Back to GetFilings.com

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2003
OR

For the transition period from              to             

Commission File No. 001-08728

FLORIDA EAST COAST INDUSTRIES, INC.

Registrant’s Telephone Number, Including Area Code: (904) 829-3421

Securities to be registered pursuant to Section 12(b) of the Act:

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 if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (   )

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

Based on the closing price on June 30, 2003, the aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $576 million.

The number of shares of the Registrant’s common stock, no par value, outstanding is 36,794,809 shares and 984,002 shares of treasury stock at February 27, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 3, 2004 (the Proxy Statement) are incorporated in Part III of this report by reference.

TABLE OF CONTENTS

Forward-Looking Statements

This Form 10-K, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include the Company’s present expectations or beliefs concerning future events. These statements may be identified by the use of words like “plan,” “expect,” “aim,” “believe,” “project,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could,” and other expressions that indicate future events and trends. The Company cautions that such statements are necessarily based on certain assumptions, which are subject to risks and uncertainties that could cause actual results to materially differ from those contained in these forward-looking statements. Such forward-looking statements may include, without limitation, statements that the Company does not expect that lawsuits, environmental costs, commitments, including future contractual obligations, contingent liabilities, completing negotiations that result in the ending of the 30-year ground lease with Broward County in a manner satisfactory to both parties, financing availability, labor negotiations or other matters will have a material adverse effect on its consolidated financial condition, statements concerning future capital needs and sources of such capital funding, statements concerning future intentions with respect to the payment of dividends, execution of a share repurchase program and other potential capital distributions, number of shares to be repurchased, availability of cash to fund the stock repurchase, future growth potential of the Company’s lines of business, performance of the Company’s product offerings, other similar expressions concerning matters that are not historical facts, and projections relating to the Company’s financial results. The Company cautions that such statements are necessarily based on certain assumptions, which are subject to risks and uncertainties that could cause actual results to materially differ from those contained in these forward-looking statements. Important factors that could cause such differences include, but are not limited to, the changing general economic conditions (particularly in the state of Florida, the southeast US and the Caribbean) as they relate to economically sensitive products in freight service and building rental activities; ability to manage through economic recessions or downturns in customers’ business cycles; industry competition; possible future changes in the Company’s structure, lines of business, business and investment strategies, and related implementation; legislative or regulatory changes; technological changes; volatility of fuel prices (including volatility caused by military actions); changes in depreciation rates resulting from future railway right-of-way and equipment life studies; changes in the ability of the Company to complete its financing plans, changes in interest rates, settle future contractual obligations as estimated in time and amount (including a satisfactory ending of the 30-year ground lease with Broward County) and conclude labor negotiations in a satisfactory way; changes in insurance markets, including increases in insurance premiums and deductibles: the availability and costs of attracting and retaining qualified independent third party contractors; liability for environmental remediation and changes in environmental laws and regulations; the ultimate outcome of environmental investigations or proceedings and other types of claims and litigation; natural events such as weather conditions, floods, earthquakes and forest fires; discretionary government decisions affecting the use of land and delays resulting from weather conditions and other natural occurrences that may affect construction or cause damage to assets; the ability of buyers to terminate contracts to purchase real estate from the Company prior to the expiration of inspection periods; failure or inability of third parties to fulfill their commitments or to perform their obligations under agreements; costs and availability of land and construction materials; buyers’ inability or unwillingness to close transactions, particularly where buyers only forfeit deposits upon failure to close; the Company’s future taxable income and other factors that may affect the availability and timing of utilization of the Company’s deferred tax assets; uncertainties, changes or litigation related to tax laws, regulations and the application thereof that could limit the tax benefits of the EPIK sale or of other possible transactions involving the Company; ability of the Company to execute and complete a share repurchase program; the Company’s ability to pay dividends, repurchase shares or to make other distributions to shareholders; and other risks inherent in the real estate and other businesses of the Company.

As a result of these and other factors, the Company may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect its business, financial condition, operating results and stock price.

