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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to______
COMMISSION FILE NO. 001-08723
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FLORIDA EAST COAST INDUSTRIES, INC.
-----------------------------------
(Exact name of Registrant as specified in its charter)
FLORIDA 59-2349968
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
Class A Common Stock-No par value
(including rights attached thereto) New York Stock Exchange
Class B Common Stock-No par value
(including rights attached thereto) New York Stock Exchange
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 or, 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.
Based on the closing prices on March 15, 2002, the aggregate market value of the
Class A common stock and the Class B common stock held by non-affiliates of the
Registrant was approximately $492 million and $531 million, respectively, and
$1,023 million in total.
The number of shares of the Registrant's Class A common stock, no par value,
outstanding is 16,919,716 shares and 799,084 shares of treasury stock, and the
number of Class B shares, no par value, outstanding is 19,609,216 shares at
March 15, 2002, with no 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 May 30, 2002 (the Proxy Statement) are
incorporated in Part III of this Report by reference.
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. Such forward-looking
statements may include, without limitation, statements that the Company does not
expect that lawsuits, environmental costs, commitments, 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, 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.
These forward-looking statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those anticipated in
the statements. Important factors that could cause such differences include, but
are not limited to, the ability of the Company to compete effectively in a
rapidly evolving and price competitive marketplace and to respond to customer
demands and industry changes (particularly in the telecommunications industry
where significant changes have occurred); the ability to achieve revenues from
the Company's services, particularly services in the telecommunications business
that are in the early stages of development or operation; the ability to manage
growth; changes in business strategy; legislative or regulatory changes;
technological changes; volatility of fuel prices; changing general economic
conditions (particularly in the state of Florida) as it relates to economically
sensitive products in freight service and building rental activities; changes in
contractual relationships; industry competition; changes in capital markets or
in the Company's business or financial performance that may affect the
availability or cost of capital to the Company; natural events such as weather
conditions, floods, earthquakes and forest fires; and the ultimate outcome of
environmental investigations or proceedings and other types of claims and
litigation.
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 four wholly owned subsidiaries, in rail and trucking
operations, real estate and telecommunications. The Company's rail operations
connect many of the major population centers and port facilities of Florida, and
provide efficient service for its customers through multiple competitive
connections to the rest of North America. Florida East Coast Railway, L.L.C.
(FECR) carries construction aggregates (crushed stone and sand), automobiles and
other rail carload commodities, as well as intermodal freight. Florida Express
Carriers, Inc. (FLX) is a common and contract motor carrier operating with a
concentration in the Southeast. FLX offers truckload over-the-road service, as
well as intermodal drayage. FLX also offers transportation logistic and
brokerage services. The Company, through its real estate subsidiary, Flagler
Development Company (Flagler), is engaged in the acquisition, development,
ownership, management, leasing and sale of commercial real estate. Flagler has
extensive real estate holdings in Florida, totaling approximately 16,000 acres,
including 6.0 million sq. ft. of rentable commercial and industrial space in 54
buildings owned and operated by Flagler, 638,000 sq. ft. in four buildings held
jointly with Duke Realty Corporation, 559,978 sq. ft. in lease-up, 97,000 sq.
ft. under construction, and 590,550 sq. ft. in pre-development. Flagler owns
unimproved land, including certain land (939 acres) with relevant development
permits authorizing the construction of 13.6 million sq. ft. of additional
industrial and commercial space and 13,400 acres of land, which has yet to be
entitled for development. EPIK Communications Incorporated (EPIK) is a provider
of wholesale telecommunications private line services (bandwidth, wave services,
IP, collocation and dark fiber) in the Southeast. Established in May 1999, EPIK
completed construction of a high-capacity fiber optic network between Atlanta,
Georgia and Miami and throughout Florida in 2001. The network runs along FECR's
rail corridor on the east coast of Florida and along other rail, utility and
road corridors.
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
wholly 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.
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FECR serves approximately 900 carload and intermodal customers combined. The
following table summarizes the Company's freight shipments by commodity group
and as a percentage of rail freight revenues:
TRAFFIC
YEAR ENDED DECEMBER 31, 2001
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COMMODITY UNITS PERCENTAGE (%) AMT. OF REVENUE PERCENTAGE (%)
--------- -------- -------------- --------------- --------------
Intermodal
TOFC/COFC 263,885 60.6 61,901,766 39.4
Rail Carloads
Crushed stone 106,473 24.4 47,062,872 29.9
Construction materials 5,519 1.3 3,420,063 2.2
Vehicles 24,487 5.6 19,464,609 12.4
Foodstuffs 8,640 2.0 6,670,301 4.2
Chemicals 3,813 0.9 4,297,558 2.7
Paper 7,680 1.8 7,314,480 4.7
Other 14,822 3.4 7,107,937 4.5
-------- ------ ------------ ------
TOTAL 435,319 100.0 157,239,586 100.0
======== ====== ============ ======
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 2001,
approximately 45 percent of FECR's freight revenues were attributable to traffic
that originated on other railroads; approximately 6 percent was attributable to
traffic that originated on FECR but bound for other destinations, and 49 percent
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 9.5 percent of FECR's revenue in 2001. 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.
Customers are generally given a "through freight" rate, a single figure
encompassing the rail transportation of a commodity from point of origin to
point of destination, regardless of the number of carriers that handles the car.
Rates are developed by the carriers based on the commodity, volume, distance and
competitive market considerations. The entire freight bill is either paid to the
originating carrier (prepaid), or to the destination carrier (collect), and
divided among all carriers which handle the move. The basis for the division
varies and can be based on factors (or revenue requirements) independently
established by each carrier which comprises the through rate, or on a percentage
basis established by division agreements among the carriers. Haulage
arrangements generally provide FECR with a per unit amount of revenue with no
direct customer billing requirement or interline settlement(s). A carrier such
as FECR, which actually places the car at the customer's location and attends to
the customer's daily switching requirements, receives revenue greater than an
amount based simply on mileage hauled.
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, which is renewable annually, whereby FECR receives
specified revenues for each unit transported.
As owner in fee simple of its railroad right-of-way extending along the east
coast from Jacksonville to Miami, the Company actively manages this and
ancillary real estate assets owned by it to generate miscellaneous rents and
right-of-way lease profits. FECR owns approximately 1,200 acres of ancillary
properties within the state of Florida. The Company continues to evaluate these
holdings and, when appropriate, engages in strategic activities (sales,
development, etc.) that will extract/create value for the Company. FECR leases
its right-of-way to various tenants for uses including telecommunications
companies' fiber optics systems pursuant to long-term leases. These revenues are
included in the telecommunications segment. In addition, FECR generates revenues
from the grant of licenses and leases to use railroad property and
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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.
CUSTOMERS
One customer generated approximately 19 percent of the Company's rail revenues
in 2001. FECR's top five customers accounted for approximately 44 percent of
2001 freight revenues. The Company's business could be adversely affected if its
large customers suffered significant reductions in their businesses or reduced
shipments of commodities transported by FECR.
COMPETITION
Although the Company's railroad is often the only rail carrier directly serving
its customers, the Company's railroad competes directly with other railroads
that could potentially deliver freight to the Company's markets and customers
via different routes and use of multiple modes of transportation such as
transload services. FECR's primary rail competition is CSXT. FECR also competes
directly with other modes of transportation, including motor carriers and, to a
lesser extent, ships and barges. Competition 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 the Company'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.
Service disruptions, improvements and/or changes in services offered by NS and
CSXT could adversely or positively affect FECR's intermodal business.
REGULATION
FECR is subject to regulation by the Surface Transportation Board (STB) of the
U.S. Department of Transportation, which succeeded the ICC on January 1, 1996.
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 U.S. Department of Transportation, through the Federal Railroad
Administration, regulates the safety of railroad operations, including certain
track and mechanical equipment standards and certain human factor issues.
The relaxation of economic regulation of railroads, begun over a decade ago by
the ICC under the Staggers Rail Act of 1980 (Staggers Act), has continued under
the STB, and additional rail business could be exempted from regulation in the
future. Significant exemptions are TOFC/COFC (i.e., piggyback) business, rail
boxcar traffic, lumber, manufactured steel, automobiles and certain bulk
commodities, such as sand, gravel, pulpwood and wood chips for paper
manufacturing. Transportation contracts on regulated shipments, which no longer
require regulatory approval, effectively remove those shipments from regulation
as well. Over 95 percent of FECR's freight revenues come from either exempt
traffic or traffic moving under transportation contracts.
Due in part to industry consolidation and certain service issues that arose
after certain mergers of rail carriers, efforts were made in 2000 and 2001 to
re-subject the rail industry to federal economic regulation. This pressure could
re-emerge during 2002. 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 re-impose
such economic regulation.
The Company's railway operations are 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,
3
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, the Company'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. The Company 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.
The Company is currently involved in various remediations of properties relating
to its transportation operations (see Item 3. Legal Proceedings). Based on
information presently available, the Company does not believe that the costs of
addressing any known environmental issues relating to its transportation
operations will be material. However, the future cost of complying with
environmental laws and containing or remediating contamination cannot be
predicted with any certainty, and there can be no assurances that such
liabilities or costs would not have a material adverse effect on the Company in
the future.
RISKS
Market Risks. FECR's freight traffic is generally affected by overall economic
conditions, particularly those in the state of Florida, and intermodal
competition. 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 or that of Florida's will
continue to experience higher than average national growth or rebound quickly
from any slowdowns.
Fuel Price Risks. FECR's operations require significant amounts of diesel fuel.
Prices of diesel fuel can vary greatly. Generally, the increases in fuel price
are passed along to customers through a "fuel surcharge." 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.
Interchange Carrier Risks. Approximately 45 percent of FECR's traffic is
interchanged from CSXT or NS. The ability of these carriers to market and
service southbound traffic into the Florida market will affect the amount of
traffic FECR moves.
Economic Risks Associated with Rail Car Utilization. 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 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 by other
railroads and transportation service providers. Also, FECR, through operating
agreements, 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 revenue sharing arrangement goes into effect whereby
Greenbrier and FECR apportion the revenue based upon the length of time the car
is off-line.
