FLORIDA EAST COAST INDUSTRIES INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-08728

Florida East Coast Industries, Inc.

(Exact name of Registrant as specified in its charter)


Florida		59-2349968

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)


One Malaga Street, St. Augustine, Florida		32084

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code - (904) 829-3421

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES (X) NO ( )

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES (X) NO ( )

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.


Class		Outstanding at March 31, 2003

Class A Common Stock-no par value Class B Common Stock-no par value		17,035,511 shares 19,609,216 shares

FLORIDA EAST COAST INDUSTRIES, INC.


		Page Numbers

PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
	Consolidated Balance Sheets - March 31, 2003 and December 31, 2002		2
	Consolidated Statements of Income - Quarters Ended March 31, 2003 and 2002		3
	Consolidated Statements of Cash Flows - Quarters Ended March 31, 2003 and 2002		4
	Notes to Consolidated Financial Statements		5-12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Comparison of First Quarter 2003 versus First Quarter 2002		13-16
	Changes in Financial Condition, Liquidity and Capital Resources		16-17
	Other Matters		17-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk			18
Item 4. Controls and Procedures			18
PART II
OTHER INFORMATION
Item 1. Legal Proceedings			19
Item 5. Other Information			19-20
Item 6. Exhibits and Reports on Form 8-K			20

FLORIDA EAST COAST INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS

(dollars in thousands)


			March 31			December 31
			2003			2002

			(unaudited)
Assets
Current Assets:
	Cash and cash equivalents			26,849			83,872
	Accounts receivable (net)			23,108			20,538
	Income tax receivable			74,572			74,572
	Materials and supplies			3,850			1,710
	Assets related to discontinued operations (Note 3)			1,310			2,224
	Land held for sale (Note 10)			3,884			—
	Deferred income taxes			15,400			15,400
	Other current assets			7,669			6,760

		Total current assets		156,642			205,076
Properties, Less Accumulated Depreciation				815,948			795,650
Other Assets and Deferred Charges				44,879			50,510

Total Assets				1,017,469			1,051,236

Liabilities and Shareholders’ Equity
Current Liabilities:
	Accounts payable and accrued expenses			24,730			30,901
	Short-term debt (Note 8)			2,689			2,641
	Accrued casualty and other liabilities			2,135			2,047
	Liabilities related to discontinued operations (Note 3)			1,847			2,464
	Other accrued liabilities			18,621			12,343

		Total current liabilities		50,022			50,396
Deferred Income Taxes				126,577			122,103
Long-Term Debt, net of current portion (Note 8)				249,452			294,143
Accrued Casualty and Other Liabilities				10,799			11,278
Shareholders’ Equity:
	Common Stock:
		Class A common stock; no par value; 50,000,000 shares authorized; 17,834,595 shares issued and 17,035,511 shares outstanding at March 31, 2003, and 17,827,299 shares issued and 17,028,215 shares outstanding at December 31, 2002 Class B common stock; no par value; 100,000,000 shares authorized; 19,609,216 shares issued and outstanding at March 31, 2003 and December 31, 2002		69,510			68,888
	Retained earnings			522,938			516,937
	Restricted stock deferred compensation			(2,474	)		(3,154	)
	Treasury stock at cost (799,084 shares)			(9,355	)		(9,355	)

		Total shareholders’ equity		580,619			573,316

Total Liabilities and Shareholders’ Equity				1,017,469			1,051,236

(Prior year’s results have been reclassified to conform to current year’s presentation.)

See accompanying notes to unaudited condensed consolidated financial statements.