Readers should not place undue reliance on forward-looking statements, which reflect management’s view only as of the date hereof. The Company undertakes no obligation to publicly release revisions to these forward-looking statements that reflect events or circumstances after the date hereof or reflect the occurrence of unanticipated events.

PART I

As used throughout this Form 10-K Annual Report, the terms “FECI” the “Company” and “Registrant” mean Florida East Coast Industries, Inc. and its consolidated subsidiaries.

ITEM 1. BUSINESS

General

FECI is a holding company incorporated under the laws of the state of Florida in 1983 engaged, through two wholly owned subsidiaries, in the railroad and real estate businesses. The Company’s railroad subsidiary, Florida East Coast Railway, LLC (FECR or Railway), connects many of the major population centers and port facilities of Florida’s east coast, and provides efficient service for its customers through multiple competitive connections to the rest of North America. The Company, primarily through its real estate subsidiary, Flagler Development Company (Flagler), is engaged in the development, management, leasing, operation and selected sale of commercial and industrial properties. Flagler has extensive real estate holdings in Florida.

During 2002, the Company sold its telecommunications subsidiary, EPIK Communications Incorporated (EPIK). Also during 2002, the Company discontinued the operations of its trucking subsidiary, Florida Express Carriers, Inc. (FLX). Certain drayage operations with moves to and from FECR’s rail facilities previously managed by FLX are now managed by FECR, using third party contractors.

Information regarding FECI’s reclassification of its former Class A and Class B common stock into a single class of common stock is contained in Item 5 and Note 2 of the financial statements in Item 8 of this Annual Report on Form 10-K.

Financial information about FECI’s operating segments is contained in Items 7 and 8 of this Annual Report on Form 10-K.

Railway

General

FECR operates a Class II railroad along 351 miles of mainline track between Jacksonville and Miami, Florida, serving some of the most densely populated areas of the state. FECR also owns and operates approximately 276 miles of branch, switching and other secondary track and 159 miles of yard track, all within Florida. FECR has the only coastal right-of-way between Jacksonville and Miami and is the exclusive rail-service provider to the Port of Palm Beach, Port Everglades (Fort Lauderdale) and the Port of Miami.

FECR serves approximately 1,250 carload and intermodal customers combined. During 2003, the number of customers included approximately 350 drayage customers, which previously were customers of FECI’s trucking subsidiary and now are serviced by FECR. The following table summarizes FECR’s freight shipments by commodity group and as a percentage of rail freight revenues:

TRAFFIC
Years Ended December 31
(dollars and units in thousands)

*-Railway began management of drayage operations in November 2002. (Prior year’s results have been reclassified to conform to current year’s presentation.)

FECR connects with Norfolk Southern Railway Company (NS) and with CSX Transportation, Inc. (CSXT) at Jacksonville and is able to offer its customers competitive rail connections to the rest of North America. During 2003, approximately 40% of FECR’s freight revenues were attributable to traffic that originated on other railroads; approximately 6% was attributable to traffic that originated on FECR but bound for other destinations, and 54% was attributable to traffic that both originated and terminated on FECR’s system (local traffic). Haulage operating agreements with NS and South Central Florida Express, Inc. (SCFE) generated 8% of FECR’s revenue in 2003. With the exception of haulage services provided for SCFE described below, FECR does not receive traffic from one railroad to be passed over its track to another railroad.

FECR handles rail cars for SCFE between Fort Pierce and Jacksonville for interchange with CSXT or NS. SCFE is a short-line railroad operating under a twenty-year Trackage Rights Agreement over a branch line owned by FECR extending from Fort Pierce to Lake Harbor. A concurrent Car Haulage Agreement is in effect between Fort Pierce and Jacksonville.

FECR also handles certain types of traffic for NS from Jacksonville to Miami under a Haulage Agreement, whereby FECR receives specified revenues for each unit transported. In late 2001, FECR began offering a service that is known as the “Hurricane Train.” This extends FECR’s commercial reach into the Atlanta region. This service is operated pursuant to an agreement with NS.