TRUCKING
GENERAL
FECI owns 100 percent of the stock of FLX, formerly International Transit,
Inc. (ITI). FLX is a common and contract motor carrier operating with a
concentration in the Southeast. FLX offers truckload over-the-road service, as
well as intermodal drayage. FLX also offers transportation logistic services and
maintains a brokerage operation. Ownership of FLX enables the Company to provide
coordinated motor/rail intermodal services with FECR to and from southeastern
points.
During the third quarter of 2000, FLX restructured its operations. This
restructuring accomplished the relocation of its corporate headquarters from
Cincinnati, Ohio to Jacksonville, Florida, and consolidated
4
certain functions (e.g., dispatching, billing, etc.) in the Jacksonville,
Florida headquarters. Also, the restructuring realigned FLX's operations to a
more southeastern focused carrier. These accomplishments more closely align the
management team and trucking operations with FECR, allowing FECR and FLX to
provide an array of transportation alternatives to its freight customers.
During 2001 and 2000, FLX interlined 15,259 and 15,731 intermodal units
(trailers and containers), respectively, with FECR's intermodal facility at
Jacksonville.
CUSTOMERS
The trucking operation is not dependent on any significant customer. No customer
generates revenues which exceeds 10 percent of the trucking operation's
revenues. The top twenty-five customers account for approximately 56.2 percent
of its revenues.
COMPETITION
The trucking industry is highly competitive. The same competitive factors, as
noted in Railway above, substantially affect the Company's trucking operations
as well. During 2001, FLX experienced intense competition from other carriers,
including individual owner/operators, as the economy slowed. This competition is
likely to continue in 2002. However, consolidation within the industry and
increased financial distress among smaller competitors could result in fewer
competitors.
REGULATION
The Company's trucking operations are 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.
The Company's trucking operation is regulated by the U.S. Department of
Transportation, including the Federal Highway Administration. This regulatory
authority exercises broad powers, generally governing activities such as
authorizations to engage in motor carrier operations and safety and human
factors such as hours of service.
RISKS
Market Risks. FLX's freight traffic is generally affected by overall economic
conditions, especially those in the Southeast section of the United States,
particularly in the state of Florida. There can be no assurance that the overall
economy or that of the Southeast section of the United States will rebound
quickly from any slowdowns, or that the Southeast will continue to experience
higher than average national growth.
Fuel Price Risks. Trucking operations require significant amounts of diesel
fuel. Prices of diesel fuel can vary greatly. Generally, the increases in fuel
price are passed along to customers through a "fuel surcharge." 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.
Insurance Risks. The trucking industry has confronted sharp increases in
insurance costs, particularly comprehensive general liability and workers'
compensation. FLX's insurance expenses have risen and it has raised its level of
self-insured retention. It, therefore, has additional financial exposure to the
costs of accidents involving its drivers or agents.
REAL ESTATE
GENERAL
FECI owns 100 percent of the stock of Flagler. Flagler is engaged in the
acquisition, development, ownership, leasing, management and sale of real estate
in the state of Florida.
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Flagler owns and operates office and industrial properties in Florida. Flagler
owned and operated 54 buildings as of December 31, 2001, with approximately 6.0
million sq. ft. of rentable commercial/industrial space on 432 acres of land. A
schedule of these buildings is included in Part 1, Item 2 of this Report. At
December 31, 2001, Flagler's operating properties were 92.0 percent occupied.
Flagler's buildings are primarily Class "A" office space and high-quality
commercial/industrial facilities constructed after 1987. Flagler also has four
operating buildings, with 638,000 sq. ft. of rentable commercial space, which
are held jointly (50/50) with Duke Realty Corporation.
At December 31, 2001, Flagler had 559,978 sq. ft. in lease-up, 97,000 sq. ft.
under construction, and 590,550 sq. ft. in pre-development, for a total of 1.2
million sq. ft., primarily located in the Jacksonville, Orlando and Miami areas.
For those projects in pre-development phase, Flagler has obtained the necessary
permits and invested in engineering, architectural planning and design.
Flagler owns 939 acres of unimproved land with relevant development permits
authorizing the construction of 13.6 million sq. ft. of additional office,
industrial and commercial space. Additionally, Flagler owns 13,400 acres of
unimproved, unentitled land, primarily situated adjacent to FECR's rights-of-way
along the eastern coast of Florida, 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 area markets, all of which are
active with local, regional and national development companies competing for
land and tenants. The projects under development include:
- GRAN PARK AT SOUTHPARK - ORLANDO, FL: Located at the
intersection of John Young Parkway and Beeline Expressway. Six
buildings, totaling 836,000 sq. ft., have been completed. The
park has entitlements for an additional 163,000 sq. ft. of
office and call center space. Pre-development is currently
underway for a seventh building totaling 93,000 sq. ft.
In 1999, based on the success of SouthPark, Flagler acquired
an additional 90 acres adjacent to the existing park. The land
has entitlements for 1.8 million sq. ft. of office space and
98,000 sq. ft. of commercial space. This property is currently
in the master planning phase and initial site work is
anticipated to begin in 2002.
- BEACON STATION AT GRAN PARK - MIAMI, FL: Located northwest of
Miami International Airport. Twenty-eight buildings, totaling
3.1 million sq. ft., have been completed, including a 300,000
sq. ft. build-to-suit distribution center for Caterpillar
Logistics delivered in 2001. The park has entitlements for an
additional 4.0 million sq. ft. of office, industrial and
commercial space. Pre-development is currently underway for
two projects totaling 361,000 sq. ft. Flagler has also
developed 540,000 sq. ft. of industrial space at Beacon
Station in a 50/50 joint venture with Duke Realty Corporation.
Flagler owns approximately 535 acres adjacent to this park for
future development.
- BEACON POINTE AT WESTON - WESTON, FL: Located in west Broward
County at I-75 in Weston. In 1998, Flagler purchased 30 acres
with entitlements for 400,000 sq. ft. of office space. Flagler
is developing the project in a 50/50 joint venture with Duke
Realty Corporation. Two office buildings, totaling 195,000 sq.
ft., have been completed. The third 97,000 sq. ft. office
building is currently under construction. The park has
entitlements for an additional 108,000 sq. ft. of office
space.
- GRAN PARK AT DEERWOOD - JACKSONVILLE, FL: Located in the most
rapidly expanding area of Jacksonville. Six office buildings,
totaling 788,000 sq. ft., have been completed. The park has
entitlements for an additional 244,000 sq. ft. of office
space.
- GRAN PARK AT JACKSONVILLE - JACKSONVILLE, FL: Located in south
Jacksonville at I-95. Seven buildings, totaling 773,000 sq.
ft. within the park, are owned and operated by Flagler. The
park has entitlements for an additional 3.6 million sq. ft. of
office, industrial and commercial space on approximately 390
undeveloped usable acres. Site preparation is currently
underway for an I-95
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interchange at Old St. Augustine Road, which should increase
access to the park, with construction of the interchange
anticipated to begin in 2002.
The following is a summary of the Company's development activity as of December
31, 2001:
NET RENTABLE BUILDING
STATUS OWNER PROPERTY DESCRIPTION SQUARE FEET START DATE
------ ----- -------------------- ------------ ----------
Lease-up Flagler/Duke Beacon Pointe at Weston 97,178 April 2000
Lease-up Flagler Gran Park at Deerwood North 135,000 Aug. 2000
Lease-up Flagler Beacon Station at Gran Park 201,000 Feb. 2001
Lease-up Flagler Beacon Station at Gran Park 42,800 Feb. 2001
Lease-up Flagler Port Everglades 84,000 Mar. 2001
Under construction Flagler/Duke Beacon Pointe at Weston 97,000 Feb. 2001
Pre-development Flagler Beacon Station at Gran Park 160,211 TBD
Pre-development Flagler Beacon Station at Gran Park 200,709 TBD
Pre-development Flagler Gran Park at SouthPark 93,400 TBD
Pre-development Flagler Port Everglades 136,230 TBD
---------
TOTAL 1,247,528
=========
FECR owns approximately 1,200 acres of ancillary properties within the state of
Florida. The Company continues to evaluate these holdings and, when appropriate,
engages in strategic activities (sales, development, etc.) that will
extract/create value for the Company.
CUSTOMERS
Flagler leases to approximately 300 tenants in a variety of industries,
including travel, technology, distribution and import/export. Flagler's largest
commercial tenant occupied approximately 5 percent of leased space in 2001.
COMPETITION
The real estate industry is generally characterized by significant competition.
The Company intends to pursue strategic growth initiatives, including office and
industrial developments in Florida, when the acquisition and/or development of
property would, in the opinion of management, result in a favorable
risk-adjusted return on investment. There are a number of developers and real
estate companies that compete with the Company in seeking properties for
acquisition, resources for development and prospective tenants. Competition from
other real estate developments may adversely affect the Company's ability to
attract and retain tenants, achieve favorable rental rates and control expenses
of operation. 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 affect on the Company's business,
operations or cash flows.
REGULATION
Development of real property in Florida entails an extensive approval process
involving overlapping regulatory jurisdictions. Real estate projects must
generally comply with the provisions of the Local Government Comprehensive
Planning and Land Development Regulation Act (Growth Management Act). In
addition, development projects that exceed certain specified regulatory
thresholds require approval of a comprehensive Development of Regional Impact
(DRI) application. Compliance with the Growth Management Act and the DRI process
is usually lengthy and may have a material adverse affect on the Company's real
estate development activities.
The Growth Management Act requires counties and cities to adopt comprehensive
plans guiding and controlling future real property development in their
respective jurisdictions. After a local government adopts its comprehensive
plan, all development orders and development permits it issues must be
consistent with the plan. Each such plan must address such topics as future land
use, capital improvements, traffic circulation, sanitation, sewerage, potable
water, drainage and solid wastes. The local government's comprehensive plans
must also establish "levels of service" with respect to certain specified
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public facilities and services to residents. Local governments are prohibited
from issuing development orders or permits if facilities and services are not
operating at established levels of service, or if the projects for which permits
are requested will reduce the level of service for public facilities below the
level of service established in the local government's comprehensive plan. If
the proposed development would reduce the established level of services below
the level set by the plan, the development order will require that the
developer, at the outset of the project, either sufficiently improve the
services to meet the required level, or provide financial assurances that the
additional services will be provided as the project progresses.
