##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission
File Number 001-32866
 FLORIDA EAST COAST INDUSTRIES, INC.
  Florida
    
    20-4427296(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)One Malaga StreetSt. Augustine, Florida
    
    32084(Address of principal executive offices)
    
    (Zip Code)
 (904) 829-3421
 þ o
 
 þ o o
 o þ
  Class
    
    Outstanding at September 30, 2006Common Stock-no par value
    
    35,604,099 shares




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##### Table of Contents



FLORIDA EAST COAST INDUSTRIES, INC.
 INDEX
 PageNumbersPART IFINANCIAL
INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets  September 30, 2006 and December 31, 2005
    
    
    2Consolidated Statements of Income 
Three Months and Nine Months Ended September 30, 2006 and 2005
    
    
    3Consolidated Statements of Cash Flows 
Nine Months Ended September 30, 2006 and 2005
    
    
    4  5Notes to Consolidated Financial Statements
    
    
    6  20Item 2. Managements Discussion and Analysis of the Consolidated
Financial Condition and Results of OperationsComparison of Third Quarter 2006 versus Third Quarter 2005 and
Nine Months 2006 versus Nine Months 2005
    
    
    21  38Changes in Financial Condition, Liquidity and Capital Resources
    
    
    39  41Other Matters
    
    
    42  45Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    45Item 4. Controls and Procedures
    
    
    45PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
    46Item 1A. Risk Factors
    
    
    46Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    47Item 5. Other Information
    
    
    47Item 6. Exhibits
    
    
    48EX-10(p)EX-31.1EX-31.2EX-32.1




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##### Table of Contents



Item 1. Financial Statements
 FLORIDA EAST COAST INDUSTRIES, INC.
 
 CONSOLIDATED BALANCE SHEETS
  September 30
    
    December 312006
    
    2005(unaudited)AssetsCurrent Assets:Cash and cash equivalents (Note 16)
    
    
    17,185
    
    
    
    75,990Restricted cash (Note 16)
    
    
    361
    
    
    
    Accounts receivable (net)
    
    
    43,309
    
    
    
    35,732Accounts receivable from related parties
    
    
    6,192
    
    
    
    Materials and supplies
    
    
    4,733
    
    
    
    3,840Assets held for sale (Note 12)
    
    
    9,032
    
    
    
    9,761Deferred income taxes
    
    
    3,528
    
    
    
    1,345Prepaid expenses
    
    
    11,778
    
    
    
    6,727Straight line rent
    
    
    4,774
    
    
    
    4,429Total Current Assets
    
    
    100,892
    
    
    
    137,824Long Term Assets:Properties, less accumulated depreciation and amortization (Note 13)
    
    
    1,153,468
    
    
    
    955,395Investment in unconsolidated joint ventures (Note 4)
    
    
    39,178
    
    
    
    Goodwill (Note 2)
    
    
    31,297
    
    
    
    Intangible assets, less amortization (Note 2)
    
    
    19,312
    
    
    
    9,696Prepaid commissions
    
    
    12,785
    
    
    
    11,486Straight line rent
    
    
    19,094
    
    
    
    17,717Other assets
    
    
    5,015
    
    
    
    5,626Total Long Term Assets
    
    
    1,280,149
    
    
    
    999,920Total Assets
    
    
    1,381,041
    
    
    
    1,137,744Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable and accrued expenses
    
    
    59,344
    
    
    
    48,544Taxes payable (Note 15)
    
    
    18,758
    
    
    
    2,044Deferred revenue
    
    
    10,075
    
    
    
    5,527Short-term debt (Note 9)
    
    
    5,437
    
    
    
    5,198Other accrued liabilities
    
    
    15,571
    
    
    
    6,819Total Current Liabilities
    
    
    109,185
    
    
    
    68,132Deferred Income Taxes
    
    
    215,533
    
    
    
    187,241Long-Term Debt (net of current portion)(Note 9)
    
    
    329,932
    
    
    
    332,760Other Long-Term Liabilities
    
    
    35,060
    
    
    
    11,449Minority Interest in Joint Ventures(Note 4)
    
    
    4,811
    
    
    
    Shareholders EquityCommon Stock: (Note 10)
    
    
    166,915
    
    
    
    130,098Common stock, no par value; 150,000,000 shares authorized,
39,929,218 shares issued and 35,604,099 shares outstanding at
September 30, 2006 and 39,487,258 shares issued and 32,983,135
shares outstanding at December 31, 2005Amounts shown net of un-amortized (expected weighted-average
amortization period of 2.8 years) restricted stock deferred
compensation of $24,857 and $10,860, respectivelyRetained earnings
    
    
    657,761
    
    
    
    615,656Treasury stock at cost (4,325,119 shares at September 30, 2006 and
6,504,123 shares at December 31, 2005. September 30, 2006 treasury
stock includes 1,106,977 contingent shares) (Note 7)
    
    
    (138,156
    )
    
    
    (207,592
    )Total Shareholders Equity
    
    
    686,520
    
    
    
    538,162Total Liabilities and Shareholders Equity
    
    
    1,381,041
    
    
    
    1,137,744
  2




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##### Table of Contents





FLORIDA EAST COAST INDUSTRIES, INC.





CONSOLIDATED STATEMENTS OF INCOME






Three Months
    
    Nine MonthsEnded September 30
    
    Ended September 302006
    
    2005
    
    2006
    
    2005Operating revenues:Railway operations
    
    
    63,396
    
    
    
    59,902
    
    
    
    200,476
    
    
    
    175,336Realty rental and services
    
    
    42,197
    
    
    
    23,289
    
    
    
    101,722
    
    
    
    66,986Flagler CAM recoveries associated with hurricane costs (Note
5)
    
    
    101
    
    
    
    
    
    
    
    312
    
    
    
    Total realty rental and services
    
    
    42,298
    
    
    
    23,289
    
    
    
    102,034
    
    
    
    66,986Realty sales
    
    
    1,332
    
    
    
    3,482
    
    
    
    47,410
    
    
    
    10,261Total revenues
    
    
    107,026
    
    
    
    86,673
    
    
    
    349,920
    
    
    
    252,583Operating expenses:Railway operations
    
    
    47,102
    
    
    
    43,079
    
    
    
    144,732
    
    
    
    127,578Hurricane recoveries, net of expenses
    
    
    (5,788
    )
    
    
    304
    
    
    
    (5,329
    )
    
    
    304Total railway operations
    
    
    41,314
    
    
    
    43,383
    
    
    
    139,403
    
    
    
    127,882Realty rental and services
    
    
    39,845
    
    
    
    18,863
    
    
    
    93,251
    
    
    
    54,503Hurricane recoveries, net of expenses
    
    
    (2,563
    )
    
    
    221
    
    
    
    (1,641
    )
    
    
    280Total realty rental and services
    
    
    37,282
    
    
    
    19,084
    
    
    
    91,610
    
    
    
    54,783Realty sales
    
    
    674
    
    
    
    1,326
    
    
    
    32,412
    
    
    
    2,147Corporate general & administrative
    
    
    3,609
    
    
    
    3,451
    
    
    
    11,489
    
    
    
    19,105Total expenses
    
    
    82,879
    
    
    
    67,244
    
    
    
    274,914
    
    
    
    203,917Operating profit
    
    
    24,147
    
    
    
    19,429
    
    
    
    75,006
    
    
    
    48,666Minority interest
    
    
    34
    
    
    
    
    
    
    
    38
    
    
    
    Income from investment in unconsolidated joint ventures (Note 4)
    
    
    67
    
    
    
    
    
    
    
    9
    
    
    
    Interest income
    
    
    153
    
    
    
    374
    
    
    
    1,264
    
    
    
    1,117Interest expense
    
    
    (5,134
    )
    
    
    (5,074
    )
    
    
    (15,317
    )
    
    
    (14,821
    )Other income (Note 8)
    
    
    2,363
    
    
    
    2,383
    
    
    
    8,275
    
    
    
    11,632(2,517
    )
    
    
    (2,317
    )
    
    
    (5,731
    )
    
    
    (2,072
    )Income before income taxes
    
    
    21,630
    
    
    
    17,112
    
    
    
    69,275
    
    
    
    46,594Provision for income taxes
    
    
    (8,138
    )
    
    
    (6,387
    )
    
    
    (25,909
    )
    
    
    (17,394
    )Income from continuing operations
    
    
    13,492
    
    
    
    10,725
    
    
    
    43,366
    
    
    
    29,200Discontinued Operations(Note 3)(Loss) gain on sale of discontinued operations (net of taxes)
    
    
    (111
    )
    
    
    
    
    
    
    5,713
    
    
    
    Earnings from discontinued operations
    
    
    (111
    )
    
    
    
    
    
    
    5,713
    
    
    
    Net income
    
    
    13,381
    
    
    
    10,725
    
    
    
    49,079
    
    
    
    29,200Earnings Per ShareIncome from continuing operations  basic
    
    $
    0.39
    
    
    $
    0.33
    
    
    $
    1.27
    
    
    $
    0.91Income from continuing operations  diluted
    
    $
    0.38
    
    
    $
    0.32
    
    
    $
    1.26
    
    
    $
    0.89(Loss) gain on sale of discontinued operations  basic
    
    $
    (0.01
    )
    
    
    
    
    
    $
    0.17
    
    
    
    Gain on disposition of discontinued operations  diluted
    
    
    
    
    
    
    
    
    
    $
    0.17
    
    
    