FECR owns approximately 1,213 acres of ancillary properties within the state of Florida. FECR continues to evaluate these holdings and, when appropriate, engages in strategic activities (sales, development, etc.) that will create value for FECR. Sales of these properties are reported in other sales of the realty segment. FECR also actively manages its 100’ wide railroad right-of-way to generate miscellaneous rents and right-of-way lease profits, which are not reported as part of the railway segment but as other income. FECR leases its right-of-way to various tenants for uses, including telecommunications companies’ fiber optics systems pursuant to long-term leases. These rents also are included in other income. In addition, FECR generates revenues from the grant of licenses and leases to use railroad property and rights-of-way for outdoor advertising, parking lots and lateral crossings of wires and pipes by municipalities, and utility and telecommunications companies. These miscellaneous rents are included in other income.

2

Customers

One customer, Rinker Materials Corporation, generated approximately 20% of rail revenues in 2003. FECR’s top five customers accounted for approximately 43% of 2003 freight revenues. Two of these customers do business as providers of aggregate materials.

Competition

Although FECR is often the only rail carrier directly serving its customers, FECR competes directly with other railroads that could potentially deliver freight to FECR’s markets and customers via different routes and use of multiple modes of transportation such as transload services. FECR’s primary rail competition for carload traffic is CSXT. FECR also competes directly with other modes of transportation, including motor carriers, ships and barges. Intermodal competition involving trailers and containers on flat rail cars competes directly with motor carriers and is based primarily upon the rate charged and the transit time required, as well as the quality and reliability of the service provided. Any improvement in the cost or quality of these alternate modes of transportation could increase competition from these other modes of transportation and adversely affect FECR’s business.

There is continuing strong competition among rail, water and highway carriers. Price is usually only one factor of importance as shippers and receivers choose a transport mode and a specific transportation company with which to do business. Inventory carrying costs, service reliability, ease of handling, and the desire to avoid loss and damage during transit are increasingly important considerations, especially for higher valued finished goods, machinery and consumer products. Additionally, decisions about ports of call can affect FECR’s business. As international shipping companies alter their ship rotations into various ports, this could change the railroad’s intermodal shipments from the affected port facility.

Regulation

FECR is subject to regulation by the Surface Transportation Board (STB) of the U.S. Department of Transportation (USDOT). The STB has jurisdiction over some rates, conditions of service and the extension or abandonment of rail lines. The STB also has jurisdiction over the consolidation, merger or acquisition of control of and by rail common carriers. The USDOT, through the Federal Railroad Administration (FRA), regulates the safety of railroad operations, including certain track and mechanical equipment standards and certain human factor issues. The USDOT and Occupational Safety and Health Administration (OSHA) have jurisdiction over a number of safety and health aspects of rail operations, including the movement of hazardous materials.

Rates in the rail industry were substantially deregulated by The Staggers Act of 1980 (The Staggers Act) and subsequent legislation and regulation. The Staggers Act encouraged and enabled rail carriers to innovate and compete for business, thereby contributing to the economic health of the nation and to the revitalization of the industry. Accordingly, the nation’s rail carriers can be expected to vigorously oppose efforts to reimpose such economic regulation.

FECR is also subject to extensive environmental laws and regulations, including the federal Clean Air Act (CERCLA), and various other environmental laws and regulations. Violations of various statutory and regulatory programs can result in civil penalties, remediation expenses, natural resource damage claims, potential injunctions, cease and desist orders and criminal penalties. Some environmental statutes impose strict liability, rendering a person liable for environmental damage without regard to negligence or fault on the part of such person. In addition, FECR’s present and historic ownership and operation of real property, including rail yards, in connection with its transportation operations involve the storage, use or disposal of hazardous substances that may have contaminated and may in the future contaminate the environment. FECR may also be liable for the costs of cleaning any site at which it has disposed (intentionally or unintentionally) of hazardous substances by virtue of, for example, an accident, derailment or leak, or to which it has transported hazardous substances it generated, such as waste oil (see Item 3. Legal Proceedings).

