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 September 30, 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 September 30, 2003

Common Stock-no par value		36,683,998 shares

FLORIDA EAST COAST INDUSTRIES, INC.

PART I

FINANCIAL INFORMATION

INDEX


		Page
		Numbers

Item 1. Financial Statements
	Consolidated Balance Sheets - September 30, 2003 and December 31, 2002		3
	Consolidated Statements of Income - Three Months and Nine Months Ended September 30, 2003 and 2002		4
	Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2003 and 2002		5
	Notes to Condensed Consolidated Financial Statements		6-15
Item 2. Management’s Discussion and Analysis of the Consolidated Financial Condition and Results of Operations
	Comparison of Third Quarter 2003 versus Third Quarter 2002 and Nine Months 2003 versus Nine Months 2002		16-21
	Changes in Financial Condition, Liquidity and Capital Resources		21-22
	Other Matters		22-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk			23
Item 4. Controls and Procedures			23-24
PART II
OTHER INFORMATION
Item 1. Legal Proceedings			24
Item 2. Changes in Securities and Use of Proceeds			24
Item 5. Other Information			25-26
Item 6. Exhibits and Reports on Form 8-K			27

FLORIDA EAST COAST INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)


			September 30			December 31
			2003			2002

			(unaudited)
Assets
Current Assets:
	Cash and cash equivalents			91,967			83,872
	Accounts receivable (net)			27,236			20,538
	Income tax receivable			—			74,572
	Materials and supplies			2,671			1,710
	Assets related to discontinued operations			—			2,224
	Assets held for sale (Note 10)			13,410			—
	Deferred income taxes			25,788			15,400
	Other current assets			9,028			6,760

		Total current assets		170,100			205,076
Properties, Less Accumulated Depreciation and Amortization				810,286			795,650
Other Assets and Deferred Charges				21,402			50,510

Total Assets				1,001,788			1,051,236

Liabilities and Shareholders’ Equity
Current Liabilities:
	Accounts payable and accrued expenses			30,852			30,901
	Short-term debt (Note 8)			2,787			2,641
	Accrued casualty and other liabilities			1,945			2,047
	Liabilities related to discontinued operations			—			2,464
	Other accrued liabilities			39,029			12,343

		Total current liabilities		74,613			50,396
Deferred Income Taxes				143,067			122,103
Long-Term Debt, net of current portion (Note 8)				239,034			294,143
Accrued Casualty and Other Liabilities				10,659			11,278
Shareholders’ Equity:
	Common Stock: (Note 2)
		Common stock; no par value; 150,000,000 shares authorized; 37,555,591 shares		76,080			68,888
		issued and 36,683,998 shares outstanding at September 30, 2003, and 37,436,515 shares issued and 36,637,431 shares outstanding at December 31, 2002
	Retained earnings			475,167			516,937
	Restricted stock deferred compensation			(5,410	)		(3,154	)
	Treasury stock at cost (871,593 shares)			(11,422	)		(9,355	)

		Total shareholders’ equity		534,415			573,316

Total Liabilities and Shareholders’ Equity				1,001,788			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)


	Three Months						Nine Months
	Ended September 30						Ended September 30

	2003			2002			2003			2002

Operating revenues		87,096			58,192			235,370			179,024
Operating expenses		(85,812	)		(48,156	)		(204,400	)		(144,561	)

Operating profit		1,284			10,036			30,970			34,463
Interest income		365			89			759			212
Other income (Note 7)		2,224			1,748			7,417			8,483
Interest expense		(4,137	)		(5,137	)		(12,641	)		(15,077	)

		(1,548	)		(3,300	)		(4,465	)		(6,382	)
(Loss) income before income taxes		(264	)		6,736			26,505			28,081
Provision for income taxes		102			(2,593	)		(10,204	)		(10,813	)

(Loss) income from continuing operations		(162	)		4,143			16,301			17,268
Discontinued Operations: (Note 3)
Loss from operation of discontinued operations (net of taxes)		(93	)		(152,514	)		(414	)		(164,088	)
Gain on disposition of discontinued operations (net of taxes)		1,301			988			1,328			988

Income (loss) from discontinued operations		1,208			(151,526	)		914			(163,100	)
Net income (loss)		1,046			(147,383	)		17,215			(145,832	)

Earnings Per Share:
(Loss) income from continuing operations - basic & diluted	$	(0.00	)	$	0.11		$	0.44		$	0.47
Loss from operation of discontinued operations – basic		—		$	(4.18	)	$	(0.01	)	$	(4.50	)
Loss from operation of discontinued operations – diluted		—		$	(4.16	)	$	(0.01	)	$	(4.48	)
Gain on disposition of discontinued operations - basic & diluted	$	0.03		$	0.03		$	0.04		$	0.03

Net income (loss) - basic	$	0.03		$	(4.04	)	$	0.47		$	(4.00	)
Net income (loss) - diluted	$	0.03		$	(4.02	)	$	0.47		$	(3.98	)
Average shares outstanding – basic		36,509,557			36,440,611			36,500,847			36,442,184
Average shares outstanding – diluted		36,509,557			36,631,064			36,810,584			36,621,124

(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 CASH FLOWS
(dollars in thousands)
(unaudited)


			Nine Months
			Ended September 30

			2003			2002

Cash Flows from Operating Activities:
	Net income (loss)			17,215			(145,832	)
	Adjustments to reconcile net income to cash generated by operating activities:
		Depreciation and amortization		35,931			49,012
		Restructuring charges and other costs		—			5,474
		Payment of restructuring charges		—			(4,512	)
		Asset and impairment charge		—			238,066
		FLX exit costs		—			3,839
		Gain on sales and other disposition of properties		(25,827	)		(10,870	)
		Non-cash gain on contract termination		—			(9,437	)
		Deferred taxes		10,576			(91,541	)
		Other		2,360			(577	)