The Growth Management Act is, in some instances, significantly affecting the
ability of developers to obtain local government approval in Florida. In many
areas, infrastructure funding has not kept pace with growth. As a result,
substandard facilities and services are delaying or preventing the issuance of
permits. The Growth Management Act could adversely affect the ability of
developers in Florida, including Flagler, to develop real estate projects.
Continued growth and development of properties in Florida have prompted efforts
to pass legislation to curtail or more intensely regulate such development and
to amend the Growth Management Act.
The DRI review process 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, zoning and
community development agencies and authorities. Local government approval of any
DRI is subject to appeal to the Governor and Cabinet by the Florida Department
of Community Affairs, and adverse decisions by the Governor or Cabinet are
subject to judicial appeal.
In addition, a substantial portion of the developable property in Florida,
including certain of the Company's property, is raw land located in areas where
its development may affect the natural habitats of various endangered or
protected wildlife species, or in sensitive environmental areas such as wetlands
and coastal areas, which are subject to extensive and evolving federal, state
and local regulation. Accordingly, federal, state and local wildlife protection,
zoning and land use restrictions, as well as community development requirements,
may become increasingly restrictive and, as a result, significant limitations
may be imposed on the Company's ability to develop its real estate holdings in
accordance with their most profitable uses.
The Company's ownership and development of real estate are subject to extensive
and changing federal, state and local environmental laws, the provisions and
enforcement of which may become more stringent in the future. Pursuant to those
laws, the owner or operator of 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,
the protection of endangered species, or the protection of wetlands. In
addition, violations of various statutory and regulatory programs can result in
civil penalties, remediation expenses, natural resource damages, potential
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 relating to the real estate operations.
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 recession or recover as expected in the future. 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) would generally not be reduced if an economic downturn caused
a reduction in revenues generated from the Company's properties. Florida's
travel and tourism industry is an important part of Florida's economy and
downturns in these industries can affect growth plans of certain Flagler
tenants.
Development Risks. The Company's real estate development activities require
significant capital expenditures. The Company will be required to obtain funds
for its capital expenditures and operating activities through cash flow from
operations, property sales or financings. There can be no assurances that funds
available from cash flow, property sales and financings will 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
8
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.
Joint Venture Risks. The Company has entered into certain joint venture
relationships and may initiate future joint venture projects as part of its
overall development strategy. A joint venture may involve special risks
associated with the possibility that (i) the venture partner at any time may
have economic or business interests or goals that are inconsistent with those of
the Company, (ii) the venture partner may take actions contrary to the
instructions or requests of the Company, or contrary to the Company's policies
or objectives with respect to its real estate investments, or (iii) the venture
partner could experience financial difficulties or (iv) the joint venture
properties may require deficit or capital funding as the result of unexpected
future events (e.g., economic slowdown, etc.). Actions by the Company's venture
partners may have the result of subjecting property owned by the joint venture
to liabilities in excess of those contemplated by the terms of the joint venture
agreement or have other adverse consequences. In addition, the Company's joint
venture partners may dedicate time and resources to existing commitments and
responsibilities outside of the joint venture activities.
TELECOMMUNICATIONS
GENERAL
FECI owns 100 percent of the stock of EPIK. EPIK is a provider of wholesale
telecommunications private line services in the Southeast. Established in May
1999, EPIK has created a high-capacity fiber optic network along a densely
populated corridor reaching 12 metropolitan areas within the Southeast that
comprise nearly 75 percent of the region's population. EPIK's broadband network
extends from Atlanta to Miami along FECR's right-of-way and in other rail,
utility and highway corridors. EPIK is a "carriers' carrier," providing
wholesale bandwidth in the form of private line, wave, Internet Protocol (IP),
Ethernet, collocation, dark fiber and services to wireless and international
carriers, long-distance companies (IXCs), Internet service providers (ISPs), and
competitive local exchange carriers (CLECs).
On November 14, 2001, the Company announced a restructuring plan to reduce
EPIK's ongoing operating expenses and capital requirements, and continuation of
a previously announced review of the carrying value of EPIK's telecommunications
assets. The plan entailed refocusing EPIK's resources on growing revenues on its
completed, lit Southeast telecommunications network and curtailing capital
expenditures and operating expenses related to other growth activities. The plan
and the review are both responses to reduced growth expectations in the
telecommunications industry.
As a result of the restructuring plan, the Company has recorded pretax charges
to operating expenses for restructuring and asset impairments of $110.2 million.
The charge was comprised of $12.1 million of restructuring expenses and $98.1
million of asset write-downs.
EPIK's high-count fiber and OC-192 Southeast backbone from Atlanta to Miami
includes 1,850 inter-city route miles comprising 255,000 fiber-strand miles. To
complement its long-haul inter-city network, EPIK has constructed 400 route
miles (14,000 fiber miles) of metropolitan networks in the Southeast with the
development of routes in the greater Miami metropolitan area, Orlando,
Jacksonville, Tampa, Fort Myers, Fort Lauderdale, Melbourne, Daytona, St.
Augustine and Atlanta.
EPIK's Southeast network is fully redundant, using both geodiverse fiber paths
and SONET/SDH architecture to ensure high levels of reliability. EPIK's 12
long-haul points of presence (POPs) are equipped with Nortel Networks(TM)
Optera(TM) OC-192 dense wavelength division multiplexing (DWDM) equipment to
provide the highest levels of capacity and rapid provisioning. The network
contains over 45 POPs, utilizing a combination of optical equipment from Nortel,
ONI, Cisco and Redback. As of December 31, 2001, EPIK had deployed Juniper
Networks OC-192 routers and Foundry Ethernet Switches to enable the provisioning
of Internet Protocol services under the enLIGHTened IP and enLIGHTened Ethernet
I service marks.
EPIK's product offerings include the following:
9
Wholesale Services - Private Line Capacity
- Transport speeds from DS-3 to OC-48 (the highest commercially
available service speed)
- Accessible, centrally-located points of presence in major
metropolitan areas
- 15-day on-net provisioning
- 4-hour mean time to repair
- Around-the-clock network control center (NCC)
- Highly reliable geographically diverse SONET ring architecture
Wave Length Services
EPIK offers wave-based, unprotected, capacity service delivered at 2.5 Gbps or
10 Gbps speeds.
- Reduced time and expense of deploying, managing and
maintaining dark fiber
- Easy to provision and expand service
- Transparent to customers' network management system
- Seamless integration of customers' equipment into existing
network
enLIGHTened IP
Core network capabilities
- 10 Gbps backbone
- Connectivity using DS-3 to OC-192
- Around-the-clock network control center (NCC)
- Product Options: Dedicated Internet Access, IP, and Virtual
Private Networks
enLIGHTened Ethernet Services
Core network capabilities
- Connectivity using Fast Ethernet (100Mbps and Gigabit Ethernet
(1000 Mbps)
- Around-the-clock network control center (NCC)
- Product Options: Ethernet transport
Collocation
EPIK leases carrier-grade collocation space in its points of presence (POPs) and
optical amplifier (OPAMP) locations to dark fiber and optical service customers.
- Rack and cage space
- Carrier-class facilities
- Versatile AC and DC power options tailored to specific
equipment needs
Dark Fiber
- EPIK leases and sells dark fiber on its network
CUSTOMERS
As a wholesale provider of communication services, EPIK's sales and marketing
efforts are directed towards wireless communications companies, such as cellular
and PCS providers, international carriers, IXCs, ISPs, and CLECs. EPIK completed
construction of its lit Southeast network in late 2001 and had developed a
limited number of customers. 2001 was a difficult year for many companies in the
telecommunications industry. As a result, certain of EPIK's telecommunications
customers have filed for bankruptcy or are facing financial difficulties. EPIK
actively monitors its existing and potential customers for credit risk. EPIK's
customers may continue to be affected by these overall industry and economic
factors.
At December 31, 2001, EPIK's contracted revenue backlog was $101.9 million, of
which $20.8 million was with customers considered at credit risk. As of December
31, 2001, the top five customers represented approximately 83 percent of the
revenue backlog.
10
COMPETITION
The wholesale carriers' carrier business in the Southeast is highly competitive
among a small number of companies and subject to rapid change. Competition is
principally on the basis of availability, price and customer service. EPIK
competes primarily on the basis of network reach, rapid customer provisioning,
network technological capabilities (e.g., Internet Protocol), transmission
quality and reliability, highly responsive customer service and price. EPIK
faces substantial competition from IXCs, other regional carriers such as
affiliates of energy utilities and railroads, Incumbent Local Exchange Carriers
(ILECs) and CLECs. Major competitors include, but are not limited to, Level 3,
Qwest, Williams, BellSouth, Progress Telecom, Florida Power & Light, Fibernet,
MCI Worldcom, Sprint and AT&T.
REGULATION
EPIK does not believe that its existing telecommunications offerings are subject
to federal regulation. Nonetheless, EPIK has secured an international section
214 authorization from the Federal Communications Commission (FCC) in order to
have the flexibility to offer international telecommunications services. EPIK
also does not believe that its existing telecommunications offerings are subject
to state regulation, except in Georgia where EPIK has been certificated as an
IXC. However, the telecommunications industry is highly regulated by federal,
state and local authorities, judicial and legislative actions may increase
regulatory requirements, and the scope of services subject to regulation is not
clearly defined and is subject to change. EPIK, therefore, cannot forecast
whether federal or state regulators would consider it to be currently subject to
regulation, or whether it will be subject to regulation in the future and can
make no assurance that future regulatory, judicial or legislative action will
not have a material adverse effect on EPIK.
Federal Regulation. The FCC regulates interstate telecommunications services.
