 million, development fees of $0.1 million and
$0.1 million, construction coordination fees of $0 million and $0.1 million and
leasing commissions of $0.6 million and $0.4 million. Note 13.Taxes Payable Sept. 30, 2004
    
    Dec. 31, 2003(dollars in thousands)Federal Income Tax
    
    
    7,077
    
    
    
    3,494State Income Tax
    
    
    
    
    
    
    Property Taxes
    
    
    14,161
    
    
    
    1,340Other
    
    
    296
    
    
    
    544Taxes Payable
    
    
    21,534
    
    
    
    5,378
 Note 14.Cash Deposits and §1031 Escrow Funds At September 30, 2004, the Company had $17.7 million of cash deposits and §1031
escrow funds held by qualifying intermediaries. These funds represent $9.9
million currently anticipated to be used in §1031 exchanges to buy qualifying
property and $7.8 million of non-refundable deposits associated with the
Companys anticipated land sales. Note 15.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 (e.g. hoppers, flatcars, etc.), bridges and track structure (rail, ties,
ballast, and other track material). During the third quarter of 2004 the
engineering study (including associated estimated accounting lives) for
locomotives was completed. Additionally, the engineering studies for rolling
stock and bridges were substantially completed, however, finalization of these
studies is not expected until late in the fourth quarter of 2004. The
right-of-way asset engineering study is currently under way with a completion date
during the first half of 2005. The locomotive study
indicated no substantive change in the annual
maintenance or capital replacement programs. FECR will continue
its general practice of maintaining locomotives for the entirety of their
useful operating life. From this engineering study FECR identified three major
sub-components of its locomotive assets: Hulk/Chassis, Locomotive engine and
Combos (i.e. wheel assemblies, electric 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 8% or $0.2 million as a result of the study. These depreciable
lives will be implemented in the fourth quarter of 2004. These pending studies and their conclusions 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. 15




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##### 



Item 2. 
 Managements Discussion and Analysis of the Consolidated
Financial Condition and Results of Operations Forward-Looking Statements This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
include the Companys present expectations or beliefs concerning future events.
These statements may be identified by the use of words like plan, expect,
aim, believe, project, anticipate, intend, estimate, will,
should, could, and other expressions that indicate future events and
trends. Such forward-looking statements may include, without limitation,
statements that the Company does not expect that lawsuits, review of open tax
years by the IRS, environmental costs, commitments, including future
contractual obligations, contingent liabilities, financing availability, labor
negotiations or other matters will have a material adverse effect on its
consolidated financial condition, statements concerning future capital needs
and sources of such capital funding, statements concerning future intentions
with respect to the payment of dividends, execution of a share repurchase
program, 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 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, settle future contractual obligations as
estimated in time and amount and conclude labor negotiations in a satisfactory
way; changes in insurance markets, including increases in insurance premiums
and deductibles; the availability and costs of attracting and retaining
qualified independent third party contractors; liability for environmental
remediation and changes in environmental laws and regulations; the ultimate
outcome of environmental investigations or proceedings and other types of
claims and litigation; natural events such as weather conditions, floods,
earthquakes and forest fires; discretionary government decisions affecting the
use of land and delays resulting from weather conditions and other natural
occurrences that may affect construction or cause damage to assets; the ability
of buyers to terminate contracts to purchase real estate from the Company
prior to the expiration of inspection periods; failure or inability of third
parties to fulfill their commitments or to perform their obligations under
agreements; costs and availability of land and construction materials; buyers
inability or unwillingness to close transactions, particularly where buyers
only forfeit deposits upon failure to close; the Companys future taxable
income and other factors that may affect the availability and timing of
utilization of the Companys deferred tax assets; uncertainties, changes or
litigation related to tax laws, regulations and the application thereof that
could limit the tax benefits of the EPIK sale or of other possible transactions
involving the Company; ability of the Company to execute and complete a share
repurchase program; the Companys ability to pay dividends, repurchase shares
or to make other distributions to shareholder(s); and other risks inherent in
the real estate and other businesses of the Company. As a result of these and other factors, the Company may experience material
fluctuations in future operating results on a quarterly or annual basis, which
could materially and adversely affect its business, financial condition,
operating results and stock price. 16




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##### 



Readers should not place undue reliance on forward-looking statements, which
reflect managements view only as of the date thereof. The Company undertakes
no obligation to publicly release revisions to the forward-looking statements
in this Report that reflect events or circumstances after the date hereof or
reflect the occurrence of unanticipated events. Results of Operations Consolidated Results Third Quarter and Nine Months The Company reported consolidated revenues of $76.8 million for the third
quarter 2004, compared to $86.8 million in the third quarter 2003. The decrease
in consolidated revenues is due to two large land sales that took place during
the third quarter of 2003 (Citicorp - $14.4 million and Stuart Commerce Bank -
$2.2 million) partially offset by increased 2004 Railway revenues and Flagler
rental and services revenue. The Company reported income (loss) from continuing
operations of $10.4 million and ($0.2) million for the quarters ended September
30, 2004 and 2003, respectively. The Company reported net income of $10.5
million, or $0.31 per diluted share in the third quarter, 2004, compared with
net income of $1.0 million, or $0.03 per diluted share in the third quarter of
2003. The increase in income from continuing operations and net income results
primarily from a 2003 charge of $16.4 million ($10.1 million after tax) for
reserves associated with the termination of the Port Everglades lease.
Additionally, improved operating profit from Flagler rental and services
revenue was offset by decreased operating profit at FECR which resulted from
the negative impact of hurricane related lost revenues and costs. For the nine months ended September 30, 2004, FECI reported consolidated
revenues of $218.7 million, compared to $234.8 million for the same period in
2003. Consolidated revenues decreased for the nine months ended September 30,
2004 due to decreased land sales activity at Flagler. The nine months ended
September 30, 2003 contained several large land sales at Flagler including
Citicorp ($14.4 million), Baptist Hospital ($9.5 million), Ft. Pierce ($5.6
million), Stuart Commerce Park ($2.2 million) and Weston Office Park ($2.2
million) as well as other small parcels. This was partially offset by revenue
increases at FECR and higher Flagler realty and rental services revenue. The
Company reported income from continuing operations of $24.6 million and $16.2
million for the nine months ended September 30, 2004 and 2003, respectively.
The Company reported net income of $27.2 million, or $0.75 per diluted share,
for the nine months ended September 30, 2004, compared to net income of $17.2
million, or $0.47 per diluted share, for the prior year period. The increase in
income from continuing operations and net income is primarily effected by the
2003 charge of $16.4 million ($10.1 million after tax) for reserves associated
with the termination of the Port Everglades lease offset by the above mentioned
2004 land sale activity decrease plus an increase in corporate general and
administrative expenses (primarily costs associated with grants of restricted
stock). Additionally, other income increased in 2004 due to new utility
wire-crossing agreements ($2.6 million) with a single customer. 17