FLORIDA EAST COAST INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share amounts)
(unaudited)


	Quarters Ended March 31

	2003			2002

Operating revenues		76,265			59,968
Operating expenses		(63,018	)		(47,837	)

Operating profit		13,247			12,131
Interest income		157			74
Other income (Note 7)		2,251			3,841
Interest expense		(4,297	)		(4,791	)

		(1,889	)		(876	)
Income before income taxes		11,358			11,255
Provision for income taxes		(4,373	)		(4,333	)

Income from continuing operations		6,985			6,922
DISCONTINUED OPERATIONS (Note 3)
Income (loss) from operation of discontinued operations (net of taxes)		119			(7,338	)
Loss on disposition of discontinued operations (net of taxes)		(187	)		—

Loss from discontinued operations		(68	)		(7,338	)
Net income (loss)		6,917			(416	)

EARNINGS PER SHARE
Income from continuing operations - basic and diluted		0.19			0.19
Loss from operation of discontinued operations – basic and diluted		—			(0.20	)
Loss on disposition of discontinued operations - basic and diluted		—			—

Net income (loss) - basic and diluted		0.19			(0.01	)
Average shares outstanding – basic		36,487,969			36,439,329
Average shares outstanding – diluted		36,696,988			36,588,932

(Prior year’s results have been reclassified to conform to current year’s presentation, including discontinued operations.)

See accompanying notes to unaudited condensed consolidated financial statements.

FLORIDA EAST COAST INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)
(unaudited)


			Quarters Ended March 31

			2003			2002

Cash Flows from Operating Activities:
	Net income (loss)			6,917			(416	)
	Adjustments to reconcile net income to cash generated by operating activities:
		Depreciation and amortization		11,860			16,410
		Gain on sales and other disposition of properties		(6,264	)		(1,973	)
		Other		681			138
		Deferred taxes		4,474			(589	)

				17,668			13,570
Changes in operating assets and liabilities:
	Accounts receivable			(1,758	)		(1,034	)
	Other current assets			(3,571	)		(628	)
	Other assets and deferred charges			(3,147	)		1,787
	Accounts payable			(6,695	)		(12,463	)
	Income taxes receivable/payable			—			2,542
	Other current liabilities			6,222			3,688
	Accrued casualty and other long-term liabilities			(357	)		(1,556	)

				(9,306	)		(7,664	)
Net cash generated by operating activities				8,362			5,906
Cash Flows from Investing Activities:
	Purchases of properties			(35,302	)		(14,101	)
	Proceeds from disposition of assets			14,897			3,116

Net cash used in investing activities				(20,405	)		(10,985	)
Cash Flows from Financing Activities:
	Proceeds from exercise of options			640			—
	Purchase of common stock			(61	)		(46	)
	Payments of mortgage debt			(643	)		(598	)
	Net payments of line of credit			(44,000	)		(5,000	)
	Payment of dividends			(916	)		(913	)

Net cash used in financing activities				(44,980	)		(6,557	)
Net Decrease in Cash and Cash Equivalents				(57,023	)		(11,636	)
Cash and Cash Equivalents at Beginning of Period				83,872			14,089

Cash and Cash Equivalents at End of Period				26,849			2,453

Supplemental Disclosure of Cash Flow Information:
	Cash received for income taxes			—			(2,542	)

	Cash paid for interest			4,564			4,690

See accompanying notes to unaudited condensed consolidated financial statements.

FLORIDA EAST COAST INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. General

In the opinion of management, the accompanying unaudited consolidated financial statements reflect all accruals and adjustments considered necessary to present fairly the Company’s financial position as of March 31, 2003 and December 31, 2002, and the results of operations and cash flows for the three-month periods ended March 31, 2003 and 2002. Results for interim periods are not necessarily indicative of the results to be expected for the year. These interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K and Form 10-K/A for the year ended December 31, 2002 filed with the Securities and Exchange Commission.

Certain prior year amounts have been reclassified to conform to the current year’s presentation.

Note 2. Recapitalization

On February 27, 2003, FECI’s Board of Directors approved the submission of a proposal to shareholders in the definitive Proxy Statement for the Company’s 2003 Annual Meeting of Shareholders for the elimination of its 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 proposal is subject to the approval of a majority of the outstanding shares of each of the Class A common stock and the Class B common stock voting as separate classes and will be presented at the upcoming Annual Meeting of Shareholders scheduled to be held on May 28, 2003. The reclassification is subject to certain other conditions, including receipt of a private letter ruling from the Internal Revenue Service that the reclassification will not affect the tax-free distribution by The St. Joe Company (NYSE: JOE) in October 2000 of the Class B shares to its shareholders. The reclassification is intended to simplify FECI’s capital structure, increase the liquidity and trading efficiencies of the common stock and reduce the administrative costs associated with the dual-class structure.