    Net income  basic
    
    $
    0.38
    
    
    $
    0.33
    
    
    $
    1.44
    
    
    $
    0.91Net income  diluted
    
    $
    0.38
    
    
    $
    0.32
    
    
    $
    1.43
    
    
    $
    0.89Average shares outstanding  basic
    
    
    34,933,849
    
    
    
    32,503,303
    
    
    
    34,147,821
    
    
    
    32,170,430Average shares outstanding  diluted
    
    
    35,060,743
    
    
    
    33,079,757
    
    
    
    34,356,450
    
    
    
    32,850,807




3




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##### Table of Contents





FLORIDA EAST COAST INDUSTRIES, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS






Nine MonthsEnded September 302006
    
    2005Cash Flows from Operating ActivitiesNet income
    
    
    49,079
    
    
    
    29,200Adjustments to reconcile net income to cash generated by operating activities:Depreciation and amortization
    
    
    43,868
    
    
    
    40,592Gain on involuntary conversion, due to Hurricane Wilma
    
    
    (1,913
    )
    
    
    Gain on disposition of properties, including those discontinued
    
    
    (24,287
    )
    
    
    (8,114
    )Deferred taxes
    
    
    8,513
    
    
    
    995Stock compensation expense (Note 10)
    
    
    9,156
    
    
    
    7,915Changes in operating assets and liabilities:Accounts receivable
    
    
    (324
    )
    
    
    (4,175
    )Prepaid expenses
    
    
    (5,707
    )
    
    
    (2,839
    )Materials and supplies
    
    
    (892
    )
    
    
    (785
    )Straight line rent
    
    
    (1,722
    )
    
    
    (5,228
    )Prepaid commissions
    
    
    (4,794
    )
    
    
    (2,599
    )Other assets and deferred charges
    
    
    2,134
    
    
    
    (949
    )Accounts payable
    
    
    (8,117
    )
    
    
    (5,212
    )Taxes payable (Note 15)
    
    
    15,825
    
    
    
    16,679Income tax refund
    
    
    
    
    
    
    2,800Other current liabilities
    
    
    12,920
    
    
    
    (2,821
    )Other long-term liabilities
    
    
    (209
    )
    
    
    (964
    )Net cash generated by operating activities
    
    
    93,530
    
    
    
    64,495Cash Flows from Investing ActivitiesPurchases of properties and equipment
    
    
    (112,368
    )
    
    
    (152,256
    )Acquisition of Codina Group Inc. and related interests, net of cash acquired (Note 2)
    
    
    (65,804
    )
    
    
    Investment in unconsolidated joint ventures
    
    
    (8,479
    )
    
    
    Decrease in restricted cash
    
    
    1,445
    
    
    
    Proceeds from hurricane related insurance settlement
    
    
    3,343
    
    
    
    Proceeds from disposition of assets, including those discontinued
    
    
    58,701
    
    
    
    10,261Net cash used in investing activities
    
    
    (123,162
    )
    
    
    (141,995
    )Cash Flows from Financing ActivitiesBorrowings from long term debt
    
    
    272
    
    
    
    Payment of mortgage debt
    
    
    (3,870
    )
    
    
    (3,645
    )Payment of acquired debt
    
    
    (30,117
    )
    
    
    Payment of dividends
    
    
    (6,976
    )
    
    
    (5,540
    )Proceeds from exercise of options
    
    
    10,167
    
    
    
    19,132Tax benefit associated with equity based compensation
    
    
    3,116
    
    
    
    3,924Stock repurchase program payments (Note 7)
    
    
    
    
    
    
    (2,289
    )Purchase of common stock
    
    
    (2,360
    )
    
    
    (1,474
    )Investment by minority interest
    
    
    595
    
    
    
    Net cash (used in)/provided by financing activities
    
    
    (29,173
    )
    
    
    10,108Net Decrease in Cash and Cash Equivalents
    
    
    (58,805
    )
    
    
    (67,392
    )Cash and Cash Equivalents at Beginning of Period
    
    
    75,990
    
    
    
    126,166Cash and Cash Equivalents at End of Period
    
    
    17,185
    
    
    
    58,774Supplemental Disclosure of Cash Flow InformationCash paid for income taxes (net of refunds)
    
    
    19,219
    
    
    
    7,200Cash paid for interest
    
    
    17,063
    
    
    
    16,521




4




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##### Table of Contents





Supplemental Schedule on Non-Cash Investing and Financing Activities




(dollars in thousands)Fair value of assets acquired
    
    
    246,193Acquisition transaction costs
    
    
    5,616Equity issued for initial consideration
    
    
    (76,412
    )Cash paid for acquired Company (1)
    
    
    (71,461
    )Liabilities assumed
    
    
    103,936


(1) Reconciliation to Statements of Cash FlowsCash paid for acquired Company
    
    
    71,461Less cash acquired
    
    
    (4,125
    )Less transaction costs paid in 2005
    
    
    (1,532
    )Acquisition of Codina Group, Inc. per Statements of Cash Flows
    
    
    65,804






5



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##### Table of Contents



FLORIDA EAST COAST INDUSTRIES, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Note 1. General
   Note 2 Acquisition of Codina Group and Related Interests
     *
    
    Beacon Countyline, 497 acres in Hialeah; future plans are for the creation of a large
industrial and office park.
 *
    
    Beacon Commons, 92 acres in Doral, future site of a retail, office and residential
development.
 *
    
    Gables Office Building, a 45,000 sq. ft. office building currently under construction.
 6




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##### Table of Contents



*
    
    Beacon Lakes, a 480-acre industrial park, including five industrial buildings and
entitlements for an additional 6.0 million sq. ft. in West Dade. The Company owns a 21.2%
interest in a venture with an affiliate of AMB Properties that owns the Beacon Lakes
development, except for the 57 acres described herein. Within the Beacon Lakes development
is included a 120-unit warehouse condominium project on 57 acres known as Beacon Village.
Beacon Village is owned by Beacon Village, LLC, which is owned 50% by the Company and 50% by
an affiliate of AMB Properties.
 *
    
    Red Road Commons, a proposed 50% interest in a venture with an affiliate of Fairfield
Properties, Inc. to build 407-unit residential apartments on land to be leased in South
Miami.
 *
    
    Downtown Doral (formerly Beacon City Center), a venture with an affiliate of JPMorgan that
holds an exclusive option to acquire and redevelop a 77-acre property in Doral for
residential and commercial uses.
 *
    
    Burger King, a proposed 30% interest in a venture with an affiliate of JPMorgan to acquire
land and construct a 15-story, 250,000 sq. ft. building for Burger Kings corporate
headquarters.
  Purchase Price Allocations
  (dollars in thousands)
    
    April 27, 2006Cash
    
    
    4,125Other current assets
    
    
    16,576Property and equipment, net
    
    
    161,116Goodwill
    
    
    21,784Intangible assets
    
    
    11,600Investments in joint ventures
    
    
    30,699Other assets
    
    
    293Assets acquired
    
    
    246,193Current liabilities
    
    
    25,731Acquired debt
    
    
    30,117Other long-term debt
    
    
    1,009Deferred tax liabilities
    
    
    18,663Other liabilities
    
    
    24,200Minority interest
    
    
    4,216Liabilities assumed
    
    
    103,936Net assets acquired
    
    
    142,257
   7




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##### Table of Contents



Pro Forma Financial Information
  Three Months Ended
    
    Nine Months Ended(dollars in thousands,
    
    September 30
    
    September 30except per share amounts)
    
    2006
    
    2005
    
    2006
    
    2005Revenue
    
    
    107,026
    
    
    
    100,093
    
    
    
    373,842
    
    
    
    313,120Net income
    
    
    13,381
    
    
    
    8,813
    
    
    
    48,316
    
    
    
    25,914Earnings per share:Basic
    
    $
    0.38
    
    
    $
    0.27
    
    
    $
    1.41
    
    
    $
    0.81Diluted
    
    $
    0.38
    
    
    $
    0.27
    
    
    $
    1.41
    
    
    $
    0.79
  Note 3. Discontinued Operations
  Note 4. Investments in Joint Ventures
 Emerging
Issues Task Force Abstracts Determining Whether a General Partner, or the
General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights
 Investments in Consolidated Joint Ventures
  *
    Downtown Doral (CM Doral Development Company LLC)  A venture with an affiliate of
JPMorgan that holds an exclusive option to acquire and redevelop a 77-acre property in Doral
for residential and commercial uses. The Company has an interest in a partnership (Codina
Doral Ltd) with Armando Codina and his children, which holds a 50.1% interest in this
venture.
  8




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##### Table of Contents



Investments in Unconsolidated Joint Ventures
  *
    Beacon Lakes, a 480-acre industrial park, including five industrial buildings and
entitlements for an additional 6.0 million sq. ft. in West Dade. AMB Codina Beacon Lakes,
LLC owns the Beacon Lakes development, except for the 57 acres described herein. AMB Codina
Beacon Lakes LLC is owned 21.2% by the Company and 78.8% by an affiliate of AMB Properties.
Within the Beacon Lakes development is included a 120-unit warehouse condominium project on
57 acres. Beacon Village is owned by Beacon Village LLC, which is owned 50% by the Company
and 50% by an affiliate of AMB Properties. The Beacon Lakes joint venture entities are
accounted for using the equity method.*
    Boca 54 (Boca 54 Land Associates LLC)  On May 31, 2006, the Company entered into and owns
a 20% interest in a venture with an affiliate of TIAA  CREF that owns a 54-acre land parcel
with entitlements for 941,000 sq. ft. of office space located in the City of Boca Raton. The
Boca 54 joint venture is accounted for using the equity method.
 Note 5. Impact from Hurricanes
     9