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##### 



Railway
Third Quarter FECRs traffic volume and revenues for the three months ended September 30,
2004 and 2003, respectively, are shown below. Also, FECRs quarterly operating
expenses are presented below. TRAFFIC
Three Months Ended September 30
(dollars and units in thousands) 2004
    
    2003
    
    Percent
    
    2004
    
    2003
    
    PercentCommodity
    
    Units
    
    Units
    
    Variance
    
    Revenues
    
    Revenues
    
    VarianceRail CarloadsCrushed stone (aggregate)
    
    
    28.1
    
    
    
    31.5
    
    
    
    (10.8
    )
    
    
    13,495
    
    
    
    14,691
    
    
    
    (8.1
    )Construction materials
    
    
    1.4
    
    
    
    1.5
    
    
    
    (6.7
    )
    
    
    913
    
    
    
    808
    
    
    
    13.0Vehicles
    
    
    4.3
    
    
    
    4.7
    
    
    
    (8.5
    )
    
    
    3,509
    
    
    
    3,744
    
    
    
    (6.3
    )Foodstuffs & kindred
    
    
    3.0
    
    
    
    2.9
    
    
    
    3.4
    
    
    
    2,329
    
    
    
    2,151
    
    
    
    8.3Chemicals & distillants
    
    
    0.8
    
    
    
    0.9
    
    
    
    (11.1
    )
    
    
    1,003
    
    
    
    1,004
    
    
    
    (0.1
    )Paper & lumber
    
    
    1.4
    
    
    
    1.4
    
    
    
    
    
    
    
    1,408
    
    
    
    1,412
    
    
    
    (0.3
    )Other
    
    
    3.0
    
    
    
    3.7
    
    
    
    (18.9
    )
    
    
    1,813
    
    
    
    2,172
    
    
    
    (16.5
    )Total carload
    
    
    42.0
    
    
    
    46.6
    
    
    
    (9.9
    )
    
    
    24,470
    
    
    
    25,982
    
    
    
    (5.8
    )Intermodal
    
    
    68.6
    
    
    
    62.1
    
    
    
    10.5
    
    
    
    20,801
    
    
    
    18,043
    
    
    
    15.3Total freight units/revenues
    
    
    110.6
    
    
    
    108.7
    
    
    
    1.7
    
    
    
    45,271
    
    
    
    44,025
    
    
    
    2.8Ancillary revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    990
    
    
    
    704
    
    
    
    40.6Railway segment revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,261
    
    
    
    44,729
    
    
    
    3.4
 (Prior years results have been reclassified to conform to current years
presentation. Previously, drayage revenues were shown separately but are now
classified for all periods in intermodal revenues, given their integrated
relationship.) RAILWAY OPERATING EXPENSES Three Months
    
    Three MonthsEnded Sept. 30
    
    Ended Sept. 30(dollars in thousands)
    
    2004
    
    2003Compensation & benefits
    
    
    12,795
    
    
    
    12,537Fuel
    
    
    3,869
    
    
    
    3,228Equipment rents (net)
    
    
    835
    
    
    
    826Car hire (net)
    
    
    (1,162
    )
    
    
    (1,427
    )Depreciation
    
    
    5,006
    
    
    
    4,925Purchased services
    
    
    2,284
    
    
    
    2,327Repairs to/by others (net)
    
    
    (1,009
    )
    
    
    (1,189
    )Load/unload
    
    
    1,822
    
    
    
    1,808Casualty & insurance
    
    
    1,775
    
    
    
    1,670Property taxes
    
    
    1,462
    
    
    
    1,363Materials
    
    
    2,087
    
    
    
    2,296General & administrative expenses
    
    
    2,112
    
    
    
    2,447Outside contractor delivery costs
    
    
    3,251
    
    
    
    2,110Other
    
    
    3,312
    
    
    
    1,048Total operating expenses
    
    
    38,439
    
    
    
    33,969
 (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.) 18




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##### 



Railway segment revenues increased $1.6 million to $46.3 million in third
quarter 2004 from $44.7 million in third quarter 2003. FECR had five days in
early September and four days in late September with no traffic movements due
to Hurricanes Frances and Jeanne reducing 2004 third quarter revenues. Carload
revenues decreased $1.5 million in the third quarter 2004 over 2003. This
decrease in carload revenue was primarily a decline in third quarter 2004
aggregate revenues of $1.2 million due to lost revenue days associated with
Hurricanes Frances and Jeanne. However, offsetting FECRs decline in carload
revenues was an increase in intermodal revenue. After several years of decline
in intermodal revenue, the third quarter of 2004 marked its fifth consecutive
quarter of year-to-year growth despite the effects of the hurricanes, ending
the quarter with $20.8 million in revenue, for an increase of $2.8 million over
third quarter 2003. The hurricane train from Atlanta to South Florida
increased revenues over 2003 with a record volume month during the quarter.
Additionally, intermodal haulage revenue and the international business segment
experienced strong growth in third quarter 2004. Partially offsetting these
intermodal increases were declines in intermodal traffic received from one of
FECRs connecting carrier. Operating expenses increased $4.5 million in third quarter 2004 over 2003.
Third quarter 2004 expenses increased $3.0 million due to a main line
derailment ($0.8 million), and Hurricanes Frances and Jeanne (estimated at $2.2
million combined), which are included in other expenses. The hurricane
expenses included tree clearing, property damage to signals, buildings and
bridges, and costs to operate and flag crossings during the power outages.
Compensation expenses increased $0.3 million due to general wage increases.
Outside contracted delivery service expenses to move product from the customers
to the rail ramp increased $1.1 million in third quarter 2004 over 2003. Fuel
expense increased $0.6 million due to increases in price per gallon and
additional volume. The Railway forward purchases fuel to manage the risk of fuel price increases.
As of September 30, 2004, the Railway had forward purchase contracts of 4.9
million gallons for delivery from October 2004 to September 2005 for an average
purchase price of $0.9793 per gallon before taxes and freight. This represents
54% of the estimated consumption for three months ended December 31, 2004 for
an average purchase price of $0.9776 and represents 27% of the estimated
consumption for the nine months ending September 30, 2005 for an average
purchase price of $0.9805. 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 (e.g. hoppers, flatcars, etc.), bridges and track structure (rail, ties,
ballast, and other track material). During the third quarter of 2004 the
engineering study (including associated estimated accounting lives) for
locomotives was completed. Additionally, the engineering studies for rolling
stock and bridges were substantially completed, however, finalization of these
studies is not expected until late in the fourth quarter of 2004. The
right-of-way asset engineering study is currently under way with a completion date
during the first half of 2005. The locomotive study
indicated no substantive change in the annual
maintenance or capital replacement programs. FECR will continue
its general practice of maintaining locomotives for the entirety of their
useful operating life. From this engineering study FECR identified three major
sub-components of its locomotive assets: Hulk/Chassis, Locomotive engine and
Combos (i.e. wheel assemblies, electric 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 8% or $0.2 million as a result of the study. These depreciable
lives will be implemented in the fourth quarter of 2004. These pending studies and their conclusions 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. 19