The Communications Act of 1934, as amended, defines "telecommunications service"
to mean the "offering of telecommunications for a fee directly to the public, or
to such classes of users as to be effectively available directly to the public,
regardless of the facilities used." The FCC has found that telecommunications
services include only those services that are offered on a "common carrier"
basis - that is, services that are provided pursuant to standard rates, terms
and conditions to a relatively broad customer base. In contrast, services that
are offered on a "private carrier" basis are not subject to regulation as
telecommunications services. EPIK believes that it acts as a private carrier
because it provides service to a limited class of customers (e.g., other
carriers) on the basis of individually negotiated terms and conditions and
long-term service agreements.
Although private carriers are generally unregulated, private carriers that serve
end-user customers are required to contribute to the federal universal service
fund. Because EPIK provides service to Internet service providers, which are
considered end-users, EPIK contributes to that fund as well as other federal
funds to support telecommunications relay services and the administration of
numbering resources.
If EPIK is found to be providing interstate telecommunications services (that
is, to be acting as a common carrier), then several additional regulatory
requirements could apply:
- EPIK would require prior FCC authorization to offer
international services. Because EPIK has obtained such
authorization, this requirement will not be a future burden on
the Company.
- EPIK would have to comply with various reporting requirements.
- EPIK would be under general obligations to (1) provide service
upon reasonable request, (2) provide service at just,
reasonable and non-discriminatory rates, terms and conditions,
(3) interconnect directly or indirectly with the networks of
other carriers, (4) assure that its services are accessible to
and usable by persons with disabilities, (5) assure that its
network complies with the requirements of the Communications
Assistance for Law Enforcement Act, (6) limit its use of
customer proprietary network information to provisioning of
the services in connection with which that information was
obtained, and (7) be subject to the FCC's complaint process.
Imposition of some or all of these requirements could materially increase EPIK's
costs of doing business and limit its pricing flexibility and its ability to
respond promptly to customer demands. In addition, if some of
11
EPIK's competitors remain unregulated, EPIK could be at a material competitive
disadvantage.
State Regulation. State public utility commissions (PUCs) regulate intrastate
telecommunications services. EPIK does not believe it is subject to significant
state PUC regulation because it acts as a private carrier. For example, Florida
recognizes the private carrier concept. Some other states, however, may not
recognize the private carrier concept or may nonetheless seek to subject EPIK to
regulation. EPIK has chosen to apply for certification as an IXC in the state of
Georgia, for instance, even though EPIK operates solely as a private carrier in
that state. State regulation of intrastate telecommunications services is
similar to FCC regulation of interstate telecommunications services, although
the states vary considerably in the nature and extent of regulation imposed on
regulated entities. For instance, while most states require service providers to
obtain formal prior authorization before initiating service, some do not.
Similarly, while most states require service providers to file tariffs, some do
not. States also may impose universal service contribution requirements and
other rules intended to protect public safety and welfare, ensure the continued
quality of communications services, and safeguard the rights of consumers. The
Company cannot predict whether application of state regulation of EPIK's
services would have a material adverse effect.
Local Regulation. Local governments exercise legal authority that may impact
EPIK's business. As an example, local governments typically have the ability to
license public rights-of-way, subject to the limitation that they may not
prohibit the provision of telecommunications services. Regulation of the use of
public rights-of-way may affect the timing in which EPIK is able to provide
service and the costs of doing so.
RISKS
Technological Risks. The telecommunications industry is subject to rapid and
significant changes in technology. For example, recent technological advances
permit substantial increases in transmission capacity of both new and existing
fiber. The introduction of new products and services, or the emergence of new
technologies may reduce the cost, or increase the supply of certain services
similar to those provided by EPIK, impairing the competitiveness of EPIK's
offerings. EPIK cannot predict which of many possible future products and
service offerings will be crucial to maintain its competitive position, or what
expenditures will be required to develop profitably and to provide such products
and services.
Competition-related Risks. The telecommunications industry is highly
competitive. EPIK faces substantial competition from IXCs, other private
wholesale carriers such as affiliates of energy utilities and railroads and
CLECs. In addition to these entities, potential competitors capable of offering
services similar to those offered by EPIK include microwave carriers, satellite
carriers, wireless telephone system operators, and end-users with private
communications networks. In the future, EPIK may be subject to more intense
competition due to the development of new technologies, an increased supply of
domestic and international transmission capacity, and consolidation among and
between local and long distance carriers. In addition, as the regional Bell
operating companies gain authority to enter into long distance service markets,
they may rapidly be able to offer competitive services over region-wide fiber
optic networks that already are in place.
Regulatory Risks. Regulation of the telecommunications industry is changing
rapidly. Existing and future federal, state, and local governmental regulations
will greatly influence the viability of EPIK. Undesirable regulatory changes
could adversely affect EPIK's business, financial condition, competitiveness and
results of operations. For example, while EPIK does not believe that it is
subject to federal or state regulation as a common carrier, EPIK cannot predict
the future regulatory status of its business. The FCC has recognized a class of
private, non-common carriers whose practice it is to make individualized
decisions on what terms and with whom to deal, and EPIK believes it falls into
this class. These carriers may be subject to the FCC's jurisdiction but are not
currently extensively regulated. In addition, some states may not recognize the
private carrier concept and, for this or other reasons, may seek to regulate
EPIK's intrastate services. If EPIK becomes subject to the FCC's or state PUC's
jurisdiction, it will be required to comply with a number of regulatory
requirements including, but not limited to, rate regulation, prior authorization
requirements, reporting requirements and special payments. Additionally, to the
extent EPIK offers services to non-carriers, it must contribute to the federal
universal service fund. Compliance with these regulatory requirements may impose
substantial administrative burdens on EPIK. Furthermore, CLECs, ILECs and IXCs
(which may be both customers and competitors of EPIK) are subject to various
federal and state telecommunications laws and regulations. Changes in those laws
and policies may affect EPIK's business
12
by virtue of the interrelationships between EPIK and these regulated
telecommunications companies. It is difficult for EPIK to forecast how these
changes will affect EPIK.
Market Risks. The telecommunications sector has been experiencing an
unprecedented downturn. Several previously well-capitalized companies have
declared bankruptcy, including some of EPIK's largest customers, such as
360NETWORKS, Inc. and Network Plus, Inc. It is possible that additional
bankruptcies will occur which will erode EPIK's existing or potential customer
base. In the last two years, EPIK had entered into several like-kind exchange
transactions to create a dark fiber network beyond the Southeast. EPIK
anticipated that several of the carriers with whom it executed such agreements
would become customers of EPIK by using collocation services offered by EPIK
along its Southeast network. However, most of these transactions have been
terminated due to the bankruptcies of the customers or the customers' inability
to perform.
FINANCIAL INFORMATION ABOUT FECI'S SEGMENTS
The Company had total segment operating revenues of $304.3 million and an
operating loss of $98.3 million in 2001. (See Note 9. 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
$160.7 million; trucking revenues were $36.2 million; real estate revenues were
$89.2 million, and telecommunications revenues were $18.2 million. Segment
operating profit (loss) was $41.2 million for the railroad; ($6.3 million) for
trucking; $26.0 million for real estate, and ($151.6 million) for the
telecommunications segment.
SOURCES AND AVAILABILITY OF RAW MATERIALS
All raw materials FECR, FLX, Flagler and EPIK use, including fuel, track
materials and building construction materials and network components, 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 first and last quarters of the year. The
Company's trucking, real estate and telecommunications businesses are not
generally seasonal.
WORKING CAPITAL
At December 31, 2001, the Company's current assets exceeded current liabilities
by $2.3 million. The Company has a $300 million revolving credit facility (see
Note 15 of the Financial Statements). At December 31, 2001, $39 million was
drawn on the facility (see also Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations). At December 31, 2001, the
Company had cash and cash equivalent balances of $14.1 million.
EMPLOYEES
FECI employed 24 people; FECR employed 804; EPIK employed 166; FLX employed 115,
and Flagler had 35 employees as of December 31, 2001. During 2002, certain
additional positions within Flagler will be filled to facilitate the strategic
direction and transactions of the real estate operation. Approximately 612 of
FECR's employees are represented by the following labor unions: United
Transportation 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). The collective bargaining
agreements can next be amended starting in 2003. FECR considers its working
relationship with its unions to be satisfactory.
ITEM 2. PROPERTIES
The Company's material physical properties at December 31, 2001 are listed below
and are grouped by industry segment. All properties shown are owned in fee
simple, except where otherwise indicated.
13
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 and telecommunications
facilities. 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.
Tracks, their bridges and the fixed property and signal improvements supporting
the transportation effort are maintained to a level equaling the needs of
service. The mainline and its passing tracks are, in general, constructed of
132-pound per yard continuous welded rail supported on concrete crossties. These
facilities provide a reliable infrastructure for the conduct of a transportation
service suited to the business demands of the railway's customers, to include
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. These tracks and certain
mainline yard tracks are of a lesser weight of rail supported on wood ties.
FECR owns 72 diesel electric locomotives; 2,353 freight cars; 994 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.
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 revenue sharing arrangement goes into effect whereby
Greenbrier and FECR apportion the revenue based upon the length of time the car
is off-line.
FECR also owns lands outside of the right-of-way. These holdings include certain
properties in downtown Miami and large rail yards in Jacksonville, Fort Pierce
and Miami. 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 for approximately six miles from the Miami International
Airport, southerly to a major metropolitan mall in Miami-Dade County. The
northerly portion of this corridor remains in rail service.
BUENA VISTA YARD PROPERTY
This approximate 56-acre site is located along North Miami Avenue
between NW 36th Street and NW 29th Street, Miami, Florida. The property is the
former site of FECR's downtown rail yard. It is the largest vacant parcel near
downtown Miami.
MIAMI FREIGHT HOUSE SITE
This site consists of 6.8 acres, located along SW 3rd Street, with approximately
345' of frontage on the
14
Miami River. This prime location is located near the Downtown Government Center
in the downtown district of Miami.
MILLER SHOPS WEST
An approximate 215-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 on Cidco Road in Cocoa, Florida, in an industrial area.
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.
TRUCKING
In January 2001, FLX leased 10,120 sq. ft. of office space in Jacksonville,
Florida from Flagler for its corporate headquarters. In 2000, FLX leased 7,168
sq. ft. of office space in Jacksonville, Florida from the prior owner of FLX.