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##### Table of Contents



2005 HURRICANE  COST AND RECOVERY SUMMARY
 Total
    
    Cost (Recovery)Estimated
    
    recognized
    
    Cost (Recovery)Cost and
    
    in first nine months
    
    recognized(dollars in thousands)
    
    (Recovery)(1)
    
    of 2006
    
    since inceptionRailwayOperating expenses (Hurricane Costs)
    
    
    3,779
    
    
    
    867
    
    
    
    3,473Hurricane recoveries (net) (2)
    
    
    (979
    )
    
    
    (362
    )
    
    
    (979
    )Insurance recovery  Physical damage and extra expenses
    
    
    (2,417
    )
    
    
    (2,102
    )
    
    
    (2,102
    )Utility service interruption insurance settlement
    
    
    (3,732
    )
    
    
    (3,732
    )
    
    
    (3,732
    )Hurricane recoveries, net of expenses
    
    
    (3,349
    )
    
    
    (5,329
    )
    
    
    (3,340
    )Railway Realty RentalOperating expenses (Hurricane Costs)
    
    
    461
    
    
    
    177
    
    
    
    461Insurance recovery  Physical damage
    
    
    (195
    )
    
    
    (195
    )
    
    
    (195
    )Hurricane recoveries, net of expenses
    
    
    266
    
    
    
    (18
    )
    
    
    266FlaglerFlagler CAM recoveries associated with Hurricane
    
    
    (733
    )
    
    
    (312
    )
    
    
    (655
    )Capital expenditures (Properties)
    
    
    5,242
    
    
    
    4,776
    
    
    
    5,055Operating expenses (Hurricane Costs)
    
    
    1,720
    
    
    
    579
    
    
    
    1,351Asset write-off due to replacement (3)
    
    
    1,898
    
    
    
    1,660
    
    
    
    1,847Insurance proceeds
    
    
    (3,862
    )
    
    
    (3,862
    )
    
    
    (3,862
    )Hurricane recoveries, net of expenses
    
    
    (244
    )
    
    
    (1,623
    )
    
    
    (664
    )
 
 (1)
    
    The amounts shown in this column are managements best estimates of total costs to be incurred and amounts to be
recovered due to the 2005 hurricanes, however, these estimates are subject to change, which could be material. Remaining estimated
recoveries relate to costs yet to be submitted or incurred.(2)
    
    Hurricane recoveries (net) represent amounts recovered from various municipalities located along the Railways
right-of-way and other governmental authorities for reimbursement for operation of rail crossings during the outage and for related
repairs of those crossings.(3)
    
    Represents assets (primarily roofs) most of which have been replaced during 2006 and their related write-off
of remaining net book value. Note 6. Commitments and Contingencies
     10




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##### Table of Contents



Note 7. Dividends and Stock Repurchase
    Note 8. Other Income
 Three Months
    
    
    Nine MonthsEnded September 30
    
    
    Ended September 30(dollars in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Pipe & wire crossings/signboards
    
    
    859
    
    
    
    869
    
    
    
    3,429
    
    
    
    3,812Fiber lease income
    
    
    1,762
    
    
    
    1,753
    
    
    
    5,277
    
    
    
    5,330Air rights income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,049Other (net)
    
    
    (258
    )
    
    
    (239
    )
    
    
    (431
    )
    
    
    (559
    )2,363
    
    
    
    2,383
    
    
    
    8,275
    
    
    
    11,632
  Note 9. Debt
    11




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Note 10. Stock-Based Compensation
     12




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##### Table of Contents



Nine Months Ended
    
    
    Years EndedSeptember 30
    
    
    December 312006
    
    
    2005
    
    
    2005
    
    
    2004Stock compensation cost ($ in
thousands) for share-based
payment plans:Stock options
    
    
    31
    
    
    
    458
    (1)
    
    
    458
    (1)
    
    
    2,009
    (2)Restricted stock
    
    
    9,087
    (3)
    
    
    7,457
    (1)
    
    
    9,442
    (1)
    
    
    2,810Employee Stock Purchase Plan
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    9,156
    
    
    
    7,915
    
    
    
    9,900
    
    
    
    4,819Amount of related income tax
benefit recognized
    
    
    3,525
    
    
    
    3,047
    
    
    
    3,811
    
    
    
    1,855
 
 (1)
    
    First quarter 2005 included costs associated with the appointment of Mr. Adolfo Henriques as Chairman,
President and Chief Executive Officer and termination benefits provided to Mr. Robert W. Anestis. These expenses totaled $9.1
million in the first quarter and included $5.3 million of additional equity compensation, which is included in the above
amounts.(2)
    
    In a first quarter 2004 transaction (the Transaction) initiated at the request of the Board of Directors, the
Company cancelled vested, in-the-money stock options (the Options) to acquire 144,000 shares of the Companys common stock
held by the Companys former Chief Executive Officer (CEO), Robert W. Anestis. The embedded value of the Options (fair market
value less strike price) was $2 million. The embedded value, less applicable tax withholding, was paid in common stock. The
CEO was issued 36,407 shares (valued at $35.06, 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, which is included in the above
amount.(3)
    
    Included in this amount is $1.6 million of accelerated vesting related to the former President of Flagler
Development Company and another former employee.  Stock Options
 Weighted
    
    AggregateAverage
    
    IntrinsicWeighted
    
    Remaining
    
    ValueAverage Exercise
    
    Contractual
    
    ($ inNumber of Shares
    
    Price
    
    Term
    
    thousands)Outstanding balance at December 31, 2005
    
    
    616,487
    
    
    $
    31.78
    
    
    
    3.5
    
    
    
    Changes during the nine months:Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (327,950
    )
    
    $
    31.00
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    (2,571
    )
    
    $
    21.09
    
    
    
    
    
    
    
    Outstanding balance at September 30, 2006
    
    
    285,966
    
    
    $
    32.70
    
    
    
    3.1
    
    
    $
    6,971Exercisable at September 30, 2006
    
    
    283,026
    
    
    $
    32.82
    
    
    
    3.1
    
    
    $
    6,867
  13




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##### Table of Contents



Non-Vested Restricted Stock
 Weighted AverageGrant Date FairNumber of Shares
    
    ValueOutstanding balance at December 31, 2005
    
    
    355,790
    
    
    $
    40.40Changes during the nine months:Granted
    
    
    433,556
    
    
    $
    53.28Vested
    
    
    (143,766
    )
    
    $
    39.95Forfeited
    
    
    (6,488
    )
    
    $
    36.09Outstanding balance at September 30, 2006
    
    
    639,092
    
    
    $
    49.21
   Three Months
    
    
    
    
    
    
    
    
    
    
    Nine MonthsEnded September 30
    
    
    Ended September 30(dollars in thousands, except per share amounts)
    
    2006
    
    
    2005
    
    
    2004
    
    
    2006
    
    
    2005
    
    
    2004Net income  as reported inclusive of compensation
cost for restricted stock
    
    
    13,381
    
    
    
    10,725
    
    
    
    10,470
    
    
    
    49,079
    
    
    
    29,200
    
    
    
    27,160Stock-based compensation expense included in reported
income for all stock option awards (net of related
tax effects)
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    Deduct: Total stock-based employee compensation
expense determined under the fair-value-based method
(Black Scholes) for all stock option awards (net of
related tax effects)
    
    
    (4
    )
    
    
    (71
    )
    
    
    (189
    )
    
    
    (20
    )
    
    
    (274
    )
    
    
    (569
    )Pro forma net income
    
    
    13,381
    
    
    
    10,654
    
    
    
    10,281
    
    
    
    49,079
    
    
    
    28,926
    
    
    
    26,591Earnings per share:Basic  as reported
    
    $
    0.38
    
    
    $
    0.33
    
    
    $
    0.32
    
    
    $
    1.44
    
    
    $
    0.91
    
    
    $
    0.77Basic  pro forma
    
    $
    0.38
    
    
    $
    0.33
    
    
    $
    0.31
    
    
    $
    1.44
    
    
    $
    0.90
    
    
    $
    0.75Diluted  as reported
    
    $
    0.38
    
    
    $
    0.32
    
    
    $
    0.31
    
    
    $
    1.43
    
    
    $
    0.89
    
    
    $
    0.75Diluted  pro forma
    
    $
    0.38
    
    
    $
    0.32
    
    
    $
    0.30
    
    
    $
    1.43
    
    
    $
    0.88
    
    
    $
    0.74
 Note 11. Earnings Per Share
     14




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##### Table of Contents



Note 12. Realty Acquisitions, Land Sales and Associated Costs
       Note 13. Segment Information
     15




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##### Table of Contents



16




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##### Table of Contents



September 30
    
    December 31(dollars in thousands)
    
    2006
    
    2005FECR Properties(1)Road equipment and structures
    
    
    456,765
    
    
    
    442,954Buildings
    
    
    14,205
    
    
    
    13,234Equipment
    
    
    199,302
    
    
    
    203,188Land and land improvements
    
    
    22,965
    
    
    
    12,562Fiber
    
    
    3,200
    
    
    
    3,200Construction in progress
    
    
    13,432
    
    
    
    7,018709,869
    
    
    
    682,156Less accumulated depreciation
    
    
    283,884
    
    
    