---



##### 



Nine Months FECRs traffic volume and revenues for the nine months ended September 30, 2004
and 2003, respectively, are shown below. Also, FECRs nine month operating
expenses are presented below. TRAFFIC
Nine Months Ended September 30
(dollars and units in thousands) 2004
    
    2003
    
    Percent
    
    2004
    
    2003
    
    PercentCommodity
    
    Units
    
    Units
    
    Variance
    
    Revenues
    
    Revenues
    
    VarianceRail CarloadsCrushed stone (aggregate)
    
    
    93.9
    
    
    
    90.8
    
    
    
    3.4
    
    
    
    44,268
    
    
    
    41,209
    
    
    
    7.4Construction materials
    
    
    4.0
    
    
    
    4.2
    
    
    
    (4.8
    )
    
    
    2,608
    
    
    
    2,339
    
    
    
    11.5Vehicles
    
    
    16.1
    
    
    
    16.9
    
    
    
    (4.7
    )
    
    
    12,715
    
    
    
    13,556
    
    
    
    (6.2
    )Foodstuffs & kindred
    
    
    9.0
    
    
    
    9.0
    
    
    
    
    
    
    
    6,982
    
    
    
    6,610
    
    
    
    5.6Chemicals & distillants
    
    
    2.8
    
    
    
    2.7
    
    
    
    3.7
    
    
    
    3,293
    
    
    
    3,058
    
    
    
    7.7Paper & lumber
    
    
    4.0
    
    
    
    5.3
    
    
    
    (24.5
    )
    
    
    4,301
    
    
    
    5,169
    
    
    
    (16.8
    )Other
    
    
    10.3
    
    
    
    11.7
    
    
    
    (12.0
    )
    
    
    6,445
    
    
    
    6,864
    
    
    
    (6.1
    )Total carload
    
    
    140.1
    
    
    
    140.6
    
    
    
    (0.4
    )
    
    
    80,612
    
    
    
    78,805
    
    
    
    2.3Intermodal
    
    
    202.6
    
    
    
    186.1
    
    
    
    8.9
    
    
    
    61,639
    
    
    
    53,089
    
    
    
    16.1Total freight units/revenues
    
    
    342.7
    
    
    
    326.7
    
    
    
    4.9
    
    
    
    142,251
    
    
    
    131,894
    
    
    
    7.9Ancillary revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,669
    
    
    
    2,333
    
    
    
    14.4Railway segment revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144,920
    
    
    
    134,227
    
    
    
    8.0
 (Prior years results have been reclassified to conform to current years
presentation. Previously, drayage revenues were shown separately but are now
classified for all periods in intermodal revenues, given their integrated
relationship.) RAILWAY OPERATING EXPENSES Nine Months
    
    Nine MonthsEnded Sept. 30
    
    Ended Sept. 30(dollars in thousands)
    
    2004
    
    2003Compensation & benefits
    
    
    40,057
    
    
    
    38,228Fuel
    
    
    11,318
    
    
    
    10,162Equipment rents (net)
    
    
    2,443
    
    
    
    2,301Car hire (net)
    
    
    (2,022
    )
    
    
    (2,236
    )Depreciation
    
    
    14,990
    
    
    
    14,659Purchased services
    
    
    6,929
    
    
    
    6,487Repairs to/by others (net)
    
    
    (2,226
    )
    
    
    (2,578
    )Load/unload
    
    
    5,753
    
    
    
    5,427Casualty & insurance
    
    
    4,732
    
    
    
    4,721Property taxes
    
    
    4,324
    
    
    
    3,851Materials
    
    
    7,559
    
    
    
    6,944General & administrative expenses
    
    
    6,546
    
    
    
    7,490Outside contractor delivery costs
    
    
    8,239
    
    
    
    5,719Other
    
    
    4,682
    
    
    
    2,233Total operating expenses
    
    
    113,324
    
    
    
    103,408
 (Prior years results have been reclassified to conform to current years
presentation. Previously,
drayage expenses were shown separately but are now classified for all
periods in their related
natural category expense item.) Railway segment revenues increased $10.7 million to $144.9 million through
September 2004 from $134.2 million through September 2003. Carload revenues
increased $1.8 million over 2003 levels which is driven by record levels of
aggregate business increasing revenue $3.1 million in 2004 over 2003. Food and
kindred increased $0.4 million due to new capacity from an existing customer.
Paper and lumber decreased $0.9 million due to lower first half 2004 lumber
shipments and the loss of a coal contract in third quarter 2003 that was
recently recaptured. Vehicle revenues decreased $0.8 million in 2004 over 20




---



##### 



2003 primarily due to the rental buyback program shifted to later in 2004 and
loss of the National Guard move from the Iraq war in 2003. Intermodal revenues increased $8.6 million for the first nine months in 2004
over the same period 2003. Leading the way was a resurgence in the parcel/LTL,
domestic truckload segments and International loads, as well as continued
strength in our Integrated Product. Intermodal haulage revenue experienced
strong growth in 2004 as well as the retail service, which includes
door-to-door deliveries. Partially offsetting these increases were declines in
intermodal traffic received from one of FECRs connecting carriers. Operating expenses increased $9.9 million to $113.3 million for nine months
ended September 2004, compared with $103.4 million for same period 2003.
Overall, expenses (included in Other) increased $3.2 million due to a main
line derailment ($0.8 million), Hurricane Charley ($0.2 million), and
Hurricanes Frances and Jeanne (estimated at $2.2 million combined) in the third
quarter 2004. The hurricane expenses were for tree clearing, property damage
to signals, buildings and bridges, and costs to operate and flag crossings
during the power outages. Compensation and benefits increased $1.8 million due
to general wage increase, volume for new business and variable compensation.
Outside contracted delivery expenses increased $2.5 million to deliver the
additional door-to-door intermodal business. Materials increased $0.6 million
due to additional repairs to the locomotives and freight cars. Fuel expense
increased $1.2 million due to volume and increased price for diesel fuel.
Purchased services increased $0.4 million over 2003 due to additional rail
inspection services. Depreciation increased $0.3 million in 2004 over 2003.
Equipment rents and per diem increased $0.4 million due to additional trailers
and hopper cars being used for additional business. Property taxes increased
$0.5 million for 2004 due to an increase in the property assessment for 2003.
Offsetting these increases is a reduction of information technology costs of
$0.9 million. Realty
Third Quarter Flaglers quarterly revenues and operating expenses for the three months ended
September 30, 2004 and 2003, respectively, are presented below. REALTY SEGMENT REVENUES Three Months
    
    Three MonthsEnded Sept. 30
    
    Ended Sept. 30(dollars in thousands)
    
    2004
    
    2003Rental revenues  Flagler
    
    
    15,136
    
    
    
    13,787Services fee revenues
    
    
    76
    
    
    
    Rental income  straight-line rent adjustments
    
    
    739
    
    
    
    890Operating expense recoveries
    
    
    938
    
    
    
