UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

OR

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 þ   NO o

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. o

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

Based on the closing price on June 30, 2004, the aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $883 million.

The number of shares of the Registrant’s common stock, no par value, outstanding at February 18, 2005 is 32,140,610 shares and 6,546,527 shares of treasury stock.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 2, 2005 (the Proxy Statement) are incorporated by reference in Part III of this report.

TABLE OF CONTENTS

Forward-Looking Statements

This Form 10-K contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include the Company’s present expectations or beliefs concerning future events. These statements may be identified by the use of words like “plan,” “expect,” “aim,” “believe,” “project,” “anticipate,” “intend,” “estimate,” “may,” “will,” “should,” “could,” and other expressions that indicate future events and trends. Such forward-looking statements may include, without limitation, statements that the Company does not expect that lawsuits, review of open tax years by the IRS, environmental costs, commitments, including future contractual obligations, contingent liabilities, financing availability, labor negotiations or other matters will have a material adverse effect on its consolidated financial condition, statements concerning future capital needs and sources of such capital funding, statements concerning future intentions with respect to the payment of dividends, execution of a share repurchase program, and other potential capital distributions, number of shares to be repurchased, availability of cash to fund the stock repurchase, ability to reinvest (tax deferred) sales proceeds into qualifying 1031 properties, future growth potential of the Company’s lines of business, performance of the Company’s product offerings, other similar expressions concerning matters that are not historical facts, and projections relating to the Company’s financial results. The Company cautions that such statements are necessarily based on certain assumptions, which are subject to risks and uncertainties that could cause actual results to materially differ from those contained in these forward-looking statements. Important factors that could cause such differences include, but are not limited to, the changing general economic conditions (particularly in the state of Florida, the southeast US and the Caribbean) as they relate to economically sensitive products in freight service and building rental activities; ability to manage through economic recessions or downturns in customers’ business cycles; industry competition; possible future changes in the Company’s structure, lines of business, business and investment strategies, and related implementation; legislative or regulatory changes; technological changes; volatility of fuel prices (including volatility caused by military actions); changes in levels of preventive and capital maintenance and depreciation rates resulting from future railway right-of-way and equipment life studies; changes in the ability of the Company to complete its financing plans, changes in interest rates, the settlement of future contractual obligations as estimated in time and amount (customary to the Company’s historical cost structure) including labor direct negotiations, mediation and in one instance, mutually agreed binding arbitration 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, hurricanes, floods, earthquakes and forest fires; discretionary government decisions affecting the use of land and delays resulting from weather conditions and other natural occurrences, like hurricanes, 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; 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 thereof. The Company undertakes no obligation to publicly release revisions to the forward-looking statements in this Report that reflect events or circumstances after the date hereof, or reflects 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 acquisition, development, management, leasing, operation and selected sale of commercial and industrial properties. Flagler has extensive real estate holdings in Florida.

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 6, 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 277 miles of branch, switching and other secondary track and 158 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 1,000 carload and intermodal customers combined. During 2004, the number of customers included approximately 200 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)

(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 2004, approximately 37% of FECR’s freight revenues were attributable to traffic that originated on other railroads; approximately 5% was attributable to traffic that originated on FECR but bound for other destinations, and 58% 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 2004. 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 long term 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 allowing up to 50 spaces per day. During 2004, we reached and exceeded this capacity on certain days, which may limit the ability to grow this business segment in the future unless additional capacity is made available. In early 2005, we are reviewing opportunities to increase loadings on the “Hurricane Train” service. Additionally, through joint marketing arrangements, FECR provides direct service to the south Florida markets; one with CSX transportation, with loads originating in the Northeast and one with Norfolk Southern, with loads originating in the Chicago and surrounding areas.

FECR owns or has an interest in approximately 1,206 acres of ancillary properties, including 3 rail corridors (661 acres) that are either abandoned or are candidates for abandonment, within the state of Florida. FECR continues to evaluate these holdings and, when appropriate, engages in strategic activities (sales, development, etc.). 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 use, 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.

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Customers

One customer, Rinker Materials Corporation, generated approximately 21% of rail revenues in 2004. FECR’s top five customers accounted for approximately 43% of 2004 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. FECR’s Intermodal freight services (trailers and containers on flat-rail cars) compete directly with motor carriers. 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 revitalization of the industry. Accordingly, the nation’s rail carriers can be expected to vigorously oppose efforts to re-impose such economic regulation.

FECR is also subject to extensive 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).

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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, South America, and Asian economies. In addition, 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 economy 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. See Item 3 for a discussion of legal proceedings.

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, 2004, FECR had forward purchase contracts of 5.2 million gallons of fuel for delivery from January 2005 to December 2005 for an average purchase price of $1.13 per gallon before taxes and freight. This represents 35% of the estimated consumption for year 2005.