3

Risks

Cyclical Risks. FECR’s freight traffic is subject to the effect of cycles in the U.S. national, regional and local economies and, to a lesser extent, cycles in the international economies. Historically, traffic tends to increase at the beginning of an economic recovery. Traffic tends to decrease early in an economic downturn.

Market Risks. FECR’s freight traffic is generally affected by overall economic conditions, particularly those in the state of Florida, and with respect to intermodal traffic, international economies, including the Caribbean and South America economies. Also, the level of state and federal highway and other public projects can affect the amount of aggregate loadings FECR’s customers request. There can be no assurance that the overall economy will rebound quickly from any slowdowns or that Florida’s will continue to experience higher than the national average growth.

Claims and Lawsuits. The nature of FECR’s business exposes it to the potential for various claims and litigation related to labor and employment, personal injury and occupational illness, property damage, environmental and other matters. FECR maintains insurance for most of these potential claims, subject to varying deductibles and self-insured retentions. Therefore, FECR may be subject to claims or litigation that could involve significant expenditures.

Fuel Price Risks. FECR’s operations require significant amounts of diesel fuel. Prices of diesel fuel can vary greatly. Increases in fuel price may be passed along to customers through a “fuel surcharge” or otherwise, though often with delayed effect. However, there are no assurances that these surcharges will cover the entire fuel price increase for a given period, or that competitive market conditions will effectively allow freight providers the ability to pass along this cost. FECR forward purchases fuel to manage the risk of fuel price increases. As of December 31, 2003, FECR had forward purchase contracts of 3.8 million gallons of fuel for delivery from January 2004 to November 2004 for an average purchase price of $0.74 per gallon before taxes and freight. This represents 31% of the estimated consumption for the first eleven months of 2004.

Interchange Carrier Risks. Approximately 40% of FECR’s traffic is interchanged from CSXT, SCFE or NS. The ability of these carriers (CSXT and NS) to market and service southbound traffic into the Florida market will affect the amount of traffic FECR moves.

Rail Car Utilization Risks. FECR earns per diem rents on the use of its car and intermodal fleet of equipment based on other railroads’ or transportation service providers’ use of the equipment. Future significant downturns in the overall U.S. economy, equipment obsolescence or reduced market demand for our car and intermodal fleet, or efforts by other railroads or transportation providers to improve equipment utilization practices could affect the utilization of and per diem rents for this equipment from other railroads and transportation service providers which would lower operating profits. Also, FECR, through operating agreements, currently leases approximately 1,800 rail cars from Greenbrier Leasing Corporation (Greenbrier) and other entities, with lease lengths of up to five to ten years, cancelable every three years. The lease terms call for FECR to be billed an hourly rate based upon the length of time the car is on-line versus off-line. As a car goes off-line, a per diem rent sharing arrangement goes into effect whereby Greenbrier and FECR apportion the rent based upon the length of time the car is off-line. Rents from the Greenbrier leases received by FECR were $4.0 million, $3.0 million and $0.6 million in 2003, 2002 and 2001, respectively. Certain of these leases provide for base rents payable to Greenbrier by FECR if the car remains on FECR’s line for a specified number of days. To date, these base rents (i.e., those above normal car hire) payable to Greenbrier have been minimal.

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. This plan included

4

disposition losses of approximately $5.2 million, including employee severance costs, tractor/trailer disposition costs and other costs. Wind-down activities were completed during the second quarter of 2003.

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

Real Estate

General

FECI owns 100% of the stock of Flagler. Flagler is engaged in the development, leasing, management, operation and selected sale of commercial and industrial properties in the state of Florida.

Flagler owns and operates office and industrial properties in Florida. Flagler owned and operated 59 buildings as of December 31, 2003, with approximately 6.5 million rentable sq. ft. A schedule of these buildings is included in Part 1, Item 2 of this report. At December 31, 2003, Flagler’s operating properties were 88% occupied. Flagler’s operating properties consist primarily of Class “A” office space and high-quality commercial/industrial facilities constructed after 1992.