The lease was terminated December 31, 2000.
FLX leases 717 sq. ft. of office space from FECR in Jacksonville, Florida, and
1,700 sq. ft. of office space in Atlanta, Georgia. FLX previously leased 2,500
sq. ft. in Atlanta, Georgia for terminal dispatching operations. The lease was
terminated on May 31, 2001.
FLX has approximately 156 tractors available, including 94 owner-operated
tractors. FLX has a total of 280 trailers in its fleet, consisting of 255-53',
24-48' and 1-45' dry vans.
15
REAL ESTATE
At year-end 2001, Flagler's commercial and industrial portfolio included 54
buildings aggregating 6.0 million rentable sq. ft. Flagler's income-producing
properties are detailed below:
FLAGLER'S INCOME-PRODUCING PROJECTS
(at December 31, 2001)
RENTABLE OCCUPIED
NO. OF SQUARE SQUARE % YEAR
LOCATION BLDGS. TYPE FEET FEET OCCUPIED BUILT
-------- ------ ---- -------- -------- -------- -----
duPont Center
Jacksonville, FL 2 Office Buildings 160,000 133,000 83 1987-88
Gran Park at Deerwood
Jacksonville, FL 5 Office Buildings 653,000 620,000 95 1996-00
Gran Park at Jacksonville 1 Office Building 125,000 125,000 100 1999
Jacksonville, FL 4 Office/Showroom/Warehouses 441,000 384,000 87 1997-99
1 Front Load Warehouse 99,000 99,000 100 1997
1 Rail Warehouse 108,000 57,000 53 1997
Gran Park at the Avenues 3 Office Buildings 242,000 209,000 86 1992-95
Jacksonville, FL 3 Office/Showroom/Warehouses 173,000 126,000 73 1992-97
2 Office Warehouses 302,000 293,000 97 1994-96
Gran Park at SouthPark 4 Office Buildings 571,000 475,000 83 1998-01
Orlando, FL 2 Office/Showroom/Warehouses 265,000 185,000 70 1998-01
Beacon Station at Gran Park 1 Office Building 101,000 101,000 100 2000
Miami, FL 5 Office/Showroom/ Warehouses 369,000 369,000 100 1988-94
7 Office Warehouses 889,000 853,000 96 1990-97
4 Rail Warehouses 397,000 397,000 100 1989-94
7 Front Load Warehouses 790,000 790,000 100 1991-95
1 Double Front Load Warehouse 239,000 239,000 100 1993
1 Office Service Center 39,000 39,000 100 1994
- --------- --------- ---
TOTAL-100% OWNED BUILDINGS 54 5,963,000 5,494,000 92
== ========= ========= ===
Note: An additional 638,000 sq. ft. of rentable office and industrial product is
jointly owned in 50/50 partnerships with Duke Realty Corporation. These
properties are located in Weston and Miami, Florida.
The Company periodically reviews its inventory of income-producing commercial
and industrial properties and undeveloped properties to determine how best to
maximize its value, including strategic disposition alternatives. The Company
continually invests in the development of additional rentable commercial and
industrial space, and currently has 559,978 sq. ft. in lease-up, 97,000 sq. ft.
under construction, and 590,550 sq. ft. in the pre-development stage, (see Part
I, Item 1. Business in this Report on Form 10-K).
Flagler's land portfolio includes the following major land holdings:
BALL TRACT
A 2,150-acre tract located in northern St. Johns County along the US 1 corridor
between Jacksonville and St. Augustine. The property fronts on US 1 to the west,
the Intracoastal Waterway to the east, and lies between two large announced
mixed-use residential and commercial communities not yet under development.
Flagler also expects this property to be developed as a master planned
community, incorporating both residential and commercial uses, but must first
seek and obtain various land use approvals from state, regional and local
governmental entities.
16
LEMBERG NORTH
A 580-acre tract located in northern St. Johns County along US 1 between
Jacksonville and St. Augustine. The property fronts along the western boundary
of FECR's mainline which is immediately adjacent to US 1. Flagler expects to
develop the property as a rail-oriented industrial park, but must first seek and
obtain various approvals from state, regional and local governmental entities.
MILLER SHOP
A 285-acre tract, partially owned by Flagler and FECR (Flagler, 70 acres; FECR,
215 acres), located in St. Johns County along US 1 at the northern boundary of
the city of St. Augustine. The property fronts US 1 on the east, and the San
Sebastian River on the west. Flagler expects to master plan this property for a
variety of mixed uses of commercial, industrial and residential. Additionally,
Flagler has received entitlements for 150,000 sq. ft. of commercial development
on 28 acres of the property.
NATIONAL GARDENS
A 5,900-acre tract located in Volusia and Flagler Counties divided by the
intersection of I-95 and US 1. Flagler is currently evaluating strategic
alternatives for this property.
TICO TRACT
A 1,700-acre tract located in northern unincorporated Brevard County just to the
southwest of the city limits of Titusville. The property fronts along I-95, SR
405 and US 1 and surrounds the Space Coast Executive Airport on two sides.
Flagler is currently evaluating strategic alternatives for this property.
FORT PIERCE K-4
A 565-acre tract located in St. Lucie County at the southeast quadrant of the
intersection of I-95 and the Florida Turnpike. The land use designation for the
property is for mixed-use development, with 160 acres of the property presently
zoned for heavy industrial. The remainder is presently zoned for agriculture
residential. When market analysis reflects the proper demand for industrial use,
Flagler could develop the industrial zoned property for sale. Various approvals
from state, regional and local governmental entities will be required.
107TH AVENUE PROPERTY (SECTION 8)
A 465-acre undeveloped tract located in west Dade County bounded by NW 107th
Avenue (west), NW 90th Street (north), NW 74th Street (south) and NW 97th Avenue
(east). The property is contiguous to the southeast corner of Beacon Station,
Flagler's 500-acre master planned commercial and industrial development, and
plans are to develop the property in a similar manner.
DOWNTOWN MIAMI LOTS
A 9-acre tract located in downtown Miami fronting on NW 1st Avenue adjacent to
the Miami Arena and less than one block from an announced federal courthouse.
The future land use designation and zoning of the property are for
office/mixed-use. Flagler is evaluating the development of the property for the
allowable use.
PORT EVERGLADES
A 97-acre tract of developable land located in sections of Port Everglades
Industrial Park, Broward County, Florida. The Company is currently developing
this land with industrial warehouses. This property is leased with an initial
term of 35 years and six additional 10-year lease extension options.
OVERVIEW OF FECI LAND HOLDINGS
The Company owned and managed 16,985 acres of land at year-end 2001, which
included 473 acres on which buildings are located; 939 acres of developed land
with entitlements, including the projects under development described in Item 1,
Part 1 of this Report; 14,332 acres of undeveloped land, including the
undeveloped properties described in Item 1, Part I of this Report, and 1,241
acres owned by FECR. These properties are held for lease,
17
development and/or sale and are in fifteen counties of the state of Florida as
follows:
FLAGLER FECR TOTAL
COUNTIES ACRES ACRES ACRES
-------- ------- ----- ------
Brevard 2,369 221 2,590
Broward 78 5 83
Dade 1,333 106 1,439
Duval 1,360 5 1,365
Flagler 3,461 1 3,462
Indian River 5 - 5
Manatee 86 - 86
Martin 68 2 70
Okeechobee - 14 14
Orange 176 - 176
Palm Beach 9 18 27
Putnam - 86 86
St. Johns 3,324 61 3,385
St. Lucie 566 43 609
Volusia 2,909 679 3,588
------ ----- ------
TOTAL 15,744 1,241 16,985
====== ===== ======
TELECOMMUNICATIONS
EPIK leases approximately 30,000 sq. ft. of office space in Orlando, Florida
where its corporate headquarters are located, and approximately 4,700 sq. ft. of
office space in Miami, Florida for its Miami sales office. EPIK owns or leases
54 specialized telecommunications huts, totaling approximately 61,000 sq. ft.,
located on land owned by EPIK or held under long-term ground leases, to house
telecommunications equipment along the Southeast footprint in Florida and
Georgia. EPIK also leases or owns four "carrier hotel"-sized collocation
facilities in Orlando, Florida, Tampa, Florida, Jacksonville, Florida and
Atlanta, Georgia, with approximately 63,000 sq. ft. EPIK owns a warehouse in
Fort Lauderdale, Florida, with approximately 20,000 sq. ft., used to store
network materials and supplies.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant and plaintiff in various lawsuits resulting from its
operations. In the opinion of management, adequate provision has been made in
the financial statements for the estimated liability, which may result from
disposition of such matters. The Company maintains comprehensive liability
insurance for bodily injury and property claims, but also maintains a
significant self-insured retention for these exposures, particularly at the
Railway.
The Company is subject to proceedings and consent decrees arising out of
historic disposal of fuel and oil used in the transportation business. It is the
Company's policy to accrue environmental cleanup costs when it is probable that
a liability has been incurred and an amount can be reasonably estimated. As
assessments and cleanups proceed, these accruals are reviewed and adjusted.
The Company is participating, together with several other potentially
responsible parties (PRPs), in the remediation of a site in Jacksonville,
Florida pursuant to an agreement with the United States Environmental Protection
Agency (USEPA). The site previously accepted waste oil from many businesses. The
Company has accrued its estimated share of the total estimated cleanup costs for
the site. Based upon management's evaluation, the Company does not expect to
incur additional amounts, even though the Company may have joint and several
liability.
FECR is investigating sites where contaminants from historic railroad operations
may have migrated off-site through the movement of groundwater or contaminated
soil. FECR, if required as a result of the investigation, will develop an
appropriate plan of remediation, with possible alternatives including natural
18
attenuation and groundwater pumping and treatment. Historic railroad operations
at the Company's main rail facilities have resulted in soil and groundwater
impacts. In consultation with the Florida Department of Environmental Protection
(FDEP), the Company operates and maintains groundwater treatment systems at its
primary facilities.