    775Rental revenues  undeveloped land
    
    
    136
    
    
    
    212Other
    
    
    344
    
    
    
    267Total rental revenue  Flagler properties
    
    
    17,369
    
    
    
    15,931Rental revenues  other realty operations
    
    
    827
    
    
    
    877Total rental revenues
    
    
    18,196
    
    
    
    16,808Building and land sales  Flagler
    
    
    11,154
    
    
    
    19,028Building and land sales  other realty operations
    
    
    1,173
    
    
    
    6,270Total building and land sales revenues
    
    
    12,327
    
    
    
    25,298Total realty segment revenues
    
    
    30,523
    
    
    
    42,106
 (Prior years results have been reclassified to conform to current years
presentation, including discontinued operations.) 21




---



##### 



REALTY SEGMENT EXPENSES Three Months
    
    Three MonthsEnded Sept. 30
    
    Ended Sept. 30(dollars in thousands)
    
    2004
    
    2003Real estate taxes  developed
    
    
    1,783
    
    
    
    1,560Repairs & maintenance  recoverable
    
    
    735
    
    
    
    628Services, utilities, management costs
    
    
    3,295
    
    
    
    3,097Total expenses subject to recovery  Flagler properties
    
    
    5,813
    
    
    
    5,285Real estate taxes  Flagler undeveloped land
    
    
    1,195
    
    
    
    548Repairs & maintenance  non-recoverable
    
    
    334
    
    
    
    367Depreciation & amortization  Flagler
    
    
    6,222
    
    
    
    5,445SG&A  non-recoverable  Flagler
    
    
    1,570
    
    
    
    1,475Total  non-recoverable expenses  Flagler properties
    
    
    9,321
    
    
    
    7,835Total rental expenses  Flagler properties
    
    
    15,134
    
    
    
    13,120Real estate taxes  other undeveloped land
    
    
    64
    
    
    
    714Depreciation & amortization  other
    
    
    10
    
    
    
    41SG&A  non-recoverable  other
    
    
    553
    
    
    
    18,152Total rental expenses  other realty operations
    
    
    627
    
    
    
    18,907Total rental expenses
    
    
    15,761
    
    
    
    32,027Realty sales expenses
    
    
    1,898
    
    
    
    16,260Total operating expenses
    
    
    17,659
    
    
    
    48,287
 (Prior years results have been reclassified to conform to current years
presentation, including discontinued operations.) Results from Continuing Operations Flagler rental and services revenues increased $1.5 million or 9.0% from $15.9
million in 2003 to $17.4 million in 2004. Revenues from operating properties
increased $1.4 million. Same store occupancy increased to 94% at September 30,
2004 compared to September 30, 2003 occupancy of 85%. Same store properties
generated revenues of $15.6 million during the three months ended September 30,
2004, an increase of $1.0 million over the quarter ended September 30, 2003
revenues of $14.6 million. Properties acquired in 2003 contributed revenues of
$1.2 million, consistent with the prior year. Deerwood North 300 (new in 2004)
contributed revenues of $0.4 million during the quarter ended September 30,
2004. Income from land rents decreased $0.1 million due to the continued
disposition of non-core land holdings. Services fee revenues contributed $0.1
million in 2004. Flagler held 58 finished buildings with 6.4 million square feet and occupancy
of 94% at September 30, 2004. Same store properties include 5.8 million
square feet at 94% occupancy at September 30, 2004 compared to 85% at September
30, 2003. Flagler sales revenue decreased to $11.2 million in 2004 from $19.0 million in
2003, which included the sale of 78 acres to Citicorp for $14.4 million. Flaglers operating expenses increased $2.0 million or 15.4% to $15.1 million
for the three months ended September 30, 2004 compared to $13.1 million during
the three months ended September 30, 2003. Real estate taxes increased $0.9
million ($0.2 million recoverable; $0.7 million non-recoverable) primarily
related to increased assessed land values at Flagler Station in South Florida.
Also, depreciation and amortization increased $0.8 million (new in 2004  $0.2
million; office park infrastructure/corporate  $0.6 million), recoverable
expenses increased $0.3 million related to increased repairs and maintenance of
$0.1 million and increased owners association expenses of $0.1 million related
to Flagler Center maintenance costs, as well as increased management fee
expenses of $0.1 million. Non-recoverable administrative costs increased by
$0.1 million over the prior year primarily related to additional overhead costs
such as deal chase costs, marketing and bad debt expense. 22




---



##### 



Flaglers cost of land sales decreased $14.4 million, from $16.3 million in
2003 to $1.9 million in 2004. Land sales in 2003 included property within
developed parks, which carry a higher cost per square foot. Operating profit from operating properties increased $0.9 million to $5.9
million in the third quarter of 2004 compared to $5.0 million in the third
quarter of 2003. Same store properties operating profit increased $0.9 million
during the third quarter of 2004 while operating profit from properties
acquired in 2003 decreased $0.1 million compared to the third quarter of 2003.
New in 2004 properties contributed $0.1 million of operating profit during the
third quarter of 2004. Nine Months Flaglers revenues and operating expenses for the nine months ended September
30, 2004 and 2003, respectively, are presented below. REALTY SEGMENT REVENUES Nine Months
    
    Nine MonthsEnded Sept. 30
    
    Ended Sept. 30(dollars in thousands)
    
    2004
    
    2003Rental revenues  Flagler
    
    
    44,250
    
    
    
    39,946Services fee revenues
    
    
    126
    
    
    
    Rental income  straight-line rent adjustments
    
    
    2,621
    
    
    
    3,101Operating expense recoveries
    
    
    2,925
    
    
    
    3,097Rental revenues  undeveloped land
    
    
    564
    
    
    
    800Equity pickup
    
    
    
    
    
    
    62Other
    
    
    1,004
    
    
    
    752Total rental revenue  Flagler properties
    
    
    51,490
    
    
    
    47,758Rental revenues  other realty operations
    
    
    2,321
    
    
    
    2,406Total rental revenues
    
    
    53,811
    
    
    
    50,164Building and land sales  Flagler
    
    
    17,711
    
    
    
    40,722Building and land sales  other realty operations
    
    
    2,277
    
    
    
    9,701Total building and land sales revenues
    
    
    19,988
    
    
    
    50,423Total realty segment revenues
    
    
    73,799
    
    
    
    100,587
 (Prior years results have been reclassified to conform to current years
presentation, including discontinued operations.) 23




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##### 



REALTY SEGMENT EXPENSES Nine Months
    
    Nine MonthsEnded Sept. 30
    
    Ended Sept. 30(dollars in thousands)
    
    2004
    
    2003Real estate taxes  developed
    
    
    5,951
    
    
    
    5,725Repairs & maintenance  recoverable
    
    
    2,015
    
    
    
    1,835Services, utilities, management costs
    
    
    9,362
    
    
    
    8,895Total expenses subject to recovery  Flagler properties
    
    
    17,328
    
    
    
    16,455Real estate taxes  Flagler undeveloped land
    
    
    3,100
    
    
    