At December 31, 2003, Flagler had 1,048,000 sq. ft. of properties in various phases of development, consisting of 343,000 sq. ft. under construction, including a 230,000-sq. ft. build-to-suit, and 705,000 sq. ft. in the pre-development phase, located in the Jacksonville, Orlando and Miami-Dade area markets. For those projects in the pre-development phase, Flagler has invested in engineering, architectural planning and design.

Flagler owns 855 acres of unimproved land with entitlements for the construction of 13.9 million sq. ft. of additional office, industrial and commercial space. Additionally, Flagler owns approximately 2,600 acres of unimproved, unentitled land or land with limited entitlements, primarily situated adjacent to FECR’s rights-of-way along the eastern coast of Florida, available for potential future development or disposition.

Projects under Development

The primary geographic focus of Flagler’s development activities has been in the Miami, Fort Lauderdale, Jacksonville and Orlando markets. Projects under development include:

	•		SouthPark Center I, f/k/a Gran Park at SouthPark - Orlando, FL: Located near the intersection of John Young Parkway and Beeline Expressway. Six buildings, totaling 836,000 sq. ft., have been completed, of which one building or 133,000 rentable sq. ft. was sold to a third party during 2003. The park has entitlements for an additional 163,000 sq. ft. of office space. Pre-development is currently underway for a seventh building totaling 93,400 sq. ft.
	•		SouthPark Center II, f/k/a Gran Park at SouthPark - Orlando, FL: In 1999, based on the success of SouthPark, Flagler acquired approximately 90 acres adjacent to its existing park. The land has remaining entitlements for 1.7 million sq. ft. of office space and 98,000 sq. ft. of commercial space. During 2003, construction of a 60,000 rentable sq. ft. build-to-suit project for Corinthian Colleges, Inc. was completed. The Corinthian Colleges’ build-to-suit is currently under contract for sale. At December 31, 2003, a second 137,000 sq. ft. office building was in the pre-development phase.
	•		Flagler Station, f/k/a Beacon Station - Miami, FL: Located northwest of Miami International Airport. Flagler owns and operates thirty buildings, totaling 3.3 million rentable sq. ft., at December 31, 2003, including 540,000 rentable sq. ft. previously held in partnership with Duke Realty, which Flagler purchased in January 2003. The park has entitlements for an additional 4.0 million sq. ft.

5

			of office, industrial and commercial space. Construction is currently underway for a 230,000 sq. ft. build-to-suit office building for Ryder System, Inc., and pre-development is currently underway for two projects totaling 361,000 sq. ft. Flagler owns approximately 535 acres adjacent to this park for future development or sale, of which 465 acres are under contract for sale at December 31, 2003.
	•		Deerwood North - Jacksonville, FL: Located near the intersection of Southside Boulevard and Gate Parkway North, north of J. Turner Butler Boulevard. Deerwood North consists of two office buildings, totaling 270,000 rentable sq. ft. In addition, construction was underway for a third 113,000 sq. ft. office building, which is 60% pre-leased, which was completed in January 2004. The Company has entitlements for an additional 118,000 sq. ft. of office space in Deerwood North.
	•		Flagler Center, f/k/a Gran Park at Jacksonville - Jacksonville, FL: Located in south Jacksonville at the intersection of Old St. Augustine Road and I-95. Flagler owns and operates seven buildings, totaling 771,000 rentable sq. ft., within the park. The park has entitlements for an additional 4.2 million sq. ft. of office, industrial and commercial space on approximately 335 developable acres. Flagler is constructing an interchange at Old St. Augustine Road and I-95, which should provide more efficient access to the park, with completion of the interchange anticipated in 2004. Flagler completed its expansion of Old St. Augustine Road to four lanes in 2003, providing increased traffic flow near the park, as well as additional park accessibility.

The following is a summary of the Company’s development activity as of December 31, 2003:

Customers

Flagler leases to approximately 230 tenants in a variety of industries, including financial services, distribution, hospitality services and import/export. Flagler’s largest tenant occupied approximately 6% of leased space at December 31, 2003.