				40,255			33,622
Changes in operating assets and liabilities:
	Accounts receivable			(5,873	)		6,695
	Other current assets			(5,244	)		(683	)
	Other assets and deferred charges			715			1,888
	Accounts payable			(1,042	)		(17,650	)
	Income taxes receivable			74,572			7,305
	Other current liabilities			22,993			17,106
	Accrued casualty and other long-term liabilities			(860	)		(4,415	)

				85,261			10,246
Net cash generated by operating activities				125,516			43,868
Cash Flows from Investing Activities:
	Purchase of properties			(77,349	)		(39,831	)
	Proceeds from disposition of assets			72,980			26,023

Net cash used in investing activities				(4,369	)		(13,808	)
Cash Flows from Financing Activities:
	Proceeds from exercise of options			1,564			—
	Purchase of common stock			(668	)		(68	)
	Payments of mortgage debt			(1,963	)		(1,827	)
	Net payments of line of credit			(53,000	)		(11,000	)
	Payment of dividends			(58,985	)		(2,742	)

Net cash used in financing activities				(113,052	)		(15,637	)
Net Increase in Cash and Cash Equivalents				8,095			14,423
Cash and Cash Equivalents at Beginning of Period				83,872			14,089

Cash and Cash Equivalents at End of Period				91,967			28,512

Supplemental Disclosure of Cash Flow Information:
	Cash received for income tax refunds			(74,216	)		(7,984	)

	Cash paid for interest			13,386			14,001

See accompanying notes to unaudited condensed consolidated financial statements.

FLORIDA EAST COAST INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. General

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all accruals and adjustments considered necessary to present fairly the Company’s financial position as of September 30, 2003 and December 31, 2002, the results of operations for the three-month and nine-month periods ended September 30, 2003 and 2002 and cash flows for the nine-month periods ended September 30, 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 2002 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 to amend the Company’s Articles of Incorporation to eliminate the Company’s dual-class structure by reclassifying the Company’s Class A common stock and Class B common stock into a new single class of common stock on a one-for-one basis. The reclassification was subsequently approved at the Annual Meeting of Shareholders held on May 28, 2003. On September 10, 2003, FECI and The St. Joe Company received a favorable ruling from the U.S. Internal Revenue Service regarding FECI’s reclassification of its Class A and Class B common stock into a single class of common stock. The letter ruling confirmed that the proposed reclassification would not have an adverse affect on the tax-free status of the October 2000 spin-off of St. Joe’s equity interest in FECI to St. Joe’s shareholders. FECI filed an amendment to its Articles of Incorporation with the Secretary of State of Florida in order to effect the reclassification on September 22, 2003. The condensed consolidated financial statements reflect the reclassification for all periods presented. The single class of common stock trades on the New York Stock Exchange under the ticker symbol “FLA.”

Note 3. Discontinued Operations

Trucking

During the third quarter of 2002, the Company adopted a plan to discontinue and ceased operations of its regional long-haul trucking operations. The Company largely completed its operational shut down and disposition activities for the trucking operation during the fourth quarter of 2002. Wind-down activities were completed during the second quarter of 2003.

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


	Three Months					Nine Months
	Ended Sept. 30					Ended Sept. 30

(dollars in thousands)	2003		2002			2003			2002

Summary of Operating Results of Discontinued Operations
Trucking revenues		—		6,497			—			22,940
Trucking expenses		—		7,913			(259	)		27,601

(Loss) income before income taxes		—		(1,416	)		259			(4,661	)
Income taxes		—		545			(100	)		1,794

(Loss) income from discontinued operations		—		(871	)		159			(2,867	)

(Loss) gain on disposition of discontinued operations (net of taxes of $17 for the nine months ended September 30, 2003 and $1,477 for the three and nine months ended September 30, 2002)		—		(2,362	)		27			(2,362	)

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 September 30, 2003 is as follows:


	Employee
	Severance			Tractor/Trailer
(dollars in thousands)	Costs			Disposition Costs			Other			Totals

Accruals @ 12/31/02		694			—			461			1,155
Additions & adjustments*		(182	)		367			(229	)		(44	)
Utilization		(323	)		(367	)		(130	)		(820	)

Ending balance @ 9/30/03**		189			—			102			291

*- Any additions and adjustments to the liabilities that resulted from changes in estimates or final determinations are accounted for as gain or loss on disposition of discontinued operations on the consolidated financial statements.

**-These amounts are included in Railway’s liabilities as of September 30, 2003.

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” (SFAS 144), 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 $0.4 million and $0.4 million for the quarters ended September 30, 2003 and 2002, and $1.1 million and $1.2 million for the nine months ended September 30, 2003 and 2002, respectively, and expenses of $0.2 million and $0.2 million for the quarters ended September 30, 2003 and 2002, and $0.6 million and $0.6 million for the nine months ended September 30, 2003 and 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. On July 1, 2003, Flagler sold its 50% interest in three 98,000-sq. ft. commercial office buildings located in the Beacon Pointe Office Park in South Florida previously held in partnership with Duke Realty Corporation. At September 30, 2003, Flagler had a contractual agreement to sell an industrial building located in its Gran Park at SouthPark business park in Orlando, and such building was considered “held for sale” under the provisions of SFAS 144. Accordingly, each of these properties and interests are classified and accounted for as discontinued operations, and all periods presented have been restated for the discontinued operations of the properties and ownership interests.

Three Months

Nine Months

Ended Sept. 30

(dollars in thousands)

2003

2002

2003

2002