    279,121425,985
    
    
    
    403,035Flagler(1)Land and land improvements
    
    
    371,054
    
    
    
    240,149Buildings
    
    
    489,995
    
    
    
    469,833Equipment
    
    
    6,430
    
    
    
    3,193Construction in progress
    
    
    59,068
    
    
    
    13,039926,547
    
    
    
    726,214Less accumulated depreciation
    
    
    192,413
    
    
    
    168,242734,134
    
    
    
    557,972CorporateEquipment
    
    
    15,363
    
    
    
    15,077Construction in progress
    
    
    4
    
    
    
    1,57015,367
    
    
    
    16,647Less accumulated depreciation
    
    
    12,986
    
    
    
    12,4982,381
    
    
    
    4,149
 
 (1)
    
    Included in the September 30, 2006 and year
ended 2005 amounts, respectively, are $6.3 million and $0.8 million
of FECR properties and $2.7 million and $9.0 million of Flagler
properties, respectively, for buildings and associated land that is
held for sale. 17




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##### Table of Contents



Information by industry segment:
 Three Months
    
    Nine MonthsEnded September 30
    
    Ended September 30(dollars in thousands)
    
    2006
    
    2005
    
    2006
    
    2005Operating RevenuesRailway operations:Total Railway
    
    
    63,396
    
    
    
    59,902
    
    
    
    200,476
    
    
    
    175,336Flagler:Realty rental revenues
    
    
    25,428
    
    
    
    21,867
    
    
    
    71,274
    
    
    
    63,164CAM recoveries associated with hurricane costs
    
    
    101
    
    
    
    
    
    
    
    312
    
    
    
    Total realty rental revenues
    
    
    25,529
    
    
    
    21,867
    
    
    
    71,586
    
    
    
    63,164Realty services revenues
    
    
    15,765
    
    
    
    274
    
    
    
    27,110
    
    
    
    504Land use revenues
    
    
    129
    
    
    
    202
    
    
    
    490
    
    
    
    663Total Flagler realty rental and services revenues
    
    
    41,423
    
    
    
    22,343
    
    
    
    99,186
    
    
    
    64,331Flagler realty sales
    
    
    1,193
    
    
    
    1,307
    
    
    
    42,618
    
    
    
    2,780Railway realty rental revenues
    
    
    875
    
    
    
    946
    
    
    
    2,848
    
    
    
    2,655Railway realty sales
    
    
    139
    
    
    
    2,175
    
    
    
    4,792
    
    
    
    7,481Total realty
    
    
    43,630
    
    
    
    26,771
    
    
    
    149,444
    
    
    
    77,247Total Revenues
    
    
    107,026
    
    
    
    86,673
    
    
    
    349,920
    
    
    
    252,583Operating ExpensesRailway operations:Railway operations
    
    
    47,102
    
    
    
    43,079
    
    
    
    144,732
    
    
    
    127,578Hurricane recoveries, net of expenses
    
    
    (5,788
    )
    
    
    304
    
    
    
    (5,329
    )
    
    
    304Total Railway
    
    
    41,314
    
    
    
    43,383
    
    
    
    139,403
    
    
    
    127,882Flagler:Realty rental expenses
    
    
    17,128
    
    
    
    14,528
    
    
    
    48,432
    
    
    
    42,225Hurricane recoveries, net of expenses
    
    
    (2,360
    )
    
    
    28
    
    
    
    (1,623
    )
    
    
    51Total realty rental expenses
    
    
    14,768
    
    
    
    14,556
    
    
    
    46,809
    
    
    
    42,276Realty services expenses
    
    
    14,328
    
    
    
    156
    
    
    
    25,041
    
    
    
    317Land & overhead expenses
    
    
    7,971
    
    
    
    3,680
    
    
    
    18,636
    
    
    
    10,546Total Flagler realty rental and services expenses
    
    
    37,067
    
    
    
    18,392
    
    
    
    90,486
    
    
    
    53,139Flagler realty sales
    
    
    659
    
    
    
    471
    
    
    
    31,126
    
    
    
    883Railway realty rental expenses
    
    
    418
    
    
    
    499
    
    
    
    1,142
    
    
    
    1,415Hurricane recoveries, net of expenses
    
    
    (203
    )
    
    
    193
    
    
    
    (18
    )
    
    
    229Total Railway realty rental expenses
    
    
    215
    
    
    
    692
    
    
    
    1,124
    
    
    
    1,644Railway realty sales
    
    
    15
    
    
    
    855
    
    
    
    1,286
    
    
    
    1,264Total realty
    
    
    37,956
    
    
    
    20,410
    
    
    
    124,022
    
    
    
    56,930Corporate general & administrative
    
    
    3,609
    
    
    
    3,451
    
    
    
    11,489
    
    
    
    19,105Total Expenses
    
    
    82,879
    
    
    
    67,244
    
    
    
    274,914
    
    
    
    203,917Operating Profit (Loss)Railway operations
    
    
    22,082
    
    
    
    16,519
    
    
    
    61,073
    
    
    
    47,454Realty
    
    
    5,674
    
    
    
    6,361
    
    
    
    25,422
    
    
    
    20,317Corporate general & administrative
    
    
    (3,609
    )
    
    
    (3,451
    )
    
    
    (11,489
    )
    
    
    (19,105
    )Segment & consolidated operating profit
    
    
    24,147
    
    
    
    19,429
    
    
    
    75,006
    
    
    
    48,666Minority interest
    
    
    34
    
    
    
    
    
    
    
    38
    
    
    
    Income from investment in unconsolidated joint ventures
    
    
    67
    
    
    
    
    
    
    
    9
    
    
    
    Interest income
    
    
    153
    
    
    
    374
    
    
    
    1,264
    
    
    
    1,117Interest expense
    
    
    (5,134
    )
    
    
    (5,074
    )
    
    
    (15,317
    )
    
    
    (14,821
    )Other income
    
    
    2,363
    
    
    
    2,383
    
    
    
    8,275
    
    
    
    11,632(2,517
    )
    
    
    (2,317
    )
    
    
    (5,731
    )
    
    
    (2,072
    )Income before income taxes
    
    
    21,630
    
    
    
    17,112
    
    
    
    69,275
    
    
    
    46,594
  18




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##### Table of Contents



Note 14. Related Party Transactions
   Note 15. Taxes Payable
 September 30
    
    December 31(dollars in thousands)
    
    2006
    
    2005Federal income tax
    
    
    258
    
    
    
    566State income tax
    
    
    
    
    
    
    Property taxes
    
    
    17,993
    
    
    
    939Other
    
    
    507
    
    
    
    539Taxes payable
    
    
    18,758
    
    
    
    2,044
     Note 16. Cash Deposits, §1031 Escrow Funds and Restricted Cash
    19




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##### Table of Contents



Note 17 Supplemental Employee Retirement Plan
    Note 18. Recently Issued Accounting Standards
   Note 19. Subsequent Event
   20




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##### Table of Contents



Item 2.
 Managements Discussion and Analysis of the Consolidated
Financial Condition and Results of Operations
 
 Forward-Looking Statements
   21




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##### Table of Contents



Results of Operations
 Consolidated Results  Third Quarter and Nine Months
   22




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##### Table of Contents



Railway  Third Quarter
  TRAFFIC  Three Months Ended September 30
 2006
    
    2005
    
    Percent
    
    2006
    
    2005
    
    PercentCommodity
    
    Units
    
    Units
    
    Variance
    
    Revenues
    
    Revenues
    
    VarianceRail CarloadsCrushed stone (aggregate)
    
    
    34.0
    
    
    
    35.3
    
    
    
    (3.7
    )
    
    
    18,414
    
    
    
    17,983
    
    
    
    2.4Construction materials
    
    
    1.8
    
    
    
    1.9
    
    
    
    (5.3
    )
    
    
    1,480
    
    
    
    1,385
    
    
    
    6.9Vehicles
    
    
    4.0
    
    
    
    4.8
    
    
    
    (16.7
    )
    
    
    3,813
    
    
    
    3,959
    
    
    
    (3.7
    )Foodstuffs & kindred
    
    
    3.1
    
    
    
    3.3
    
    
    
    (6.1
    )
    
    
    2,953
    
    
    
    2,851
    
    
    
    3.6Chemicals & distillants
    
    
    0.9
    
    
    
    0.8
    
    
    
    12.5
    
    
    
    1,419
    
    
    
    1,114
    
    
    
    27.4Paper & lumber
    
    
    1.6
    
    
    
    1.7
    
    
    
    (5.9
    )
    
    
    1,887
    
    
    
    1,908
    
    
    
    (1.1
    )Other
    
    
    2.9
    
    
    
    3.1
    
    
    
    (6.5
    )
    
    
    2,567
    
    
    
    2,287
    
    
    
    12.2Total carload
    
    
    48.3
    
    
    
    50.9
    
    
    
    (5.1
    )
    
    
    32,533
    
    
    
    31,487
    
    
    
    3.3Intermodal
    
    
    79.5
    
    
    
    80.4
    
    
    
    (1.1
    )
    
    
    29,709
    
    
    
    27,254
    
    
    
    9.0Total freight units/revenues
    
    
    127.8
    
    
    
    131.3
    
    
    
    (2.7
    )
    
    
    62,242
    
    
    
    58,741
    
    
    
    6.0Ancillary revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,154
    
    
    
    1,161
    
    
    
    (0.6
    )Railway segment revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,396
    
    
    
    59,902
    
    
    