Competition

The real estate industry is generally characterized by significant competition. If market conditions reflect that sales of properties would provide advantageous returns, the Company may decide to sell certain of its developed properties. There are numerous developers and real estate companies (including those in Florida) that compete with the Company in seeking properties for acquisition, resources for development and prospective tenants. Competition may adversely affect the Company’s ability to attract and retain tenants and achieve favorable rental rates. The Company may compete with entities having greater financial and other resources. There can be no assurance that the existence of such competition may not have a material adverse effect on the Company’s business, operations or cash flows.

Regulation

Real estate development in Florida is subject to extensive regulation at both the state and local levels.

6

One of the primary purposes of regulation is to ensure that infrastructure, such as traffic circulation, sanitary sewer, solid waste, drainage, potable water, parks and recreation and transportation facilities, is adequate to serve proposed development. If the facilities in the area of the development are inadequate or will become inadequate as a result of the proposed development, the developer must either improve the infrastructure to a level satisfactory to the regulatory agencies or provide financial assurances that the necessary improvements will be made as development progresses. In many areas of Florida, significant infrastructure improvements need to be made in order to support additional development. Infrastructure improvement requirements could adversely affect the ability of developers in Florida, including Flagler, to develop real estate projects.

Larger developments may be regulated as Development of Regional Impact (DRI) if they meet statutorily prescribed thresholds. The process for obtaining governmental approval of a DRI project includes an evaluation of the project’s impact on the environment, infrastructure and government services, and requires the involvement of numerous federal, state and local governmental agencies. The DRI review process is lengthy and expensive and may result in an approval that requires significant capital improvements or other exactions as a condition of the approved development.

In addition, federal, state and local regulations govern the development of lands containing endangered or protected wildlife species, and sensitive environmental areas such as wetlands and coastal areas. Much of the developable land in Florida is impacted by those regulations. As a result, those regulations may limit the Company’s ability to develop its real estate holdings.

Real estate ownership and development is subject to extensive federal, state and local environmental regulation governing hazardous substances. Pursuant to those regulations, the owner or operator of contaminated real estate may be required to perform remediation, regardless of the cause of the contamination. The sale or development of properties may also be restricted due to environmental concerns. In addition, violation of those regulations may result in civil penalties, remediation expenses, natural resource damages, injunctions, cease and desist orders and criminal penalties. The Company is not presently aware of any material contamination, or any material adverse environmental development issues relating to its real estate operations. However, there can be no assurance that environmental issues will not arise in the future.

Risks

Market Risks. There can be no assurance that the U.S. economy in general, or the economy of the Southeast and Florida in particular, will not continue to be affected by the recent recession or that they will recover as expected. Certain significant expenditures associated with the development, management and servicing of real estate (such as real estate taxes, maintenance costs and debt payments, if any) generally could not be reduced even if an economic downturn caused less revenue to be generated from the Company’s properties. Additionally, capital expenditures (especially infrastructure related) for development of office parks occur early in the construction cycle potentially becoming subject to longer than expected holding periods and costs in the event of economic downturns.

Development Risks. The Company’s real estate development activities require significant capital expenditures. Flagler’s capital expenditures for 2004 are expected to be between $75 million and $85 million. The Company has obtained funds for its capital expenditures and operating activities through operating cash flows, property sales and financings. There can be no assurances that funds available from operating cash flow, property sales and financings will continue to be sufficient to fund the Company’s required or desired capital expenditures for development. If the Company were unable to obtain sufficient funds, it might have to defer or otherwise limit certain development activities. Further, any new development, or any rehabilitation of older projects, may require compliance with new building codes and other regulations. The Company cannot estimate the cost of complying with such codes and regulations, and such costs can make a new project, or some otherwise desirable uses of an existing project, not economically feasible.

Cyclical Risks. Flagler’s leasing occupancy and development are subject to the effect of cycles in the

7

regional and local economies and, to a lesser extent, by the U.S. national economy. Historically, leasing occupancy and new building development activity are affected favorably by a period of economic recovery and unfavorably by an economic downturn.