    2,448Repairs & maintenance  non-recoverable
    
    
    885
    
    
    
    714Depreciation & amortization  Flagler
    
    
    19,508
    
    
    
    17,583SG&A  non-recoverable  Flagler
    
    
    4,098
    
    
    
    4,841Total  non-recoverable expenses  Flagler properties
    
    
    27,591
    
    
    
    25,586Total rental expenses  Flagler properties
    
    
    44,919
    
    
    
    42,041Real estate taxes  other undeveloped land
    
    
    192
    
    
    
    983Depreciation & amortization  other
    
    
    58
    
    
    
    79SG&A  non-recoverable  other
    
    
    2,263
    
    
    
    20,712Total rental expenses  other realty operations
    
    
    2,513
    
    
    
    21,774Total rental expenses
    
    
    47,432
    
    
    
    63,815Realty sales expenses
    
    
    6,015
    
    
    
    27,479Total operating expenses
    
    
    53,447
    
    
    
    91,294
 (Prior years results have been reclassified to conform to current years
presentation, including discontinued operations.) Results from Continuing Operations Flagler rental and services revenues increased $3.7 million or 7.8% from $47.8
million in 2003 to $51.5 million in 2004. Revenues from operating properties
increased $3.9 million during the nine months ended September 30, 2004. Same
store occupancy increased to 94% at September 30, 2004 compared to September
30, 2003 occupancy of 85%. Same store properties generated revenues of $45.9
million during the nine months ended September 30, 2004, including $0.4 million
of net termination fees, an increase of $2.4 million over the nine months ended
September 30, 2003 revenues of $43.5 million. Properties acquired in 2003
contributed revenues of $3.7 million during 2004, including a $0.2 million net
termination fee, compared to $3.3 million during the prior year. Deerwood North 300
(new in 2004) contributed revenues of $1.1 million during the nine months ended
September 30, 2004. For the first nine months of 2004, Flagler has experienced
a 6% rate increase in straight-line rates (per square foot) and a 6% rate
decrease in cash-on-cash rates which compares the ending and beginning cash
rent payment at the time a tenant renews their lease. Income from land rents
decreased $0.2 million due to the continued disposition of non-core land
holdings and partnership equity income decreased $0.1 million during 2004 due
to the purchase of the Beacon Station 22, 23 and 24 LP partnership interests.
Services fee revenue contributed $0.1 million during the nine months ended
September 30, 2004. Flagler sales revenue decreased to $17.7 million in 2004 from $40.7 million in
2003. Flaglers operating expenses increased $2.9 million or 6.8% to $44.9 million
for the nine months ended September 30, 2004 compared to $42.0 million during
the nine months ended September 30, 2003. Real estate taxes increased $0.9
million ($0.2 million recoverable; $0.7 million non-recoverable), depreciation
and amortization increased $1.9 million (same store  $0.2 million; new in 2003
 $0.1 million; new in 2004 added $0.4 million; office park
infrastructure/corporate  $1.2 million), recoverable expenses increased $0.6
million due to increased owners association expense of $0.4 million related to
Flagler Center maintenance costs, as well as increased administrative and
management fee expenses of $0.2 million combined. Non-recoverable repairs and
maintenance increased $0.2 million during the nine months ended September 30,
2004, offset by decreased non-recoverable administrative costs of $0.7 million
compared to the prior year. 24




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##### 



Flaglers cost of land sales decreased $21.5 million, from $27.5 million in
2003 to $6.0 million in 2004 reflecting a lower level of sales volume in 2004. Operating profit from operating properties increased $2.4 million to $15.5
million during the nine months ended September 30, 2004 compared to $13.1
million during the nine months ended September 30, 2003. Same store operating
profit increased $2.0 million to $13.9 million during 2004. Operating profit
from properties acquired in 2003 increased $0.1 million compared to the prior
year and new in 2004 properties contributed $0.3 million of operating profit
during 2004. 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. During 2004, Flagler sold (March) a 60,000-sq. ft. build-to-suit office
building for $12.6 million for a pre-tax gain of $3.7 million, or $2.3 million,
net of applicable taxes, and sold in September 2004 a 147,000-sq. ft.
industrial building for $4.1 million, for a $0.3 million pre-tax gain, or $0.2
million, net of applicable taxes. Discontinued operations for 2003 include the
operations of buildings sold in 2004 and the operations of an industrial
building sold in November 2003, and Flaglers 50% interest in three buildings
held in partnership with Duke Realty disposed of during July 2003. The
operating results of these properties, as well as the gains on the sales of
these properties are included in discontinued operations for all periods
presented. Three Months
    
    Nine MonthsEnded Sept. 30
    
    Ended Sept. 30(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Summary of Operating Results of Discontinued OperationsFlagler realty rental revenues
    
    
    8
    
    
    
    344
    
    
    
    739
    
    
    
    1,535Flagler realty rental expenses
    
    
    104
    
    
    
    403
    
    
    
    569
    
    
    
    2,260Operating (loss) income
    
    
    (96
    )
    
    
    (59
    )
    
    
    170
    
    
    
    (725
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43(Loss) income before income taxes
    
    
    (96
    )
    
    
    (59
    )
    
    
    170
    
    
    
    (682
    )Income tax benefit (expense)
    
    
    36
    
    
    
    23
    
    
    
    (66
    )
    
    
    263(Loss) income from discontinued operations
    
    
    (60
    )
    
    
    (36
    )
    
    
    104
    
    
    
    (419
    )Gain on disposition of discontinued operations (net of
taxes of $0.1 million and $1.1 million for the three
months ended September 30, 2004 and 2003 respectively,
and $1.5 million and $1.1 million for the nine months
ended September 30, 2004 and 2003 respectively.)
    
    
    170
    
    
    
    1,763
    
    
    
    2,457
    
    
    
    1,763
 Corporate Expenses
Third Quarter and Nine Months Corporate general and administrative expenses were $2.9 million and $3.4
million for the third quarters of 2004 and 2003, respectively. The decrease
primarily relates to reduced professional costs. 2003 professional
costs include expenses ($0.3 million) associated with the reclassification of the
common stock which eliminated 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 (see Note 2 to the
consolidated financial statements). Corporate expenses for the nine months ended September 30, 2004 and 2003 were
$11.6 million and $9.3 million, respectively. Increases primarily relate to
costs associated with increased incentive-based compensation (i.e. restricted
stock and annual bonuses) expense. In a transaction (the Transaction)
initiated at the request of the Board of Directors, the Company cancelled
vested, in-the-money stock options (the Options) to acquire 144,000 shares of
the Companys common stock held by the 25