    5.8
 RAILWAY OPERATING EXPENSES
 Three MonthsEnded September 302006
    
    2005Compensation & benefits
    
    
    15,321
    
    
    
    14,889Fuel
    
    
    7,885
    
    
    
    6,562Equipment rents (net)
    
    
    1,001
    
    
    
    980Car hire (net)
    
    
    (330
    )
    
    
    (703
    )Depreciation
    
    
    5,651
    
    
    
    5,517Purchased services
    
    
    2,731
    
    
    
    2,263Repairs to/by others (net)
    
    
    (1,152
    )
    
    
    (1,003
    )Load/unload
    
    
    2,261
    
    
    
    2,351Casualty & insurance
    
    
    1,040
    
    
    
    1,524Property taxes
    
    
    1,419
    
    
    
    1,302Materials
    
    
    3,547
    
    
    
    3,019General & administrative expenses
    
    
    2,097
    
    
    
    1,965Outside contractor delivery costs
    
    
    4,304
    
    
    
    3,739Other (1)
    
    
    (729
    )
    
    
    978Utility service interruption settlement
    
    
    (3,732
    )
    
    
    Total operating expenses
    
    
    41,314
    
    
    
    43,383
 
 (1)
    
    Third quarter 2006 includes $0.1 million of hurricane
costs and $2.2 million of hurricane recoveries (net). Third quarter 2005
included $0.3 million of hurricane costs.  23




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##### Table of Contents



Clean Air Non-road Diesel Rule Clean Air Non-road Diesel Rule
  24




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##### Table of Contents



25




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##### Table of Contents



Nine Months
  TRAFFIC  Nine Months Ended September 30
 2006
    
    2005
    
    Percent
    
    2006
    
    2005
    
    PercentCommodity
    
    Units
    
    Units
    
    Variance
    
    Revenues
    
    Revenues
    
    VarianceRail CarloadsCrushed stone (aggregate)
    
    
    113.5
    
    
    
    107.8
    
    
    
    5.3
    
    
    
    59,943
    
    
    
    53,203
    
    
    
    12.7Construction materials
    
    
    5.7
    
    
    
    5.5
    
    
    
    3.6
    
    
    
    4,575
    
    
    
    4,025
    
    
    
    13.7Vehicles
    
    
    16.7
    
    
    
    16.9
    
    
    
    (1.2
    )
    
    
    14,929
    
    
    
    13,600
    
    
    
    9.8Foodstuffs & kindred
    
    
    9.9
    
    
    
    10.3
    
    
    
    (3.9
    )
    
    
    9,172
    
    
    
    8,880
    
    
    
    3.3Chemicals & distillants
    
    
    2.5
    
    
    
    2.7
    
    
    
    (7.4
    )
    
    
    3,735
    
    
    
    3,436
    
    
    
    8.7Paper & lumber
    
    
    5.5
    
    
    
    5.4
    
    
    
    1.9
    
    
    
    6,406
    
    
    
    5,893
    
    
    
    8.7Other
    
    
    11.0
    
    
    
    11.3
    
    
    
    (2.7
    )
    
    
    8,773
    
    
    
    7,717
    
    
    
    13.7Total carload
    
    
    164.8
    
    
    
    159.9
    
    
    
    3.1
    
    
    
    107,533
    
    
    
    96,754
    
    
    
    11.1Intermodal
    
    
    241.5
    
    
    
    231.2
    
    
    
    4.5
    
    
    
    88,336
    
    
    
    75,266
    
    
    
    17.4Total freight units/revenues
    
    
    406.3
    
    
    
    391.1
    
    
    
    3.9
    
    
    
    195,869
    
    
    
    172,020
    
    
    
    13.9Ancillary revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,607
    
    
    
    3,316
    
    
    
    38.9Railway segment revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,476
    
    
    
    175,336
    
    
    
    14.3
 RAILWAY OPERATING EXPENSES
 Nine MonthsEnded September 302006
    
    
    2005Compensation & benefits
    
    
    48,023
    
    
    
    44,501Fuel
    
    
    24,516
    
    
    
    17,885Equipment rents (net)
    
    
    3,112
    
    
    
    3,234Car hire (net)
    
    
    63
    
    
    
    (2,015
    )Depreciation
    
    
    16,714
    
    
    
    16,287Purchased services
    
    
    8,083
    
    
    
    7,096Repairs to/by others (net)
    
    
    (3,135
    )
    
    
    (2,562
    )Load/unload
    
    
    7,134
    
    
    
    6,818Casualty & insurance
    
    
    3,146
    
    
    
    4,137Property taxes
    
    
    4,707
    
    
    
    4,372Materials
    
    
    10,604
    
    
    
    9,343General & administrative expenses
    
    
    6,644
    
    
    
    6,177Outside contractor delivery costs
    
    
    12,449
    
    
    
    10,336Other (1)
    
    
    1,075
    
    
    
    2,273Utility service interruption insurance settlement
    
    
    (3,732
    )
    
    
    Total operating expenses
    
    
    139,403
    
    
    
    127,882
 
 (1)
    
    Nine months 2006 includes $0.9 million of hurricane costs
and $2.5 million of hurricane recoveries (net). Nine months 2005 included $0.3
million of hurricane costs.  26




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##### Table of Contents



27




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##### Table of Contents



Realty  Third Quarter
  FLAGLER DEVELOPMENT CONSOLIDATED
 Three Months EndedSeptember 30(dollars in thousands)
    
    2006
    
    
    2005Revenues:Rental income
    
    
    20,907
    
    
    
    18,406Rental income  straight-line rent adjustments
    
    
    673
    
    
    
    1,109Operating expense recoveries
    
    
    3,817
    
    
    
    2,313Operating expense recoveries  hurricane related
    
    
    101
    
    
    
    Rental revenues  undeveloped land
    
    
    8
    
    
    
    6Other rental revenues
    
    
    23
    
    
    
    33Total Realty Rental Revenues
    
    
    25,529
    
    
    
    21,867Construction revenues
    
    
    10,829
    
    
    
    Brokerage revenues
    
    
    2,406
    
    
    
    274Property management
    
    
    1,562
    
    
    
    Development & other services
    
    
    968
    
    
    
    Total Realty Services Revenues
    
    
    15,765
    
    
    
    274Land use revenues
    
    
    129
    
    
    
    202Total Realty Rental & Services Revenues
    
    
    41,423
    
    
    
    22,343Realty sales
    
    
    1,193
    
    
    
    1,307Total Flagler Revenues
    
    
    42,616
    
    
    
    23,650Expenses:Real estate taxes
    
    
    2,736
    
    
    
    2,224Repairs & maintenance
    
    
    994
    
    
    
    736Services, utilities, management costs
    
    
    5,820
    
    
    
    4,326Recoverable expenses  hurricane related
    
    
    (465
    )
    
    
    28Total recoverable expenses
    
    
    9,085
    
    
    
    7,314Real estate taxes  undeveloped land
    
    
    
    
    
    
    (54
    )Repairs & maintenance
    
    
    74
    
    
    
    131Depreciation & amortization
    
    
    7,482
    
    
    
    7,159Salaries, general & administrative
    
    
    22
    
    
    
    6Non-recoverable expenses  hurricane related
    
    
    18
    
    
    
    Total non-recoverable expenses
    
    
    7,596
    
    
    
    7,242Gain on involuntary conversion of assets  hurricane related
    
    
    (1,913
    )
    
    
    Total Realty Rental Expenses
    
    
    14,768
    
    
    
    14,556Construction expenses
    
    
    10,920
    
    
    
    Brokerage expenses
    
    
    1,893
    
    
    
    156Property management
    
    
    1,044
    
    
    
    Development & other services
    
    
    471
    
    
    
    Total Realty Services Expenses
    
    
    14,328
    
    
    
    156Land and overhead expenses
    
    
    7,971
    
    
    
    3,680Total Realty Rental & Services Expenses
    
    
    37,067
    
    
    
    18,392Realty sales expenses
    
    
    659
    
    
    
    471Total Flagler Expenses
    
    
    37,726
    
    
    
    18,863Operating Profit
    
    
    4,890
    
    
    
    4,787Minority interest
    
    
    34
    
    
    
    Loss from investment in unconsolidated joint ventures
    
    
    67
    
    
    
    Interest income
    
    
    73
    
    
    
    4Interest expense
    
    
    (5,065
    )
    
    
    (5,006
    )Other expense
    
    
    (177
    )
    
    
    (168
    )Loss Before Income Taxes
    
    
    (178
    )
    
    
    (383
    )
  28




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##### Table of Contents



FLAGLER DEVELOPMENT  SAME STORE, NEW IN 2006 and NEW IN 2005  Three Months Ended September 30
 Same Store
    
    
    New in 2006
    
    
    New in 2005(dollars in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Rental income
    
    
    17,083
    
    
    
    16,713
    
    
    
    9
    
    
    
    
    
    
    
    3,815
    
    
    
    1,693Rental income  straight-line rent adjustments
    
    
    40
    
    
    
    708
    
    
    
    
    
    
    
    
    
    
    
    633
    
    
    
    401Operating expense recoveries
    
    
    2,692
    
    
    
    1,744
    
    
    
    7
    
    
    
    
    
    
    
    1,118
    
    
    
    569Operating expense recoveries  hurricane related
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Rental revenues  undeveloped land
    
    
    7
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Other rental revenues
    
    
    23
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Rental Revenues
    
    
    19,945
    
    
    
    19,204
    
    
    