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. See Items 7 and 8 of this Annual Report on Form 10-K for a more detailed discussion of the sale of this subsidiary.

Financial Information about FECI’s Segments

The Company had total segment operating revenues of $339.0 million, an operating profit of $73.9 million and total assets of $1.0 billion in 2003. (See Note 8. Segment Information of the Financial Statements and Supplementary Data set forth in Part II, Item 8 of this report on Form 10-K). The Company’s total railroad operating revenues were $181.1 million and real estate revenues were $157.9 million. Segment operating profit included $43.0 million from the railroad, $44.0 million from real estate, less $13.1 million of corporate general and administrative expenses. During 2002, the Company sold EPIK and discontinued FLX’s trucking operations. The financial statements for 2001 have been restated to reflect these transactions. The financial results of these two businesses, along with certain buildings sold or held for sale and partnership interests sold, are accounted for and shown in discontinued operations, which includes a 2003 and 2002 loss from operation of discontinued operations, net of taxes, of $0.3 million and $168.7 million, respectively, and a 2003 and 2002 gain on disposition of discontinued operations, net of taxes, of $2.1 million and $10.8 million, respectively.

Sources and Availability of Raw Materials

All raw materials FECR and Flagler use, including fuel, track materials and building construction materials, are available in adequate supply from multiple sources.

Seasonality

FECR’s rail traffic is relatively stable throughout the year with higher volumes ordinarily occurring during the second and last quarters of the year. The Company’s real estate business is not generally seasonal.

Working Capital

At December 31, 2003, the Company’s current assets exceeded current liabilities by $104.8 million. The Company had a $200 million revolving credit facility at December 31, 2003 (see Note 15 of the Financial Statements). At December 31, 2003, there were no monies drawn on the facility (see also Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations). At December 31, 2003, the Company had cash and cash equivalent balances of $125.1 million, including $5.1 million then designated for possible use to purchase real property via tax-free exchange. The Board of Directors authorized the expenditure of up to $75 million to repurchase its outstanding common stock through a program of open market purchases and privately negotiated transactions. The Company expects to finance the stock repurchase primarily from available cash balances and external financing to the extent necessary. At December 31, 2003, the Company had repurchased $2.9 million of stock pursuant to this authorization.

Employees

FECI employed 26 people; FECR employed 780, and Flagler had 67 employees as of December 31, 2003. Approximately 569 of FECR’s employees are represented by labor unions: United Transportation

8

Union (UTU) (train and engine service employees), Brotherhood of Maintenance of Way Employees (BMWE) (track maintenance and structures) and International Brotherhood of Electrical Workers (IBEW) (seven crafts, including agents and clerical, carmen, maintenance of equipment foremen, roadway shop, signals and communications, train dispatchers, boilermakers, electricians, machinists, sheetmetal workers and shop laborers).

FECR is a party to Collective Bargaining Agreements (CBAs) with these three national labor unions. All agreements are currently amendable. The Company is in various stages of collective bargaining on each of these agreements and anticipates a conclusion and execution of multi-year agreements for each craft.

Company Web Address

The Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available through the Company’s website (www.feci.com) as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission and are available free of charge upon request from the Company.

Additionally, the Company’s Code of Conduct, Corporate Governance Guidelines and Charters of the Committees of the Board of Directors are also posted on the website. This information is also available in print form via mail by request to the Company.

ITEM 2. PROPERTIES

The Company’s material physical properties at December 31, 2003 are listed below and are grouped by industry segment.

Railway

FECR owns three connected four-story buildings in St. Augustine, Florida, which are used by FECI and FECR as corporate headquarters. FECR also owns a railroad right-of-way, generally 100 feet wide, along the east coast of Florida extending for 351 miles used for its railroad operations. FECR also owns and operates approximately 276 miles of branch, switching and other secondary track, and 159 miles of yard track, various rail car marshalling yards, trailer/container and automobile loading and unloading facilities, signaling system facilities, and a number of operating offices, shops and service house buildings.