Interchange Carrier Risks. Approximately 37% 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/or 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 2,700 rail cars from Greenbrier Leasing Corporation (Greenbrier), Bombardier Capital (Bombardier), and other entities, with lease lengths of up to five to ten years, mostly 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, Bombardier and other leases received by FECR were $3.9 million, $4.0 million and $3.0 million in 2004, 2003 and 2002, respectively. Certain of these leases provide for base rents payable to Greenbrier and others 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 and others have been minimal.

Natural Disaster Risks. FECR’s operating assets are predominately located on Florida’s eastern seaboard and susceptible to damage, destruction and operational disruption from natural disasters like hurricanes and other severe storms. Damage and destruction of operating assets could be material with accompanying long periods of operational outage. Additionally, certain of FECR’s customers (especially aggregate) and their operations are subject to natural disasters, the effect of such being significantly reduced loadings.

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Real Estate

General

FECI owns 100% of the stock of Flagler. Flagler is engaged in the acquisition, 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 60 buildings as of December 31, 2004, with approximately 6.6 million rentable sq. ft. A schedule of these buildings is included in Part 1, Item 2 of this report. At December 31, 2004, Flagler’s operating properties were 95% occupied. Flagler’s operating properties consist primarily of Class “A” office space and high-quality commercial/industrial facilities primarily constructed after 1992.

At December 31, 2004, Flagler had 1,321,000 sq. ft. of properties in various phases of development, consisting of 804,000 sq. ft. under construction (including a 239,000 sq. ft. build-to-suit project), and 517,000 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 is engaged in engineering, architectural planning and design.

Flagler owns 740 acres of developable land with entitlements for the construction of 12.1 million sq. ft. of additional office, industrial and commercial space. Additionally, Flagler owns approximately 2,000 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.

At December 31, 2004, Flagler held net land sale proceeds totaling $88.3 million in escrow with a qualified intermediary, some or all of which is intended to be reinvested through qualifying tax-deferred exchanges. Flagler has identified qualifying reinvestment properties, which may be purchased during the first half of 2005. These properties include land and buildings to be developed and/or operated consistent with Flagler’s current strategic property portfolio.

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 – Orlando, FL: Located near the intersection of John Young Parkway and Beeline Expressway. Six buildings, totaling 836,000 sq. ft., have been completed, one of which (a building of approximately 133,000 sq. ft.) was sold to a third party during 2003. The park has entitlements for an additional 163,000 sq. ft. of office space. A seventh building of approximately 93,000 sq ft remains in pre-development.
	•	SouthPark Center II – Orlando, FL: In 1999, based on the success of SouthPark Center I, Flagler acquired approximately 90 acres across John Young Parkway from its existing park. The land has remaining entitlements for 1.5 million sq. ft. of office space, as well as 98,000 sq. ft. of commercial space. Two buildings totaling approximately 196,000 sq ft, have been developed, one of which, a 60,000 sq. ft. build-to-suit project, was sold to a third party during 2004. At December 31, 2004, a third 137,000 sq ft. office building was under construction.
	•	Flagler 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, 2004, including 540,000 rentable sq. ft. previously held in partnership with Duke Realty, which Flagler purchased in January 2003. Construction is currently underway for a 239,000 rentable sq. ft. build-to-suit office building for Ryder System, Inc. as well as a 201,000 sq. ft. industrial building. The park has entitlements for an additional 2.9 million sq. ft. of office, industrial and commercial space. Pre-development is currently underway for an additional 160,000 sq. ft. industrial building. Flagler owns approximately 95 acres adjacent to this park for future development or sale.
	•	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 three office buildings,

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		totaling 383,000 rentable sq. ft. In addition, construction is underway as of December 31, 2004 for a fourth 113,000 sq. ft. office building.
	•	Flagler Center – Jacksonville, FL: Located in south Jacksonville at the Old St. Augustine Road and I-95 interchange. Flagler owns and operates seven buildings, totaling 771,000 rentable sq. ft. An eighth building, a 114,000 sq. ft office building, is under construction at December 31, 2004, with a ninth and tenth building, a 150,000 sq. ft. warehouse building, which is 81% pre-leased, and a 114,000 sq. ft. office building, respectively, in pre-development. The park has entitlements for an additional 4.1 million sq. ft. of office, industrial and commercial space on approximately 331 developable acres. Flagler completed the interchange at Old St. Augustine Road and I-95 during 2004, providing a more efficient access to Flagler Center. Flagler also completed the expansion of Old St. Augustine Road to four lanes in 2003, providing increased traffic flow near the site, as well as additional site accessibility.
	•	Flagler Plaza – Sunrise, FL: A 41-acre tract located at Sunrise, FL in West Broward County. The property is entitled for 823,000 sq. ft. of office space. The site is master planned for four office buildings. Flagler is evaluating the property for future development.

The following is a summary of the Company’s development activity as of December 31, 2004:

Customers

Flagler leases to approximately 250 tenants in a variety of industries, including financial services, distribution, hospitality services, and import/export. Flagler’s largest tenant, based on square footage, occupied approximately 4% of leased space at December 31, 2004. Flagler’s largest tenant, based on rental revenues, accounted for approximately 6% of 2004 continuing operations’ contractual rental income. Flagler’s five largest tenants, based on rental revenues, accounted for approximately 23% of continuing operations’ contractual rental income.