    16
    
    
    
    
    
    
    
    5,568
    
    
    
    2,663Construction revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Brokerage revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Property management
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Development & other services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Services Revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Land use revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Rental and Services Revenues
    
    
    19,945
    
    
    
    19,204
    
    
    
    16
    
    
    
    
    
    
    
    5,568
    
    
    
    2,663Realty sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Flagler Revenues
    
    
    19,945
    
    
    
    19,204
    
    
    
    16
    
    
    
    
    
    
    
    5,568
    
    
    
    2,663Expenses:Real estate taxes
    
    
    2,195
    
    
    
    1,853
    
    
    
    37
    
    
    
    
    
    
    
    504
    
    
    
    371Repairs & maintenance
    
    
    895
    
    
    
    692
    
    
    
    
    
    
    
    
    
    
    
    99
    
    
    
    44Services, utilities, management costs
    
    
    4,601
    
    
    
    3,723
    
    
    
    20
    
    
    
    
    
    
    
    1,199
    
    
    
    603Recoverable expenses  hurricane related
    
    
    (475
    )
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    3Total recoverable expenses
    
    
    7,216
    
    
    
    6,293
    
    
    
    57
    
    
    
    
    
    
    
    1,812
    
    
    
    1,021Real estate taxes  undeveloped land
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54
    )Repairs & maintenance
    
    
    70
    
    
    
    128
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    3Depreciation & amortization
    
    
    5,490
    
    
    
    5,773
    
    
    
    22
    
    
    
    
    
    
    
    1,970
    
    
    
    1,386Salaries, general & administrative
    
    
    26
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    Non-recoverable expenses  hurricane related
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-recoverable expenses
    
    
    5,604
    
    
    
    5,907
    
    
    
    22
    
    
    
    
    
    
    
    1,970
    
    
    
    1,335Gain on involuntary conversion of assets  hurricane
related
    
    
    (1,913
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Rental Expenses
    
    
    10,907
    
    
    
    12,200
    
    
    
    79
    
    
    
    
    
    
    
    3,782
    
    
    
    2,356Construction expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Brokerage expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Property management
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Development & other services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Services Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Land and overhead expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Rental and Services Expenses
    
    
    10,907
    
    
    
    12,200
    
    
    
    79
    
    
    
    
    
    
    
    3,782
    
    
    
    2,356Realty sales expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Flagler Expenses
    
    
    10,907
    
    
    
    12,200
    
    
    
    79
    
    
    
    
    
    
    
    3,782
    
    
    
    2,356Operating Profit (Loss)
    
    
    9,038
    
    
    
    7,004
    
    
    
    (63
    )
    
    
    
    
    
    
    1,786
    
    
    
    307
     29




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##### Table of Contents



FLAGLER DEVELOPMENT  REALTY SERVICES and LAND & CORPORATE OVERHEAD  Three Months Ended September 30
 Realty
    
    
    Land & CorporateServices
    
    
    Overhead(dollars in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Rental income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rental income  straight-line rent adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating expense recoveries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating expense recoveries  hurricane related
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rental
revenues  undeveloped land
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other rental revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Rental Revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction revenues
    
    
    10,829
    
    
    
    
    
    
    
    
    
    
    
    Brokerage revenues
    
    
    2,406
    
    
    
    274
    
    
    
    
    
    
    
    Property management
    
    
    1,562
    
    
    
    
    
    
    
    
    
    
    
    Development & other services
    
    
    968
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Services Revenues
    
    
    15,765
    
    
    
    274
    
    
    
    
    
    
    
    Land use revenues
    
    
    
    
    
    
    
    
    
    
    129
    
    
    
    202Total Realty Rental and Services Revenues
    
    
    15,765
    
    
    
    274
    
    
    
    129
    
    
    
    202Realty sales
    
    
    
    
    
    
    
    
    
    
    1,193
    
    
    
    1,307Total Flagler Revenues
    
    
    15,765
    
    
    
    274
    
    
    
    1,322
    
    
    
    1,509Expenses:Real estate taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repairs & maintenance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Services, utilities, management costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Recoverable expenses  hurricane related
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoverable expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate
taxes  undeveloped land
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repairs & maintenance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation & amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Salaries, general & administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-recoverable expenses  hurricane related
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-recoverable expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on involuntary conversion of assets  hurricane related
    
    
    
    
    
    
    
    
    
    
    Total Realty Rental Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction expenses
    
    
    10,920
    
    
    
    
    
    
    
    
    
    
    
    Brokerage expenses
    
    
    1,893
    
    
    
    156
    
    
    
    
    
    
    
    Property management
    
    
    1,044
    
    
    
    
    
    
    
    
    
    
    
    Development & other services
    
    
    471
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Services Expenses
    
    
    14,328
    
    
    
    156
    
    
    
    
    
    
    
    Land and overhead expenses
    
    
    
    
    
    
    
    
    
    
    7,971
    
    
    
    3,680Total Realty Rental and Services Expenses
    
    
    14,328
    
    
    
    156
    
    
    
    7,971
    
    
    
    3,680Realty sales expenses
    
    
    
    
    
    
    
    
    
    
    659
    
    
    
    471Total Flagler Expenses
    
    
    14,328
    
    
    
    156
    
    
    
    8,630
    
    
    
    4,151Operating Profit (Loss)
    
    
    1,437
    
    
    
    118
    
    
    
    (7,308
    )
    
    
    (2,642
    )
   30




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##### Table of Contents



Results from Operations
           31




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##### Table of Contents



32




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##### Table of Contents



Nine Months
  FLAGLER DEVELOPMENT CONSOLIDATED
 Nine MonthsEnded September 30(dollars in thousands)
    
    2006
    
    
    2005Revenues:Rental income
    
    
    59,853
    
    
    
    51,511Rental
income   straight-line rent adjustments
    
    
    2,208
    
    
    
    5,240Operating expense recoveries
    
    
    9,053
    
    
    
    6,327Operating
expense recoveries   hurricane related
    
    
    312
    
    
    
    Rental revenues   undeveloped land
    
    
    21
    
    
    
    15Other rental revenues
    
    
    139
    
    
    
    71Total Realty Rental Revenues
    
    
    71,586
    
    
    
    63,164Construction revenues
    
    
    18,275
    
    
    
    Brokerage revenues
    
    
    5,004
    
    
    
    504Property management
    
    
    2,678
    
    
    
    Development & other services
    
    
    1,153
    
    
    
    Total Realty Services Revenues
    
    
    27,110
    
    
    
    504Land use revenues
    
    
    490
    
    
    
    663Total Realty Rental and Services Revenues
    
    
    99,186
    
    
    
    64,331Realty sales
    
    
    42,618
    
    
    
    2,780Total Flagler Revenues
    
    
    141,804
    
    
    
    67,111Expenses:Real estate taxes
    
    
    8,404
    
    
    
    7,165Repairs & maintenance
    
    
    2,688
    
    
    
    2,106Services, utilities, management costs
    
    
    14,889
    
    
    
    12,347Recoverable
expenses   hurricane related
    
    
    18
    
    
    
    51Total recoverable expenses
    
    
    25,999
    
    
    
    21,669Real estate
taxes   undeveloped land
    
    
    
    
    
    
    (111
    )Repairs & maintenance
    
    
    115
    
    
    
    243Depreciation & amortization
    
    
    22,165
    
    
    
    20,397Salaries, general & administrative
    
    
    171
    
    
    
    78Non-recoverable expenses   hurricane related
    
    
    272
    
    
    
    Total non-recoverable expenses
    
    
    22,723
    
    
    
    20,607Gain on
involuntary conversion of assets   hurricane related
    
    
    (1,913
    )
    
    
    Total Realty Rental Expenses
    
    
    46,809
    
    
    
    42,276Construction expenses
    
    
    18,238
    
    
    
    Brokerage expenses
    
    
    3,964
    
    
    
    317Property management
    
    
    1,742
    
    
    
    Development & other services
    
    
    1,097
    
    
    
    Total Realty Services Expenses
    
    
    25,041
    
    
    
    317Land and overhead expenses
    
    
    18,636
    
    
    
    10,546Total Realty Rental and Services Expenses
    
    
    90,486
    
    
    
    53,139Realty sales expenses
    
    
    31,126
    
    
    
    883Total Flagler Expenses
    
    
    121,612
    
    
    
    54,022Operating Profit
    
    
    20,192
    
    
    
    13,089Minority interest
    
    
    38
    
    
    
    Loss from investment in unconsolidated joint ventures
    
    
    9
    
    
    
    Interest income
    
    
    408
    
    
    
    305Interest expense
    
    
    (15,094
    )
    
    
    (14,513
    )Other expense
    
    
    (200
    )
    
    
    (341
    )Income (Loss) Before Income Taxes
    
    
    5,353
    
    
    
    (1,460
    )
   33




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##### Table of Contents



FLAGLER DEVELOPMENT  SAME STORE, NEW IN 2006 and NEW IN 2005  Nine Months Ended September 30
 Same Store
    
    
    New in 2006
    
    
    New in 2005(dollars in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Rental income
    
    
    50,685
    
    
    
    48,511
    
    
    
    9
    
    
    
    
    
    
    
    9,159
    
    
    
    3,000Rental
income  straight-line rent adjustments
    
    
    257
    
    
    
    3,131
    
    
    
    
    
    
    
    
    
    
    
    1,951
    
    
    