On March 2, 1998, FECR entered into a Trackage Agreement with SCFE providing for, among other things, the exclusive operation and maintenance of 56 miles of branch mainline.

FECR’s tracks, bridges and other fixed property and signal improvements are maintained to a level based on the needs of service. The mainline is, in general, constructed of 132-pound per yard continuous welded rail supported on concrete crossties. These facilities provide a reliable infrastructure for rail operations suited to the business demands of customers, including unrestricted movement of double-stacked containers, tri-level automobiles and heavier axle rail cars.

The branch mainlines, way switching and yard tracks are, for the most part, of 115-pound per yard materials supported by wood ties.

FECR owns or leases 74 diesel electric locomotives, 2,488 freight cars, 1,408 trailers for highway revenue service, numerous pieces of rail-mounted and non-rail-mounted work equipment, and numerous automobiles used in maintenance and transportation operations. Generally, FECR’s equipment is in good physical condition, considering its years of service and operating utilization.

During 2003, FECR commenced an engineering- and economics-based study of its principal right-of-way and equipment assets to develop a multi-year preventive maintenance and replacement plan and associated estimates of the assets’ remaining lives. The study is expected to be completed in 2004 and

9

may result in changes in FECR’s maintenance and capital spending and in the estimated remaining useful lives of its property, plant and equipment, which may affect future depreciation rates and expense.

In addition, FECR currently leases approximately 1,800 rail cars from Greenbrier Leasing Corporation and other entities, with lease lengths of up to five to ten years, cancelable every three years. The lease terms call for FECR to be billed an hourly rate based upon the length of time the car is on-line versus off-line. As a car goes off-line, a per diem rent sharing arrangement goes into effect whereby Greenbrier and FECR apportion the rent based upon the length of time the car is off-line. Rents from the Greenbrier leases received by FECR were $4.0 million, $3.0 million and $0.6 million in 2003, 2002 and 2001, respectively. Certain of these leases provide for base rents payable to Greenbrier by FECR if the car remains on FECR’s line for a specified number of days. To date, these base rents (i.e., those above normal car hire) payable to Greenbrier have been minimal.

FECR also owns lands outside of the right-of-way. These holdings include certain properties in South Florida and large rail yards in Jacksonville, Fort Pierce and Miami. Exclusive of operating rail yards, some of FECR’s land portfolio includes the following:

     Right-of-Way Corridors

Several corridors, upon which rail service is not currently provided, remain under control of FECR. The corridor in Volusia and Brevard Counties is approximately 25 miles in length and contains 331 acres. Also, a corridor extends from Edgewater to Maytown connecting to the Aurantia to Benson Junction corridor. This corridor is approximately 16 miles in length and contains 191 acres.

A corridor extends southerly for approximately six miles from the Miami International Airport to a major metropolitan mall in Miami-Dade County. The northerly portion of this corridor remains in rail service.

     Miller Shops West

An approximate 200-acre parcel is located along the headwaters of the San Sebastian River in St. Augustine. This parcel is part of FECR’s former mechanical shop property.

     Cadillac Gauge Property

This property is located in an industrial area on Cidco Road in Cocoa, Florida. This property has over 100,000 sq. ft. of warehouse space on 72 acres of land. The property offers a variety of uses and is currently being marketed for sale.

     Eyster Boulevard

This site is located in the City of Rockledge, south of Eyster Boulevard, and consists of 64.1 acres with approximately 1,290 ft. of frontage along Eyster Boulevard and over 2,600 ft. of rail frontage. A portion of the site has 330 ft. of frontage along Murrell Road. The property is currently being marketed for sale as commercial and industrial sites.

10

Real Estate

At year-end 2003, Flagler’s commercial and industrial portfolio included 59 buildings aggregating 6.5 million rentable sq. ft. Flagler’s income-producing properties are detailed below:

FLAGLER’S INCOME-PRODUCING BUILDINGS
(at December 31, 2003)