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##### 



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
Third Quarter and Nine Months Interest expense for the third quarter and first nine months of 2004 was $4.2
million and $11.9 million, respectively. This compares with interest expense of
$4.1 million and $12.6 million for the third quarter and first nine months of
2003, respectively. The lower interest expense resulted primarily from
additional interest being capitalized against new construction during 2004.
Interest cost (i.e. cash paid for interest) was $15.7 million and $13.4 million
for the first nine months of 2004 and 2003, respectively. Cash paid for
interest increased primarily due to increased levels of mortgage notes at
Flagler. Other Income
Third Quarter and Nine Months Other income for the third quarter and first nine months of 2004 was $3.0
million and $10.8 million, respectively, compared to $2.2 million and $7.4
million for the third quarter and first nine months of 2003, respectively. Pipe
and wire crossing income for the third quarter and nine months of 2004 included
$0.8 million of income from a one-time wire crossing agreement entered into
during the third quarter of 2004. Additionally, the nine month 2004 other
income amount includes $1.8 million from a separate wire crossing agreement
entered into during the second quarter of 2004. Income Tax Income tax expenses represent an effective rate of 38.5% for the third quarters
and nine months of 2004 and 2003, respectively. 
 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 nine months ended September 30, 2004 and 2003. 26




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##### 



FLORIDA EAST COAST INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited) Nine MonthsEnded September 302004
    
    2003Cash Flows from Operating ActivitiesNet income
    
    
    27,160
    
    
    
    17,215Adjustments to reconcile net income to cash generated by operating activities:Depreciation and amortization
    
    
    36,668
    
    
    
    35,931Gain on disposition of properties
    
    
    (17,973
    )
    
    
    (25,827
    )Deferred taxes
    
    
    8,798
    
    
    
    10,576Other
    
    
    4,146
    
    
    
    2,36058,799
    
    
    
    40,255Changes in operating assets and liabilities:Accounts receivable
    
    
    (406
    )
    
    
    (5,873
    )Prepaid expenses
    
    
    (852
    )
    
    
    (1,536
    )Other current assets
    
    
    (4,336
    )
    
    
    (3,708
    )Other assets and deferred charges
    
    
    (6,468
    )
    
    
    715Accounts payable
    
    
    (3,180
    )
    
    
    (1,042
    )Taxes payable
    
    
    16,156
    
    
    
    12,963Income tax refund
    
    
    
    
    
    
    74,572Other current liabilities
    
    
    (1,374
    )
    
    
    10,030Accrued casualty and other long-term liabilities
    
    
    (1,279
    )
    
    
    (860
    )(1,739
    )
    
    
    85,261Net cash generated by operating activities
    
    
    57,060
    
    
    
    125,516Cash Flows from Investing ActivitiesPurchases of properties
    
    
    (73,429
    )
    
    
    (77,349
    )Proceeds from disposition of assets
    
    
    36,713
    
    
    
    72,980Net cash used in investing activities
    
    
    (36,716
    )
    
    
    (4,369
    )Cash Flows from Financing ActivitiesReceipt from mortgage debt (Note 8)
    
    
    105,000
    
    
    
    Payment of mortgage debt
    
    
    (2,110
    )
    
    
    (1,963
    )Payment of line of credit
    
    
    
    
    
    
    (53,000
    )Payment of dividends
    
    
    (4,899
    )
    
    
    (58,985
    )Payment of stock repurchase (Note 6)
    
    
    (191,126
    )
    
    
    Proceeds from exercise of options
    
    
    10,416
    
    
    
    1,564Other
    
    
    (1,839
    )
    
    
    (668
    )Net cash used in financing activities
    
    
    (84,558
    )
    
    
    (113,052
    )Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    (64,214
    )
    
    
    8,095Cash and Cash Equivalents at Beginning of Period
    
    
    125,057
    
    
    
    83,872Cash and Cash Equivalents at End of Period
    
    
    60,843
    
    
    
    91,967Supplemental Disclosure of Cash Flow InformationCash paid (received) for income taxes
    
    
    4,700
    
    
    
    (74,216
    )Cash paid for interest
    
    
    15,718
    
    
    
    13,386
 (Prior years results have been reclassified to conform to current years presentation.) See accompanying notes to consolidated financial statements (unaudited). 27




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##### 



Net cash generated by operating activities was $57.1 million and $125.5 million
for the nine months ended September 30, 2004 and 2003, respectively. The
year-to-year fluctuation in net cash generated by operating activities is
primarily the result of a $74.6 million income tax refund received during the
second quarter 2003. During the nine months ended September 30, 2004 and 2003, respectively, the
Company invested approximately $54 million and $60 million at Flagler. For the
nine months ended September 30, 2004 and 2003, the Companys capital
investments at FECR were approximately $18 million and $16 million. Proceeds from disposition of assets were $36.7 million and $73.0 million for
the nine months ended September 30, 2004 and 2003, respectively. The majority
of these proceeds were from the sale of buildings and parcels of land by
Flagler during both the periods. 2003 proceeds reflect several large parcels
of land and the sale of a joint venture interest to Duke Realty. Net cash used in financing activities was $84.6 million and $113.1 million for
the nine months ended September 30, 2004 and 2003, respectively. 2004 cash from
financing includes proceeds from the issuance of $105 million seven-year
non-recourse mortgage notes issued in the third quarter of 2004 offset by the
purchase of 5.5 million shares of common stock from The Alfred I. duPont
Testamentary Trust and The Nemours Foundation for approximately $190 million.
Finance activities during 2003 included, primarily, repayments ($53 million)
for borrowings on the line of credit and the payments ($59 million) of a
special and quarterly dividend. At September 30, 2004, the Company had a $200 million revolving credit
agreement with certain financial institutions, for which the Company presently
pays (quarterly) commitment fees, as applicable under the agreement, at a range
of 20-50 basis points. The Companys revolving credit agreement contains
various covenants which, among other things, require the maintenance of certain
financial ratios related to fixed charge coverage and maximum leverage;
establish minimum levels of net worth; establish limitations on indebtedness,
certain types of payments, including dividends, liens and investments; and
limit the use of proceeds of asset sales. Some of the above covenants provide
specific exclusion of certain financing and investing activities at Flagler.
The Company believes the most restrictive of such ratios is the Group
Debt/EBITDA ratio (as defined in the Credit Facility Agreement). The Credit
Facility Agreement provides that at September 30, 2004, the Companys Group
Debt/EBITDA ratio shall be no greater than 2.50. At September 30, 2004, the
Companys actual Group Debt/EBITDA ratio was 0.00. Pursuant to the Credit
Facility Agreement, the required Group Debt/EBITDA ratio is 2.50 for the
remainder of the agreement (March 31, 2005). 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 and was 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 September 30
2004, there were no borrowings outstanding under the facility. During 2001, Flagler issued $247 million of mortgage notes with $160 million
due July 1, 2011 and $87 million due October 1, 2008. At September 30, 2004,
$239 million was outstanding on these notes. Certain buildings and properties
of Flagler collateralize these notes. Interest and principal repayments on the
notes are 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. 28