    2,109Operating expense recoveries
    
    
    6,310
    
    
    
    4,946
    
    
    
    7
    
    
    
    
    
    
    
    2,736
    
    
    
    1,381Operating
expense recoveries   hurricane related
    
    
    289
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    Rental revenues   undeveloped land
    
    
    20
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Other rental revenues
    
    
    132
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    3Total Realty Rental Revenues
    
    
    57,693
    
    
    
    56,671
    
    
    
    16
    
    
    
    
    
    
    
    13,877
    
    
    
    6,493Construction revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Brokerage revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Property management
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Development & other services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Services Revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Land use revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Rental and Services Revenues
    
    
    57,693
    
    
    
    56,671
    
    
    
    16
    
    
    
    
    
    
    
    13,877
    
    
    
    6,493Realty sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Flagler Revenues
    
    
    57,693
    
    
    
    56,671
    
    
    
    16
    
    
    
    
    
    
    
    13,877
    
    
    
    6,493Expenses:Real estate taxes
    
    
    6,938
    
    
    
    6,302
    
    
    
    37
    
    
    
    
    
    
    
    1,429
    
    
    
    863Repairs & maintenance
    
    
    2,439
    
    
    
    2,007
    
    
    
    
    
    
    
    
    
    
    
    249
    
    
    
    99Services, utilities, management costs
    
    
    12,114
    
    
    
    10,914
    
    
    
    20
    
    
    
    
    
    
    
    2,755
    
    
    
    1,433Recoverable
expenses  hurricane related
    
    
    (41
    )
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    3Total recoverable expenses
    
    
    21,450
    
    
    
    19,271
    
    
    
    57
    
    
    
    
    
    
    
    4,492
    
    
    
    2,398Real estate
taxes  undeveloped land
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111
    )Repairs & maintenance
    
    
    144
    
    
    
    225
    
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    18Depreciation & amortization
    
    
    16,652
    
    
    
    17,316
    
    
    
    22
    
    
    
    
    
    
    
    5,491
    
    
    
    3,081Salaries, general & administrative
    
    
    78
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    93
    
    
    
    23Non-recoverable
expenses  hurricane related
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    307
    
    
    
    Total non-recoverable expenses
    
    
    16,839
    
    
    
    17,596
    
    
    
    22
    
    
    
    
    
    
    
    5,862
    
    
    
    3,011Gain on
involuntary conversion of assets  hurricane related
    
    
    (1,913
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Rental Expenses
    
    
    36,376
    
    
    
    36,867
    
    
    
    79
    
    
    
    
    
    
    
    10,354
    
    
    
    5,409Construction expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Brokerage expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Property management
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Development & other services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Services Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Land and overhead expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Rental and Services Expenses
    
    
    36,376
    
    
    
    36,867
    
    
    
    79
    
    
    
    
    
    
    
    10,354
    
    
    
    5,409Realty sales expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Flagler Expenses
    
    
    36,376
    
    
    
    36,867
    
    
    
    79
    
    
    
    
    
    
    
    10,354
    
    
    
    5,409Operating Profit (Loss)
    
    
    21,317
    
    
    
    19,804
    
    
    
    (63
    )
    
    
    
    
    
    
    3,523
    
    
    
    1,084
     34




---



##### Table of Contents



FLAGLER DEVELOPMENT  REALTY SERVICES and LAND & CORPORATE OVERHEAD  Nine Months Ended September 30
 Realty
    
    
    Land & CorporateServices
    
    
    Overhead(dollars in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Rental income
    
    
    
    
    
    
    
    
    
    
    

    
    
    Rental
income  straight-line rent adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating expense recoveries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating
expense recoveries  hurricane related
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rental
revenues  undeveloped land
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other rental revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Rental Revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction revenues
    
    
    18,275
    
    
    
    
    
    
    
    
    
    
    
    Brokerage revenues
    
    
    5,004
    
    
    
    504
    
    
    
    
    
    
    
    Property management
    
    
    2,678
    
    
    
    
    
    
    
    
    
    
    
    Development & other services
    
    
    1,153
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Services Revenues
    
    
    27,110
    
    
    
    504
    
    
    
    
    
    
    
    Land use revenue
    
    
    
    
    
    
    
    
    
    
    490
    
    
    
    663Total Realty Rental and Services Revenues
    
    
    27,110
    
    
    
    504
    
    
    
    490
    
    
    
    663Realty sales
    
    
    
    
    
    
    
    
    
    
    42,618
    
    
    
    2,780Total Flagler Revenues
    
    
    27,110
    
    
    
    504
    
    
    
    43,108
    
    
    
    3,443Expenses:Real estate taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repairs & maintenance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Services, utilities, management costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Recoverable
expenses  hurricane related
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoverable expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate
taxes  undeveloped land
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repairs & maintenance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation & amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Salaries, general & administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-recoverable
expenses  hurricane related
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-recoverable expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on
involuntary conversion of assets  hurricane related
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Rental Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction expenses
    
    
    18,238
    
    
    
    
    
    
    
    
    
    
    
    Brokerage expenses
    
    
    3,964
    
    
    
    317
    
    
    
    
    
    
    
    Property management
    
    
    1,742
    
    
    
    
    
    
    
    
    
    
    
    Development & other services
    
    
    1,097
    
    
    
    
    
    
    
    
    
    
    
    Total Realty Services Expenses
    
    
    25,041
    
    
    
    317
    
    
    
    
    
    
    
    Land and overhead expenses
    
    
    
    
    
    
    
    
    
    
    18,636
    
    
    
    10,546Total Realty Rental and Services Expenses
    
    
    25,041
    
    
    
    317
    
    
    
    18,636
    
    
    
    10,546Realty sales expenses
    
    
    
    
    
    
    
    
    
    
    31,126
    
    
    
    883Total Flagler Expenses
    
    
    25,041
    
    
    
    317
    
    
    
    49,762
    
    
    
    11,429Operating Profit (Loss)
    
    
    2,069
    
    
    
    187
    
    
    
    (6,654
    )
    
    
    (7,986
    )
    35




---



##### Table of Contents



Results from Continuing Operations
          36




---



##### Table of Contents



Railway Realty Rental and Sales  Third Quarter and Nine Months
   Corporate Expenses  Third Quarter and Nine Months
   Interest Expense  Third Quarter and Nine Months
  Other Income  Third Quarter and Nine Months
  37




---



##### Table of Contents



Income Tax
  Discontinued Operations
  38




---



##### Table of Contents



Financial Condition, Liquidity and Capital Resources
  Nine MonthsEnded September 30(dollars in thousands - unaudited)
    
    2006
    
    
    2005Cash Flows from Operating ActivitiesNet income
    
    
    49,079
    
    
    
    29,200Adjustments to reconcile net income to cash generated by operating activities:Depreciation and amortization
    
    
    43,868
    
    
    
    40,592Gain on involuntary conversion, due to Hurricane Wilma
    
    
    (1,913
    )
    
    
    Gain on disposition of properties, including those discontinued
    
    
    (24,287
    )
    
    
    (8,114
    )Deferred taxes
    
    
    8,513
    
    
    
    995Stock compensation expense (Note 10)
    
    
    9,156
    
    
    
    7,915Changes in operating assets and liabilities:Accounts receivable
    
    
    (324
    )
    
    
    (4,175
    )Prepaid expenses
    
    
    (5,707
    )
    
    
    (2,839
    )Materials and supplies
    
    
    (892
    )
    
    
    (785
    )Straight line rent
    
    
    (1,722
    )
    
    
    (5,228
    )Prepaid commissions
    
    
    (4,794
    )
    
    
    (2,599
    )Other assets and deferred charges
    
    
    2,134
    
    
    
    (949
    )Accounts payable
    
    
    (8,117
    )
    
    
    (5,212
    )Taxes payable (Note 15)
    
    
    15,825
    
    
    
    16,679Income tax refund
    
    
    
    
    
    
    2,800Other current liabilities
    
    
    12,920
    
    
    
    (2,821
    )Other long-term liabilities
    
    
    (209
    )
    
    
    (964
    )Net cash generated by operating activities
    
    
    93,530
    
    
    
    64,495Cash Flows from Investing ActivitiesPurchases of properties and equipment
    
    
    (112,368
    )
    
    
    (152,256
    )Acquisition of Codina Group Inc. and related interests, net of cash acquired (Note 2)
    
    
    (65,804
    )
    
    
    Investment in unconsolidated joint ventures
    
    
    (8,479
    )
    
    
    Decrease in restricted cash
    
    
    1,445
    
    
    
    Proceeds from hurricane related insurance settlement
    
    
    3,343
    
    
    
    Proceeds from disposition of assets, including those discontinued
    
    
    58,701
    
    
    
    10,261Net cash used in investing activities
    
    
    (123,162
    )
    
    
    (141,995
    )Cash Flows from Financing ActivitiesBorrowings from long term debt
    
    
    272
    
    
    
    Payment of mortgage debt
    
    
    (3,870
    )
    
    
    (3,645
    )Payment of acquired debt
    
    
    (30,117
    )
    
    
    Payment of dividends
    
    
    (6,976
    )
    
    
    (5,540
    )Proceeds from exercise of options
    
    
    10,167
    
    
    
    19,132Tax benefit associated with equity based compensation
    
    
    3,116
    
    
    
    3,924Stock repurchase program payments (Note 7)
    
    
    
    
    
    
    (2,289
    )Purchase of common stock
    
    
    (2,360
    )
    