FECR is one of several PRPs alleged to have contributed to the environmental
contamination at and near the Miami International Airport. The allegations are
contained in a lawsuit filed by Miami-Dade County but not officially served on
the Railway. The Company does not currently possess sufficient information to
reasonably estimate the amount of remediation liability, if any, it may have in
regard to this matter. While the ultimate results of the claim against FECR
cannot be predicted with certainty, based on information presently available,
management does not expect that resolution of this matter will have a material
adverse effect on the Company's financial position, liquidity or results of
operation.
The Company monitors a small number of sites leased to others, or acquired by
the Company or its subsidiaries. Based on management's ongoing review and
monitoring of the sites, and the ability to seek contribution or indemnification
from the PRPs, the Company does not expect to incur material additional costs,
if any.
EPIK owns a site in Jacksonville, Florida at which field investigation indicates
some contamination of soil and groundwater by petroleum products. EPIK is
vigorously pursuing relief against PRPs, including a large petroleum and
gasoline service company. Based on the information currently available, the
Company does not believe the costs of remediation, even if borne by the Company,
will be material.
It is difficult to quantify future environmental costs as many issues relate to
actions by third parties or changes in environmental regulations. However, based
on information presently available, management believes that the ultimate
disposition of currently known matters will not have a material effect on the
financial position, liquidity or results of operations of the Company.
EPIK is involved as a creditor in several bankruptcy proceedings involving
certain of its customers.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 2001.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER
MATTERS
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The common stock of FECI is traded on the New York Stock Exchange with the
symbols FLA (Class A common) and FLA.b (Class B common). As of March 15, 2002,
there were 573 holders of record of the Company's Class A common stock and 1,123
holders of record of Class B common stock.
The following table shows the high and low sales prices and dividends per share
by quarter for 2001 and 2000:
COMMON STOCK PRICE CASH
------------------ DIVIDENDS
2001 HIGH LOW PAID
---- ---- --- ---------
Fourth Quarter
Class A $24.20 $17.00 $.025
Class B $22.60 $17.25 $.025
Third Quarter
Class A $36.25 $20.45 $.025
Class B $35.30 $20.55 $.025
Second Quarter
Class A $39.70 $29.57 $.025
Class B $37.40 $28.40 $.025
First Quarter
Class A $40.07 $31.30 $.025
Class B $39.70 $29.70 $.025
2000
Fourth Quarter
Class A $41.50 $33.75 $.025
Class B $40.63 $33.25 $.025
Third Quarter $44.94 $37.13 $.025
Second Quarter $49.94 $37.50 $.025
First Quarter $51.00 $37.19 $.025
The Company pays quarterly cash dividends on its outstanding shares of common
stock. The determination of the amount of future cash dividends, if any, to be
declared and paid by the Company will depend upon, among other things, the
Company's financial condition, funds from operations, level of capital
expenditures, future business prospects and other factors deemed relevant by the
Board of Directors. The closing prices of the Company's Class A and Class B
common stock were $29.05 and $27.09, respectively, as of March 15, 2002.
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to the
Company's consolidated statements of income for each of the five years in the
period ended December 31, 2001, and with respect to the consolidated balance
sheets for the same periods are derived from the consolidated financial
statements. This selected financial data should be read in conjunction with Item
7. Management's Discussion of Financial Condition and Results of Operations, and
Notes 1 and 4 to the Financial Statements and Supplementary Data (Item 8)
included elsewhere herein.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
(dollars in thousands, except per share amounts) 2001 2000 1999 1998 1997
----------- ------------ ------------- --------- ----------
INCOME STATEMENT DATA:
Operating Revenues 298,843 276,276 323,887 246,812 249,762
Operating Expenses *(397,157) **(241,092) ***(262,863) (189,939) (198,198)
----------- ------------ ------------- --------- ----------
Operating Profit (Loss) (98,314) 35,184 61,024 56,873 51,564
Net Interest Income (Expense) (4,177) 2,834 4,366 3,961 4,738
Other Income 2,676 4,998 ***620 9,365 6,655
Income (Loss) before Income Taxes (99,815) 43,016 66,010 70,199 62,957
Provision for Income Taxes 38,429 (17,258) (25,231) (26,578) (22,822)
----------- ------------ ------------- --------- ----------
Net Income (Loss) (61,386) 25,758 40,779 43,621 40,135
=========== ============ ============= ========= ==========
Earnings (Loss) Per Share-Basic $ (1.69) $ 0.71 $ 1.12 $ 1.20 $ 1.11
Earnings (Loss) Per Share-Diluted $ (1.69) $ 0.70 $ 1.12 $ 1.20 $ 1.11
Weighted-Average Shares-Basic 36,397 36,365 36,302 36,286 36,286
=========== ============ ============= ========= ==========
Weighted-Average Shares-Diluted 36,397 36,706 36,509 36,299 36,286
=========== ============ ============= ========= ==========
Cash Dividends Declared on Common Stock 3,652 3,643 3,636 3,627 3,624
=========== ============ ============= ========= ==========
Cash Dividends Declared Per Share on Common Stock $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.10
=========== ============ ============= ========= ==========
YEARS ENDED DECEMBER 31,
(dollars in thousands) 2001 2000 1999 1998 1997
--------- --------- ------- ------- -------
BALANCE SHEET DATA:
Total Assets 1,200,670 1,111,538 910,878 871,541 825,490
Cash and Investments 14,089 32,690 102,552 85,423 103,144
Properties Less Accumulated Depreciation 1,064,899 989,283 742,176 720,891 663,672
Long-Term Debt 282,784 88,000 -- -- --
Shareholders' Equity 684,169 748,104 724,441 686,831 648,875
* Restructuring and other costs and asset impairment charges of $110,209
are included in operating expenses for the year ended December 31,
2001.
** Restructuring and other costs of $5,282 are included in operating
expenses for the year ended December 31, 2000.
*** Special charges of $7,487 and $762 are included in operating expenses
and other income, respectively, for the year ended December 31, 1999.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis should be read in conjunction with Item 8.
Financial Statements, Item 1. Business, and Item 2. Properties, included
elsewhere herein. The following discussion contains forward-looking statements
(see cautionary statement at the front of this Report). The Company's actual
results may differ significantly from those projected in the forward-looking
statements.
GENERAL OVERVIEW
FECI is a holding company engaged, through four wholly owned subsidiaries, in
the rail, trucking, real estate and telecommunications businesses.
Except for certain of the Company's trucking and telecommunications assets and
operations, the Company's assets and operations are located in the state of
Florida. Consequently, the Company's performance is significantly affected by
the general health of the Florida economy, while more broadly affected by the
national economy.
The Company generates rail operating revenues primarily from the movement of
freight in both conventional freight cars and intermodal shipments of containers
and trailers on flatcars over its rail lines. Freight revenues are recorded as
freight moves from origin to destination. Modest non-freight operating revenues
are derived from demurrage and detention (equipment per diem paid by customers),
switching, weighing, special train and other transportation services. The
Company has one railroad customer that accounted for approximately 19 percent,
18 percent and 17 percent of railroad's operating revenues in 2001, 2000 and
1999, respectively. The Company does not believe that this customer will cease
to be a rail shipper, or will significantly decrease its freight volume in the
near future.
The Company's rail and trucking operating expenses consist of salaries and wages
and related payroll taxes and employee benefits, depreciation, insurance and
casualty claim expense, diesel fuel, car hire, property taxes, materials and
supplies, purchased services and other expenses. Many of the railway's operating
expenses are of a relatively fixed nature, and do not increase or decrease
proportionately with increases or decreases in operating revenues unless the
Company's management takes specific actions to restructure the Company's
operations. The Company experiences increases/decreases in fuel costs as the
price of diesel fuel fluctuates in the market.
Trucking revenues are generated by various services, including full
over-the-road service, intermodal pick up and delivery and transportation
brokerage.
The Company's real estate operations are cyclical and are affected by local
demographic and general economic trends and the supply and rate of absorption of
new construction. Although the Company's real estate business has a large
portfolio of income-producing properties that are expected to provide reasonably
stable operating results, the Company's real estate earnings may be
significantly affected from period to period by the nature and timing of sales
of developed property and other real estate assets.
Real estate operating revenues are generated from (i) rental agreements on its
commercial and industrial portfolio of buildings, as well as rents on its land
holdings, (ii) sales of land and/or buildings and (iii) development services
provided to customers.
Real estate operating expenses include costs of managing its commercial and
industrial properties and costs associated with land and building sales. The
Company incurs property management expenses, such as building maintenance,
leasing costs and property taxes, beginning when buildings are completed and
placed in the Company's inventory of leasable properties. The Company sells
certain real estate holdings when the return on such sales is considered
advantageous, causing fluctuations in costs of real estate sales based on the
volume and timing of such dispositions.
Passive telecommunications revenues are generated from leases of railroad
right-of-way to other telecommunications companies for the installation of fiber
optic and other facilities. EPIK's telecommunications revenues are generated
from a variety of product offerings, including leasing of bandwidth capacity on
the lit network, long-term contracts for collocation space and dark fiber along
the Southeast regional footprint, as well as
22
metro fiber rings being developed/completed in ten major Florida/Georgia
metropolitan cities (Atlanta, Jacksonville, Orlando, Tampa, Miami, Daytona, Fort
Lauderdale, Fort Myers, St. Augustine and Melbourne). Bandwidth capacity,
collocation and dark fiber revenues are recognized ratably over the term of the
contract.
EPIK's telecommunications expenses are primarily related to customer service,
network operations and sales and marketing activities. These expenses include
salaries and wages, employee benefits, professional services and purchased
services. Also, included in telecommunications expenses is depreciation related
to the completed Southeast network and operational infrastructure (i.e.,
buildings, furniture, etc.)
RESULTS OF OPERATIONS FOR 2001 COMPARED TO 2000 AND 2000 COMPARED TO 1999
Discussions are based on segment information - see Note 8 included in Item 8 of
this Report.