Competition

The real estate industry is generally characterized by significant competition. There are numerous developers and real estate companies (including those in Florida) competing with the Company for acquisitions of properties, 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. 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

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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 a 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, and 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 continue at its current strong pace, which may adversely affect the Company. 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. Capital investment at Flagler for 2005 is expected to be between $150 million and $170 million, which includes $75 million to $85 million for acquisitions of land and/or finished buildings utilizing proceeds from third and fourth quarter 2004 realty sales. The Company has obtained funds for its capital expenditures and operating activities through operating cash flows, property sales, and financings. There can be no assurance 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 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 late in a period of economic recovery and late in an economic downturn.

Natural Disaster Risks. Flagler’s operating assets are located in Florida and are susceptible to damage, destruction and operational disruption (including rents from tenants) from natural disasters like hurricanes and other severe storms, especially those assets along the east coast. Damage and destruction of operating assets could be material with accompanying long periods of operational outage.

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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, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), EPIK’s results from operations and the estimated disposition gain have been reported as discontinued operations for all years presented. See Part II, Items 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and 8 (Financial Statements) 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 $378.2 million, an operating profit of $130.2 million and total assets of $1.1 billion in 2004. (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 $200.8 million and real estate revenues were $177.4 million (which included land sales of $104.8 million). Segment operating profit included $47.3 million from the railroad, $98.0 million from real estate (which included land sales of $89.0 million), less $15.1 million of corporate general and administrative expenses. During 2002, the Company sold EPIK and discontinued FLX’s (Florida Express Carriers, Inc.) trucking operations. 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 2004 and 2003 gain/(loss) from the operation of discontinued operations, net of taxes, of $0.1 million and ($0.2) million, respectively, and a 2004 and 2003 gain on disposition of discontinued operations, net of taxes, of $2.6 million and $2.1 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, 2004, the Company’s current assets exceeded current liabilities by $111.4 million. The Company had a $200 million revolving credit facility at December 31, 2004 (see Note 14 of Item 8 of the Financial Statements). At December 31, 2004, there were no monies drawn on the facility (see also Part II, Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations). At December 31, 2004, the Company had cash and cash equivalent balances of $126.2 million, including $91.4 million, held by a qualifying intermediary, designated for possible use to purchase real property via tax-deferred exchange. The Board of Directors authorized the expenditure of up to $40 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, cash generated from operations, and external financing to the extent necessary. At December 31, 2004, the Company had not repurchased stock pursuant to this authorization.

Employees

FECI employed 20 people; FECR employed 798, and Flagler had 67 employees as of December 31, 2004. Approximately 567 of FECR’s employees are represented by labor unions: United Transportation Union (UTU) train and engine service employees, Brotherhood of Maintenance of Way Employees (BMWE) track maintenance, structures and roadway shop employees, and International Brotherhood of Electrical Workers (IBEW) representing six crafts including agents and clerical, carmen, maintenance of equipment foremen, 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 negotiations with collective bargaining representatives of these unions, including direct negotiations, mediation and in one instance, mutually agreed binding arbitration, which is scheduled for the second quarter of 2005. The Company anticipates a satisfactory resolution of these negotiations and proceedings.

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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, 2004 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 277 miles of branch, switching and other secondary track, and 158 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 76 diesel electric locomotives, 2,456 freight cars, 1,655 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 maintenance and replacement plan and associated estimates of the assets’ remaining lives. The engineering studies segregated the equipment and right-of-way assets into the following major groupings: Locomotives, rolling stock (e.g. hoppers, flatcars, etc.), bridges, and track structure (rail, ties, ballast, and other track material). During the third and fourth quarters of 2004, the engineering studies (including associated estimated depreciation lives) for locomotives and rolling stock were completed. The studies generally indicated no significant changes in capital maintenance or replacement programs or depreciation expense. (See Note 3 of the Financial Statements in Part II, Item 8 of this report). The finalizations of the bridge and right-of-way asset engineering studies are expected during the first and second quarters of 2005, respectively.

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

In addition, FECR currently manages approximately 2,700 rail cars from Greenbrier Leasing Corporation, Bombardier Capital, and other entities, with operating terms of up to five to ten years, generally cancelable every three years. The 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, Bombardier and other entities received by FECR were $3.9 million, $4.0 million and $3.0 million in 2004, 2003 and 2002, respectively. Certain of these agreements provide for base rents payable to Greenbrier and others 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 and others have been minimal.

Real Estate

At year-end 2004, Flagler’s commercial and industrial portfolio included 60 buildings aggregating 6.6 million rentable sq. ft. Flagler’s income-producing properties are detailed below:

FLAGLER’S INCOME-PRODUCING BUILDINGS
(at December 31, 2004)

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