    
    (1,474
    )Investment by minority interest
    
    
    595
    
    
    
    Net cash (used in)/provided by financing activities
    
    
    (29,173
    )
    
    
    10,108Net Decrease in Cash and Cash Equivalents
    
    
    (58,805
    )
    
    
    (67,392
    )Cash and Cash Equivalents at Beginning of Period
    
    
    75,990
    
    
    
    126,166Cash and Cash Equivalents at End of Period
    
    
    17,185
    
    
    
    58,774Supplemental Disclosure of Cash Flow InformationCash paid for income taxes (net of refunds)
    
    
    19,219
    
    
    
    7,200Cash paid for interest
    
    
    17,063
    
    
    
    16,521
   39




---



##### Table of Contents



Supplemental Schedule on Non-Cash Investing and Financing Activities
  (dollars in thousands)Fair value of assets acquired
    
    
    246,193Acquisition transaction costs
    
    
    5,616Equity issued for initial consideration
    
    
    (76,412
    )Cash paid for acquired Company (1)
    
    
    (71,461
    )Liabilities assumed
    
    
    103,936(1) Reconciliation to Statements of Cash FlowsCash paid for acquired Company
    
    
    71,461Less cash acquired
    
    
    (4,125
    )Less transaction costs paid in 2005
    
    
    (1,532
    )Acquisition of Codina Group, Inc. per Statements of Cash Flows
    
    
    65,804
       40




---



##### Table of Contents



41




---



##### Table of Contents



Other Matters
 Critical Accounting Policies
  Allocation of Acquisition Costs
   Principles of Consolidation
 Emerging Issues Task Force Abstracts Determining Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights
  Impairment of Long-lived Assets
 42




---



##### Table of Contents



Income Tax Provisions
   Revenue Recognition
 Realty Rental Revenues
 Realty Sales
 43




---



##### Table of Contents



Construction Contracts
  Railway Revenues
 Real Estate Infrastructure Costs
   Cost Capitalization
  Contingencies
 44




---



##### Table of Contents



Item 3.
 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 Item 4.
 CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
   45




---



##### Table of Contents



PART II
 
 Item 1.
 LEGAL PROCEEDINGS
  
 Item 1A.
 RISK FACTORS
  Concentration Risks of Business with Aggregate Customers:
   Windstorms
  46




---



##### Table of Contents



Item 2.
 UNREGISTERED SALES OF EQUITY SECURITIES  AND USE OF PROCEEDS
   Average Price
    
    Total Number of Shares
    
    Maximum Amount ofPaid Per Share
    
    Purchased as Part of Publicly
    
    Value that may yet beTotal Number of
    
    (including
    
    Announced Plans or
    
    Purchased under theShares Purchased
    
    commissions)
    
    Programs
    
    Plans or ProgramsJuly
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,711,048August
    
    
    2,858
    (1)
    
    $
    51.26
    
    
    
    
    
    
    
    37,711,048September
    
    
    4,119
    (1)
    
    $
    54.80
    
    
    
    
    
    
    
    37,711,048
 
 (1)
    
    Shares purchased represent shares surrendered to the Company for federal withholding obligations related to employees vesting on previously restricted stock.   
 Item 5.
 
 OTHER INFORMATION
  47




---



##### Table of Contents



Item 6.
 EXHIBITS
 Exhibits
  48




---



##### Table of Contents



SIGNATURES
  FLORIDA EAST COAST INDUSTRIES, INC.(Registrant)Dated:
November 3, 2006
    
    /s/ Amy BramlittAmy BramlittVice President and ControllerDated: November 3, 2006
    
    /s/ Daniel H. PopkyDaniel H. Popky, Executive Vice Presidentand Chief Financial Officer
 49




---



##### Table of Contents



INDEX TO EXHIBITS
 S-K ITEM 601
    
    DOCUMENTS2 (i)
    
    Codina acquisition documents.
    
    (7)3 (i)
    
    Second Amended and Restated Articles of Incorporation.
    
    (1)3 (ii)
    
    Amended and Restated By-Laws.
    
    (1)4
    
    Amended and Restated Rights Agreement.
    
    (1)10 (a)
    
    $150 million Unsecured Revolving Credit Agreement with a 5-year term between FECI and a
syndication of financial institutions with Bank of America, N.A. as Lead Arranger.
    
    (2)10 (b)
    
    Distribution and Recapitalization Agreement.
    
    (5)10 (c)
    
    Various Promissory Notes and Mortgage Security Agreements dated June 28, 2001 and September
27, 2001, covering certain Flagler buildings at various office parks.
    
    (3)10 (d)
    
    Representative Change in Control Agreement between FECI and certain FECI Executive Officers.
    
    (4)10 (e)
    
    2002 Stock Incentive Plan, as amended.
    
    (12)10 (f)
    
    FECI 2002 Employee Stock Purchase Plan.
    
    (9)10 (g)
    
    Mortgage Notes dated as of August 10, 2004 between Flagler Development Company and Metropolitan
Life Insurance Company.
    
    (10)10 (h)
    
    Representative Restricted Stock Agreement dated August 25, 2004 between FECI and certain
Executive Officers.
    
    (11)10 (i).1 -
    
    Employment and Change in Control
Agreements dated February 10, 2005, effective March 28, 2005,
    
    (6)10 (i).4
    
    and Restricted Stock and Supplemental Employee Retirement Plan (SERP) Participant
Agreements, dated March 28, 2005 between FECI and Adolfo Henriques.10 (j)
    
    Supplemental Employee Retirement Plan (SERP) dated as of March 28, 2005.
    
    (6)10 (k)
    
    Codina acquisition documents.
    
    (7)10 (l)
    
    First Amendment to Credit Agreement dated April 27, 2006, amending $150 million Unsecured
Revolving Credit Agreement with a 5-year term between FECI and a syndication of financial
institutions with Bank of America, N.A. as Lead Arranger.
    
    (13)10 (m)
    
    Employment and Change in Control Agreements dated April 27, 2006, effective April 27, 2006,
between FECI and Armando Codina.
    
    (8)10 (n)
    
    Restricted stock agreement dated May 3, 2006 between FECI and Jorgé San Miguel.
    
    (14)10 (o)
    
    Representative restricted stock agreement between FECI and certain employees of Codina Group.
    
    (15)10 (p)
    
    Second Amendment to Credit Agreement dated, October 16, 2006, amending $150 million Unsecured
Revolving Credit Agreement with a 5-year term between FECI and a syndication of financial
 institutions with Bank of America, N.A. as Lead Arranger.31.1  31.2
    
    Section 302 Certifications.32.1
    
    Section 906 Certification
 50




---



##### Table of Contents



(1)
    
    Amended and Restated Articles of Incorporation of the Registrants,
Amended and Restated By-Laws of the Registrant and Amended and Restated Shareholder
Rights Agreement, dated April 27, 2006, as were filed on Form 8-K (all incorporated by
reference as an Exhibit to the Form 8-K) with the Securities and Exchange Commission on
April 28, 2006 (File No. 001-32866).(2)
    
    This document dated February 22, 2005, is filed as exhibit 10 to Form
8-K with the Securities and Exchange Commission on February 24, 2005.(3)
    
    These documents are filed as exhibits 10.1  10.8 on Form 10-Q with the
Securities and Exchange Commission on August 14, 2001 and exhibits 10.1  10.6 on November
8, 2001.(4)
    
    This document is filed as exhibit 10.7 on Form 10-Q with the Securities
and Exchange Commission on November 8, 2001.(5)
    
    Distribution and Recapitalization Agreement, incorporated by reference
to Appendix A to the definitive Proxy Statement on Schedule 14A, filed with the Securities
and Exchange Commission on February 4, 2000 (Registration No. 001-08728).(6)
    
    These documents dated February 10, 2005 and March 28, 2005, are filed as
exhibits 10(c.1)  10(c.4) to Form 10-Q with the Securities and Exchange Commission on
April 22, 2005.(7)
    
    These documents dated January 5, 2006 are filed as exhibits to Form 8-K
with the Securities and Exchange Commission on January 11, 2006 and exhibits to Form 8-K
with the Securities and Exchange Commission filed on April 28, 2006.(8)
    
    These documents dated April 27, 2006 are filed as exhibits 99.1 and 99.2
to Form 8-K with the Securities and Exchange Commission on May 2, 2006.(9)
    
    FECIs Employee Stock Purchase Plan was filed on Form S-8 with the
Securities and Exchange Commission on June 21, 2002 (Registration No. 333-90896).(10)
    
    These documents, dated August 10, 2004, are filed as exhibits 10.1 
10.7 on Form 8-K with the Securities and Exchange Commission on August 17, 2004.(11)
    
    This document dated August 25, 2004, is filed as exhibit 10(c) to Form
10-Q with the Securities and Exchange Commission on November 3, 2004.(12)
    
    This document, dated June 2, 2005, is filed as exhibit 10(g) to Form
10-K with the Securities and Exchange Commission on March 1, 2006. (Registration No
333-90894)(13)
    
    This document, dated April 27, 2006, is filed as exhibit 10(n) to Form
10-Q with the Securities and Exchange Commission on August 8, 2006.(14)
    
    This document, dated May 3, 2006, is filed as exhibit 10(p) to Form
10-Q with the Securities and Exchange Commission on August 8, 2006.(15)
    
    This document is filed as exhibit 10(q) to Form 10-Q with the
Securities and Exchange Commission on August 8, 2006. 51