RAILWAY
During 2001 and 2000, FECR's management team continued its focus on improving
profitability. Important investments, in both operational and human capital,
were made during these periods to enhance customer service and safety while
controlling costs. During the 2001 and 2000 period, FECR recruited and deployed
more sales and marketing personnel to focus on identifying new customers,
improve revenues from existing customers and serve customers better. Recent
successes include significant new business in shipments of foodstuff
commodities, the introduction of an Atlanta-based intermodal service - the
"Hurricane Train", a program in South Florida where FECR competes directly with
barge companies on northbound container traffic. Also, FECR generated record
levels of aggregate revenues during 2001 and 2000. Over the last two years, the
Company invested $64 million of capital in equipment, improved physical plant
and new technologies at FECR.
The outlook for 2002 is for modest growth in revenue, assuming an economic
recovery in the second half. Revenue growth is expected primarily from FECR's
continued efforts to grow its intermodal business, continued increases in food
and kindred traffic, and new business relationships the FECR is working to
develop. Capital spending is expected to range between $30 and $35 million in
2002.
REVENUES - 2001 VERSUS 2000
Railway segment's operating revenues were down $4.1 million at $160.7 million
for 2001 versus $164.8 million for 2000. Most of this decrease resulted from
decreased ($2.0 million) accessorial charges (switching, demurrage, detention,
flips, etc.) as customers utilized FECR's equipment or other accessorial
services more efficiently. Freight revenues were $157.2 million for 2001
compared with $157.7 million for 2000. Revenues from automobiles increased $0.5
million as manufacturers replenished dealer stocks depleted by favorable
incentives and financing programs. Revenues from foodstuffs increased $0.6
million due to significant new business from Tropicana Products, Inc. Revenues
from various commodities increased by $1.0 million, most notably in the metals
and ore commodities, as increased loads of northbound scrap metals moved to
"mini-mills," as well as other increased traffic from metals and ore customers.
Offsetting these increases were decreases in aggregate revenues of $0.8 million
because loads fell 4.9 percent to 106,473, close to 2000's record levels of
111,921 loads, as private construction and public projects continued to take
place during 2001, but did not return to demand levels seen in 2000. Also,
intermodal revenues decreased $0.9 million for the year as the overall economy
slowed. However, FECR originated and interlined intermodal loads, and revenues
increased (4,082 units and $0.4 million, respectively) primarily the result of
greater marketing efforts by the Company.
EXPENSES - 2001 VERSUS 2000
Operating expenses decreased $1.7 million to $119.5 million compared with $121.2
million in 2000. Primary contributors to the decrease are: fuel cost decrease of
$0.9 million as fuel prices dropped in 2001 and overall consumption improved
(2.0 percent on gallons used); car hire net cost decrease of $0.7 million as
continued emphasis on car utilization improved FECR's net position; repairs
billed to/by others net decrease of $1.6 million attributable to the improved
condition of the equipment fleet, and improved systems and processes for
identifying contractually recoverable costs of outside party arrangements; and a
decrease of $1.6 million in general and administrative costs as overall
information technology and administrative costs have been reduced. Partially
offsetting these decreased expenses were increases in depreciation ($1.6
million), reflecting recent years' capital programs and increased compensation
costs as FECR added personnel to improve sales and marketing efforts and other
operational opportunities.
23
REVENUES - 2000 VERSUS 1999
FECR's operating revenues were comparable at $164.8 million for 2000 versus
$164.9 million for 1999. While aggregate loadings remained strong at 111,921
loads, an increase of 1,666 units over 1999 results, decreased intermodal
traffic offset the aggregate revenue gains. Intermodal traffic continues to be
adversely affected by operational difficulties of connecting carriers and a
general softening of the economy, especially during the second half of 2000.
Aggregate loadings reflected a strong Florida economy where private construction
and public projects (e.g., highways, etc.) continued to demand aggregate
products. All other traffic types were comparable year-over-year. Miscellaneous
freight charges, which include switching, demurrage, detention and rents for
operating properties/facilities, increased $0.9 million due to increased focus
on provisioning and billing these value added services for FECR's customers.
EXPENSES - 2000 VERSUS 1999
Excluding a 62.3 percent fuel price increase ($5.0 million) and the 1999 special
charges ($5.5 million), FECR's operating expenses decreased by $8.7 million or
7.0 percent over 1999. Decreases in expenses included labor and benefits ($2.3
million), car hire ($1.2 million), casualty and insurance ($2.2 million), fuel
efficiency ($1.0 million), and other costs, primarily derailment expenses ($0.9
million). Labor and benefits decreased as operational and headquarters'
efficiencies allowed the number of employees to decrease by 6.0 percent. An
increased focus on car utilization and velocity decreased car hire net costs by
$1.2 million. Network operations were improved to allow significant improvement
in total transit time for foreign equipment on FECR's rail line. Results for
casualty and insurance expenses for 1999 included a $2.7 million settlement for
a prior year's incident. During 2000, FECR effectively administered an improved
shutdown policy, which helped to increase fuel efficiency by $1.0 million. FECR
experienced a reduced number of derailments during 2000, which reduced costs by
$0.8 million, the largest decrease in a number of decreases for other costs.
Railway segment's operating ratio improved to 73.5 percent compared to 75.7
percent in 1999 (excluding special charges). On a fuel neutral basis, the
operating ratio would have been 70.5 percent for 2000.
TRUCKING
While impacted by difficult industry conditions, FLX achieved important
organizational and operational milestones during 2001 and 2000, including
relocation of its Company's headquarters, implementation of new systems,
integration of intermodal sales and marketing efforts with FECR such as the
Atlanta "Hurricane Train," and establishing strategic new carrier relationships
to grow the business. These efforts required additional transition and
implementation costs. While the Company expects the difficulties in the trucking
industry to continue in the near term, FLX plans to increase services offered in
conjunction with the Railway so as to be well positioned when the economy turns
around.
REVENUES - 2001 VERSUS 2000
FLX's revenues from trucking operations for 2001 were $36.2 million compared to
$31.6 million for the same period in 2000. While revenues increased by $4.6
million or 14.6 percent primarily as a result of the Company's new agency
relationships in 2001, the continued slowdown in U.S. economic growth has
adversely affected the trucking industry and FLX during 2001, resulting in
downward pressure on prices and a more competitive market for loadings.
Additionally, FLX has seen weakness in "sub-haul traffic" from other truck
carriers, an important product offering in FLX's business plan. Traffic
interchanged with FECR decreased 1.5 percent compared to 2000, although
increased marketing efforts by FLX and FECR largely overcame the effect on
interchange levels of declines in industry-wide traffic resulting from the
slower economy in 2001.
EXPENSES - 2001 VERSUS 2000
Expenses for 2001 increased to $42.5 million from $39.8 million in 2000.
Expenses in 2000 included a number of costs and restructuring charges,
approximately $5.3 million pre-tax, associated with the relocation of the
Company's headquarters from Cincinnati, Ohio to Jacksonville, Florida, as well
as force reductions and severance payments, and the addition of new facilities
and staff at the new headquarters. The 2000 costs and charges also included the
restructuring of the existing terminal network, the opening of an additional
terminal in Charlotte, North Carolina, and a charge for the impairment of
goodwill associated with the original acquisition and operations.
24
Increases in 2001's expenses include increased agency related costs (included in
purchased services operating expenses), line-haul costs, and bad debt
provisions. Expenses in 2001 also included costs associated with its
organizational and operational changes, including additional severance costs and
system conversion costs. The Company had an operating loss of $6.3 million in
2001 compared to $8.2 million in 2000.
REVENUES - 2000 VERSUS 1999
The Company's trucking subsidiary's operating revenues increased to $31.6
million in 2000 from $29.0 million in 1999. This increase reflects improved
sales efforts resulting in additional customer accounts. For the year, traffic
interchanged with FECR improved by 14 percent.
EXPENSES - 2000 VERSUS 1999
Trucking expenses increased $9.5 million to $39.8 million at December 31, 2000.
Increased expenses reflected a number of costs and restructuring charges,
including expenses associated with relocation of the Company's headquarters from
Cincinnati, Ohio to Jacksonville, Florida, as well as force reductions and
severance payments, and the addition of new facilities and staff at the new
headquarters. The costs and charges also included the restructuring of the
existing network, the opening of an additional terminal in Charlotte, North
Carolina, and a charge for the impairment of goodwill associated with the
original acquisition and operations of FLX. The total amount of the pre-tax
charges is $5.3 million.
Excluding the costs and restructuring charges, operating expenses were $34.5
million compared with $30.2 million for the same period last year. This increase
in expenses primarily relates to insurance and casualty costs ($0.7 million),
increased fuel costs ($0.6 million), and transition costs for the new management
team ($0.3 million), as well as higher line-haul costs associated with increased
revenues (driver costs $0.1 million), drayage costs ($0.9 million), brokerage
costs ($0.4 million), equipment lease expense ($0.5 million), and ($0.7 million)
increase in rail interchange costs.
REAL ESTATE
During 2001, Flagler saw its portfolio of income-producing projects grow to 54
owned buildings, and four buildings held in joint ventures. These important
investments led to record levels of rental revenues at Flagler in 2001. During
2001, Flagler addressed the softness in the real estate market by reducing its
scheduled capital expenditures program by $38 million. Flagler focused on
build-to-suit projects rather than new, speculative buildings which assisted
Flagler in maintaining property occupancy rates. Because of Flagler's deliberate
deferral of programmed 2001 and 2000 capital expenditures, revenue growth is
expected to moderate in the near term. Flagler's land holdings with entitlements
for construction of 13.6 million sq. ft. of new buildings, offers opportunities
for further investment when market demand returns to higher levels. In 2002, the
Company expects to reaccelerate Flagler's investment program if market demand
increases. The Company intends to continue its program to realize the value of
its extensive land holdings at Flagler and the Railway by developing or
monetizing them.
Flagler's future rate of growth, profitability, capital investment, and sales of
land depends, in part, on the extent of future demand in Florida's commercial
real estate markets, which is subject to uncertainty.
REVENUES - 2001 VERSUS 2000
Combined revenues from Flagler and other realty operations were $89.2 million
for 2001 compared to $75.0 million for 2000. The increase over prior year is
associated with increased rental revenues and real estate sales in 2001.