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##### 



On August 10, 2004, Flagler issued $105 million of seven-year mortgage notes.
Certain buildings and properties of Flagler collateralize these notes. The
mortgage notes consist of a $60 million note with a fixed rate of interest of
5.27% and a $45 million note with a floating rate of interest based on the
90-day LIBOR Index plus 1.00% (2.71% at September 30, 2004). Repayments of
principal and interest are payable monthly based upon a thirty-year
amortization schedule. The issuance of the notes optimized FECIs and Flaglers
capital structure, reduced its overall cost of capital and took advantage of
historically low interest rates. The floating rate feature allows Flagler the
flexibility to sell buildings securing the notes with minimal prepayment costs
after a six-month period. At September 30, 2004, the Company considers the
estimated fair market value of the mortgage notes to be $374.3 million. On July 15, 2004, the Company and its banks made amendments to the facility to
accommodate an increase in the non-recourse mortgage financing limit from $325
million to $350 million and an increase to the stock repurchase and special
dividend limit to $300 million (eliminating the financial ratio test needed to
exceed $150 million). At September 30, 2004 the Company had $46 million
remaining under the $300 million stock repurchase and special dividend limit. The Company believes its access to liquidity, via cash generated from
operations and the existing Credit Agreement and/or external financing, will be
sufficient to support normative cash needs in future years. The Company plans
on maintaining a revolving credit facility in support of its general corporate
needs. The Companys current intent is to extend or renew the existing credit
agreement before it matures on March 31, 2005. At September 30, 2004, FECI had $17.7 million of deposits and escrowed funds
included in cash and cash equivalents related to pending land sales and
potential real estate §1031 like-kind exchanges. 
 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 September 30, 2004, management had not
identified indicators of an impairment of value for any significant asset group
of the Companys. However, events or changes in circumstances could develop or
occur that would cause the Company to evaluate the recovery of its long-lived
assets and potentially record an impairment, the amount of which could be
material. Assets that are deemed impaired are recorded at the lower of carrying
amount or fair value. Income Tax Provisions  FECIs net deferred tax liability was $138.3 million at
September 30, 2004 and $129.5 million at December 31, 2003, respectively. In
2002, the Company had a federal deferred tax asset of approximately $38 million
associated with net operating loss carry forwards. During the course of 2003,
all of the federal net operating loss was utilized; however, at December 31,
2003, the Company estimated a $2.0 million alternative minimum tax (AMT)
liability for the 2003 tax year that will produce an AMT credit carry forward
which is expected to offset future federal tax liabilities. At December 31,
2002, the Company had a state deferred tax asset of approximately $11 million
relating to net operating loss carry forwards. This state deferred tax asset
was partially utilized during 2003, with approximately $8 million remaining at
December 31, 2003. The net deferred tax liability is estimated based on the
expected future tax consequences of items recognized in the financial
statements. Management must use judgment when estimating the future timing and
deductibility of expenses, loss and credit carry forwards in the Companys 29




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##### 



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 September 30, 2004 and December 31, 2003, FECI has no
valuation allowance since it expects to realize its deferred tax assets. This
expectation is primarily based upon FECIs expectation that future operations
will be sufficiently profitable to utilize the operating loss carry forwards,
as well as the existence of various tax, business and other planning strategies
available to the Company. However, the Company cannot guarantee that it will
realize this tax asset or that future valuation allowances will not be
required. Failure to utilize the tax asset could materially affect the
Companys financial results and financial position. Federal tax years through
1999 have been closed with the Internal Revenue Service (IRS). Federal tax
years 2000-2002 are currently under review by the IRS. Management believes its
income tax provision reserves at September 30, 2004 to be adequate for the
settlement, if any, of disputed tax positions taken by the Company for these
years. Historically, settlements for disputed tax positions that have effected
the total tax provision provided for in the income statement has been primarily
interest charges on timing differences between years. Revenue Recognition  Realty Rental Revenues  Revenues from realty rentals are
primarily contractual base rentals from leases of commercial property. The
Company recognizes revenues from these base rents evenly over the lease term in
accordance with SFAS 13, Accounting for Leases (SFAS 13). SFAS 13 requires
rental income from an operating lease be recognized on a straight-line basis
over the non-cancelable lease term. Accordingly, total contractual minimum
lease payments, including scheduled rent increases, are recognized as rental
revenue evenly over the lease term. Accrued revenues from contractually
scheduled rent increases in excess of amounts currently due amounted to $14.8
million at September 30, 2004 and $12.8 million at December 31, 2003, which is
reported in other assets. The Company monitors this asset for collection risk
and establishes reserves for any amounts deemed not collectible. However,
amounts collected in future periods may vary from the Companys expectations. Real Estate Infrastructure Costs  The Company periodically constructs road,
road structures and general infrastructure related to the development of
commercial real estate. Certain of these infrastructure assets may be deeded,
upon completion, to applicable governmental authorities. The Company believes
these deeded items (e.g., roads) benefit and increase the value of the parcels
within and adjacent to the related commercial real estate developments. The
Company capitalizes all infrastructure costs (including costs of infrastructure
assets deeded to governmental authorities) into the basis of its commercial
real estate developments, and allocates these costs to the individual parcels
within the park on a relative fair value basis in accordance with SFAS No. 67,
Accounting for Costs and Initial Rental Operations of Real Estate Projects
(SFAS 67). In connection with infrastructure assets constructed by the Company and deeded
to governmental authorities, certain governmental authorities may agree to
reimburse the Company certain of its construction costs for the deeded assets
based on and to the extent of annual incremental taxes (such as property taxes)
as may be collected by the governmental authority from the applicable
properties over a stipulated period of time. Prior to and at the date of
deeding the infrastructure asset to the governmental authority, reimbursements
are accounted for as a reduction in the allocated costs described above to the
extent the Companys receipt of such reimbursements has become fixed and
determinable, based upon the related incremental taxes having been assessed and
being, therefore, payable. The Company does not recognize expected future tax
reimbursements even though they may be probable and estimable, until they
become fixed and determinable. Contingencies  It is the Companys policy to reserve for certain contingencies
consisting primarily of various claims and lawsuits resulting from its
operations. In the opinion of management, appropriate reserves have been made
for the estimated liability that may result from disposition of such matters.
Managements opinion and ultimately the reserve recorded in the financial
statements are based on known facts and circumstances. In certain
circumstances, management uses the services of outside counsel to help evaluate
the facts and circumstances and gives consideration to their professional
judgment in establishing the appropriate reserve. The ultimate resolution of
these contingencies may be for an amount greater or less than the amount
estimated by management. 30




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##### 



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, other than the issuance of
$105 million seven-year mortgage notes as more particularly discussed in Part
I, Item 2, Managements Discussion & Analysis under the heading Financial
Condition, Liquidity, & Capital Resources. The table below provides market
risk information for all debt obligations including the mortgages issued during
the quarter. Expected Maturity Date 09/30/04Fair(dollars in thousands)
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    Total
    
    ValueLiabilitiesLong-Term Debt:Fixed Rate ($US)Ten Year Notes
    
    
    1,950
    
    
    
    2,099
    
    
    
    2,260
    
    
    
    2,433
    
    
    
    2,619
    
    
    
    142,841
    
    
    
    154,202
    
    
    