Note 3. Discontinued Operations

Trucking

During the third quarter of 2002, the Company adopted a plan to discontinue and ceased operations of its regional long-haul trucking operations. The Company largely completed its operational shut down and disposition activities for the trucking operation during the fourth quarter of 2002. Based on the latest information available, which could be subject to change during the wind down, management believes these assets and liabilities to be stated at their net realizable value.

Accordingly, the Company reported the results of the trucking operations and the estimated disposition loss as discontinued operations under the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and all periods have been restated.


		March 31			December 31
(dollars in thousands)		2003			2002

Net Assets (Liabilities) of Discontinued Operations
Assets
	Accounts receivable (net)		13			825
	Other current assets		1,189			1,253
	Properties, less accumulated depreciation and amortization		72			101
	Other assets and deferred charges		36			45

Total Assets			1,310			2,224
Liabilities
	Accounts payable		(548	)		(1,114	)
	Other liabilities		(1,299	)		(1,350	)

Total Liabilities			(1,847	)		(2,464	)

Net Liabilities of Discontinued Operations			(537	)		(240	)


	Three Months
	Ended March 31

(dollars in thousands)	2003			2002

Summary of Operating Results of Discontinued Operations
Trucking revenues		—			9,118
Trucking expenses		(259	)		10,875

Income (loss) before income taxes		259			(1,757	)
Income taxes		(100	)		676

Income (loss) from discontinued operations		159			(1,081	)

Loss on disposition of discontinued operations, net of tax of $118		(187	)		—

During the third quarter of 2002, the Company adopted a plan to discontinue its trucking operations. Certain liabilities were accrued related to this exit plan. A roll-forward of the liabilities through March 31, 2003 is as follows:


	Employee
	Severance			Tractor/Trailer
(000's)	Costs			Disposition Costs		Other			Totals

Accruals @ 12/31/02		694			—		461			1,155
Additions & Adjustments**		—			351		(46	)		305
Utilization		(150	)		—		(25	)		(175	)

Ending Balance @ 3/31/03		544			351		390			1,285

** - 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.

Real Estate

At December 31, 2002, Flagler owned a 101,000-rentable sq. ft. commercial office building located at its Beacon Station business park that was classified as held for sale. In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” operations of this building were classified as discontinued operations. However, during the first quarter of 2003, the Company terminated negotiations with the prospective buyer of the building and the building is no longer being marketed for sale.

Accordingly, this building is no longer classified as a discontinued operation and it has been reclassified into continuing operations. All prior periods have been reclassified to conform to the current presentation. Revenues of $0.3 million and $0.4 million for the quarters ended March 31, 2003 and March 31, 2002, respectively, and expenses of $0.2 million and $0.2 million for the quarters ended March 31, 2003 and March 31, 2002, respectively, have been reclassified to continuing operations. This building is currently stated at its original net book value, which is considered to be at or below market value.

During the third quarter 2002, Flagler sold an industrial building totaling approximately 300,000 sq. ft. located in its Beacon Station business park. This disposed property is accounted for as a discontinued operation under the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and all periods presented have been restated for the discontinued operation of this property.


	Three Months
	Ended March 31

(dollars in thousands)	2003		2002

Summary of Operating Results of Discontinued Operations
Flagler realty rental revenues		—		518
Flagler realty rental expenses		—		214

Income before income taxes		—		304
Income taxes		—		(117	)

Income from discontinued operations		—		187

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
	Ended March 31

(dollars in thousands)	2003			2002

Summary of Operating Results of Discontinued Operations
EPIK revenues		—			5,441
EPIK expenses		65			15,925

Operating loss		(65	)		(10,484	)
Other income		—			6

Loss before income taxes		(65	)		(10,478	)
Income taxes		25			4,034

Loss from discontinued operations		(40	)		(6,444	)

At the time of EPIK’s sale, the Company accrued certain liabilities (primarily employee severance) related to the sale. A roll-forward of the liabilities through March 31, 2003 is as follows:

Employee