    175,881Seven Year Notes
    
    
    1,972
    
    
    
    2,098
    
    
    
    2,233
    
    
    
    81,259
    
    
    
    1,054
    
    
    
    55,036
    
    
    
    143,652
    
    
    
    153,456Average Interest Rate
    
    
    6.84
    %
    
    
    6.84
    %
    
    
    6.84
    %
    
    
    6.80
    %
    
    
    6.80
    %
    
    
    6.80
    %Variable Rate ($US)Seven Year Notes
    
    
    992
    
    
    
    1,020
    
    
    
    1,048
    
    
    
    1,076
    
    
    
    1,106
    
    
    
    39,514
    
    
    
    44,756
    
    
    
    45,000Average Interest Rate
    
    
    3.94
    %
    
    
    4.66
    %
    
    
    5.19
    %
    
    
    5.58
    %
    
    
    5.87
    %
    
    
    5.87
    %
 The variable rate notes carry a floating rate of interest based on the 90-day
LIBOR Index plus 1.00%. For each one percent rise in interest rates, interest
cost on these notes increases approximately $0.5 million. Concurrently with the
closing of the $45.0 million of mortgage debt, Flagler purchased a three-year
interest rate cap. The interest cap has a notional amount of $45 million and
caps the interest rate on the floating rate debt at 9.00% for a period of three
years. The fair market value of the interest rate cap on September 30, 2004
was $1.0 thousand. Management considers it unlikely that interest rate
fluctuations applicable to Flaglers floating rate debt will result in a
material adverse effect on FECIs financial position, results of operations or
liquidity. 
 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 September 30,
2004. Changes in Internal Control over Financial Reporting There were no changes in the Registrants internal control over financial
reporting identified in connection with the evaluation required by paragraph
(d) of Exchange Act Rules 13a or 15d-15 that occurred during the Registrants
third fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Registrants internal control over financial reporting. 31




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##### 



PART II 
 Item 1. LEGAL PROCEEDINGS There are no new legal or regulatory proceedings pending or known to be
contemplated which, in managements opinion, are other than normal and
incidental to the kinds of businesses conducted by the Company. 
 Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES On August 5, 2004, the Company entered into an agreement to purchase 5.5
million shares of common stock from The Alfred I. duPont Testamentary Trust
(Trust) and The Nemour Foundation (Foundation) for $34.50 per share or
approximately $190 million. The price represents an 8.0% discount to the
30-day average closing price ending August 4, 2004. The shares represent
approximately 14.9% of the Companys total outstanding common stock and are
held as treasury stock. After the transaction, the Trust now owns 3,085,930
shares, or approximately 9.8% of the total shares outstanding. The Foundation
no longer owns any shares of the Company. In connection with the transaction,
the Trust representatives Winfred L. Thornton, John S. Lord and Herbert H.
Peyton resigned from the FECI board of directors during August 2004. The trust
also agreed not to sell additional shares until January 1, 2005. The
transaction was approved by the directors of the FECI Board, other than the
representatives of the Trust. 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 made during the three months ended
September 30, 2004: Maximum AmountTotal Number of Shares
    
    of Value that mayPurchased as Part of
    
    yet be PurchasedTotal Number of
    
    Average Price
    
    Publicly Announced
    
    under the Plans orShares Purchased
    
    Paid Per Share
    
    Plans or Programs
    
    Programs(000s)
    
    
    
    
    
    
    
    
    
    (000s)July
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    72,083August
    
    
    2,089
    
    
    
    34.50
    
    
    
    
    
    
    $
    0.00Sept.
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.00
 32




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##### 



The share repurchase transaction with the Trust and Foundation described
earlier, exhausted the above $75 million share repurchase authority. After the
transaction with the Trust, the Board authorized the Company to repurchase up
to $40 million of common stock through a program of open market purchases and
privately negotiated transactions, from time to time. The following table sets
forth the repurchases made during the three months ended September 30, 2004: Maximum AmountTotal Number of Shares
    
    of Value that mayPurchased as Part of
    
    yet be PurchasedTotal Number of
    
    Average Price
    
    Publicly Announced
    
    under the Plans orShares Purchased
    
    Paid Per Share
    
    Plans or Programs
    
    Programs(000s)
    
    
    
    
    
    
    
    
    
    (000s)July
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AAugust
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    40,000Sept.
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    40,000
 
 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 August 9, 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 August 9, 2004, the Registrant furnished information under Item 12 on Form 8-K, reporting

a press release on this date describing its results of operations for
the second quarter ended June 30, 2004. 3. On August 17, 2004, under Item 5 on Form 8-K, the Registrant furnished information about the Company's subsidiary,
Flagler Development Company (Flagler) which closed (August 10, 2004) on $105 million of mortgage
financing. The notes are secured on a non-recourse basis by certain of
Flaglers developed commercial and industrial rental properties. The financing
consists of a $60 million, seven year note bearing interest at a fixed rate of
5.27% and a $45 million, seven year note bearing interest at an adjustable rate
based on three-month LIBOR plus 1.00%.  Additionally, on August 16, 2004 the Company announced it had closed on its previously
announced agreement to purchase 5.5 million shares of its common stock from the
Alfred I. duPont Testamentary Trust and The Nemours Foundation. 33




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##### 



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. FLORIDA EAST COAST INDUSTRIES,
INC.(Registrant)Date: November 2, 2004
    
    /s/ Mark A. LeiningerMark A. Leininger, Vice President and ControllerDate: November 2, 2004
    
    /s/ Daniel H. PopkyDaniel H. Popky, Executive Vice President and
Chief Financial Officer
 34




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##### 



INDEX TO EXHIBITS PAGES-K ITEM 601
    
    DOCUMENTS
    
    NUMBERS10(a)
    
    Stock Purchase Agreement dated as
of August 4, 2004 between Florida East Coast Industries, Inc. and
Alfred I. duPont Testamentary Trust and The Nemours Foundation
    
    ***10(b)
    
    Mortgage Notes dated as of August
10, 2004 between Flagler Development Company and Metropolitan Life Insurance Company
    
    **10(c)
    
    Representative Restricted Stock
Agreement dated August 25, 2004 between FECI and certain Executive
Officers (Chief Executive Officer, Vice Chairman, Executive
Vice-President-Rail Operations, Executive Vice President, General
Counsel and Secretary, Executive Vice President and Chief Financial
Officer, and President and Chief Operating Officer-Flagler Development Company)
    
    *31.1 - 31.2
    
    Section 302 Certifications
    
    36-3732.1
    
    Section 906 Certification
    
    38
  ***
    These documents, dated August 4, 2004, are filed as exhibits to Form 10-Q
with the Securities and Exchange Commission on August 9, 2004.  **
    
    These documents, dated August 10, 2004, are filed on Form 8-K with the
Securities and Exchange Commission on August 17, 2004.  *
    
    This document, dated August 25, 2004, is filed as an exhibit to Form
10-Q with the Securities and Exchange Commission on November 3, 2004. 35