Combined real estate sales generated revenues of $22.5 million in 2001, an
increase of $5.0 million over 2000 real estate sales of $17.5 million. Flagler
continued to focus on strategic dispositions of surplus land holdings during
2001, resulting in increased revenues. Flagler's rental and services operations
generated $63.0 million in 2001 rental revenues compared to $54.2 million in
2000. Included in Flagler's 2001 rental and services revenues were a $1.5
million lease termination fee, and a $0.8 million development fee. Other rental
revenues increased $0.4 million or 12.7 percent to $3.7 million in 2001.
At year-end 2001, Flagler held 54 operating buildings, with 6.0 million rentable
sq. ft., which were 92.0 percent occupied at year-end 2001. Flagler's "same
store" properties, including 49 buildings, with 5.1 million rentable sq. ft.,
were 94.0 percent occupied at December 31, 2001 compared to 93.0 percent
occupied at December 31, 2000.
25
"Same store" rental revenues increased by $3.1 million or 5.9 percent to $53.9
in 2001 compared to $50.8 million in 2000.
During 2001, a Flagler owned build-to-suit property, representing 101,000 sq.
ft. and placed in service in 2000, generated 2001 rental revenues of $1.2
million. In the second quarter of 2001, a 300,000 sq. ft. build-to-suit facility
was completed and placed in service, which generated rental revenues of $1.0
million. Three additional properties, totaling 408,000 sq. ft. of rental space,
received certificates of occupancy during 2000 and are currently in the lease-up
phase of operations. Together, these properties generated 2001 rental revenues
of $3.8 million. Additionally, Flagler completed development of a 200,000 sq.
ft. build-to-suit for sale, generating development services revenue of $0.8
million in 2001.
At the end of 2001, Flagler had 10 projects, representing 1.2 million sq. ft.,
in various stages of development (approximately 559,978 sq. ft. in lease-up,
97,000 sq. ft. in construction, and 590,550 sq. ft. in pre-development).
The Company utilizes a supplemental performance indicator, in addition to
operating profit, to measure operating results from its real estate operations.
This measure is earnings before interest expense, income taxes, depreciation and
amortization (EBITDA). EBITDA is not a measure of operating results or cash
flows from operating activities as defined by generally accepted accounting
principles, nor is it necessarily indicative of cash available to fund cash
requirements and should not be considered as an alternative to cash flows as a
measure of liquidity. However, the Company believes EBITDA provides relevant
information about its real estate operations and, along with operating profit,
in understanding its real estate operating results.
EBITDA generated by the realty segment totaled $48.0 million for 2001 compared
to $39.8 million in the prior year. The increase relates to Flagler's 2001
leasing activity, and real estate sales and earnings from equity partnerships.
EBITDA from Flagler's operating rents increased $5.7 million or 15.8 percent to
$42.0 million in 2001 compared to $36.3 million in 2000. EBITDA from Flagler's
real estate sales increased $3.3 million or 42.4 percent to $11.1 million in
2001 from $7.8 million in 2000. Flagler's 2001 real estate sales included the
strategic disposition of certain land holdings, as well as an operating
property. Offsetting these gains, other realty EBITDA decreased to $2.2 million
in 2001 compared to $4.7 million in 2000, primarily the result of rent expense
for certain South Florida property acquired through lease in late 2000.
Flagler's development services generated $0.8 million of EBITDA during 2001.
Flagler's EBITDA from rental operations, net of overheads, increased $7.3
million or 26.7 percent to $34.7 million in 2001 compared to $27.4 million in
2000. EBITDA (loss) related to rail realty rental operations was ($0.1) million
in 2001, a decrease of $3.0 million compared to 2000's rail realty rental EBITDA
of $2.9 million, primarily the result of the rent expense mentioned above.
"Same store" rental EBITDA increased 8.0 percent to $37.1 million in 2001
compared to $34.4 million in 2000. New properties completed in 2000 and 2001
(including properties currently in the lease-up phase) contributed $4.6 million
to 2001's EBITDA compared to $1.4 million in 2000. Properties disposed of in
2001 generated rental EBITDA of $0.2 million, consistent with 2000.
EXPENSES - 2001 VERSUS 2000
Realty segment rental and sales operating expenses (including depreciation and
amortization) increased $9.3 million or 17.2 percent to $63.3 million in 2001
compared to $54.0 million in 2000. Increases in operating expenses were
primarily depreciation costs ($3.5 million) as new product (primarily buildings)
delivered in 2000 and 2001 came on line. Directly related to this delivery of
new product were increased "recoverable expenses" of $1.4 million. Selling,
general and administrative non-recoverable expenses increased $3.8 million,
reflecting increased other realty expenses associated with increased rent
expense on property leased in South Florida commencing in 2000. Also, Flagler's
corporate staff and related costs increased as additional functions were
transitioned from The St. Joe Company, which entails some partially temporary
increases in expenses. Realty sales expenses increased $1.3 million, reflecting
the increased sales activity during 2001.
REVENUES - 2000 VERSUS 1999
Realty rental and sales revenues from both Flagler and other realty operations
was $75.0 million for 2000 compared to $129.6 million for 1999. The decrease
from the prior year is primarily associated with real estate sales in 1999 that
generated $78.4 million in revenue, and included the disposal of three business
parks with 1.5 million sq. ft. of land and several undeveloped land parcels.
Sales of several undeveloped land parcels generated
26
$17.5 million in revenues in 2000. The decrease in revenues associated with real
estate sales was somewhat offset by increases in rental revenues. Flagler's
rental operations generated $54.2 million in 2000 rental revenues compared to
$48.2 million in 1999. Other rental revenues increased to $3.3 million in 2000
compared to $3.0 million in 1999.
At year-end 2000, Flagler held 51 finished buildings with 5.3 million sq. ft.
and 93.0 percent occupancy. Flagler's "same store" properties, including 46
buildings with 4.7 million sq. ft., were 94.0 percent occupied at December 31,
2000 compared to 89.0 percent at December 31, 1999. "Same store" rental revenues
increased by $2.1 million, with $43.7 million generated in 2000 over $41.6
million in 1999. Increases were principally due to occupancy improvements.
Four 100 percent owned Flagler operating properties, with 511,000 sq. ft. placed
in service during 1999, were 89.0 percent occupied at year-end 2000. One 101,000
sq. ft. build-to-suit facility was placed in service during May 2000. Three
additional properties, with 408,000 sq. ft., received certificates of occupancy
during 2000 and are currently in lease-up period. Together, these properties
generated $9.4 million in revenues during 2000, an increase of $7.6 million over
1999's revenues of $1.8 million. Operating properties that were sold during 1999
generated $3.5 million in revenues, with no corresponding revenues in 2000.
At the end of fourth quarter 2000, Flagler had 12 projects, with 1.8 million sq.
ft., in various stages of development (408,000 sq. ft. in lease-up period;
532,000 sq. ft. under construction; 883,000 sq. ft. in pre-development).
EBITDA generated by the realty segment totaled $39.8 million for 2000 compared
to $50.6 million in the prior year. The decrease is related to real estate
sales. Flagler's real estate sales generated EBITDA of $7.8 million in 2000
compared to $21.0 million in the prior year. Flagler's 1999 sales EBITDA
included the disposition of three business parks, including 1.5 million sq. ft.,
and several undeveloped land parcels. Flagler's 2000 sales included the
disposition of ancillary land holdings only, with no operating properties sold
during the year. Other realty land sales generated $1.8 million EBITDA in 2000
and $0.8 million in 1999.
EBITDA decreases related to real estate sales are somewhat offset by increases
related to rental activities. Flagler's rental operations (net of overheads)
generated 2000 EBITDA of $27.4 million over $26.1 million for 1999. EBITDA
covering rail realty rental operations was $2.9 million in 2000 over $2.7
million for 1999.
Flagler's operating properties generated $36.3 million in 2000's rental EBITDA,
with $32.4 million generated in the prior year. "Same store" EBITDA improved 4.0
percent with $29.8 million in 2000 compared to $28.5 million in 1999. New
properties completed in 1999 and 2000 (including properties currently in
lease-up period) contributed $6.5 million in 2000 EBITDA compared to $1.4
million in 1999. Properties that were disposed of generated $2.5 million in
rental EBITDA during 1999, with no corresponding EBITDA in 2000.
EXPENSES - 2000 VERSUS 1999
Realty rental and sales operating expenses (after depreciation and amortization)
for both Flagler and other realty decreased from $94.8 million in 1999 to $54.0
million in 2000. The decrease is associated with fewer real estate sales in
2000. As previously discussed, sales in 1999 included the disposal of three
business parks, with 1.5 million sq. ft. of operating properties, as well as
several undeveloped land parcels. Sales for 2000 included undeveloped land
parcels only, with no operating properties disposed of during the year. Sales
expenses totaled $7.9 million for 2000 compared to $56.7 million in 1999.
Offsetting the decreases in expenses associated with real estate sales were
increases in expenses related to rental activities. "Same store" rental expenses
(before depreciation and amortization) increased by $0.9 million from $13.2
million in 1999 to $14.1 million in 2000. Expenses (before amortization and
depreciation) related to projects completed in 1999 and 2000 (including those
currently in lease-up period) increased by $2.4 million from $0.5 million in
1999 to $2.9 million in 2000. "Sold store" expenses were $1.1 million in 1999,
with no corresponding expenses in 2000. Asset management fees/corporate overhead
and depreciation/amortization increased by $4.8 million, all costs that are
determined by the value of and/or additions to the portfolio, along with
transition costs associated with Flagler's new management team.
TELECOMMUNICATIONS
The telecommunications segment felt the general economic slowdown in 2001, and
also experienced lower than expected demand growth and financial stress among
industry participants, particularly freestanding independent
27
telecommunications companies, including certain of EPIK's customers. These
factors create uncertainties that continue to affect the telecommunications
industry worldwide.
EPIK completed a state-of-the-art 1,850-mile lit network from Atlanta to Miami
and throughout Florida in late 2001. The long-haul network includes extensions
through metro rings in 10 locations with concentrations in five of the largest
cities in the region, and through "express rings" to the five international
cable landings in South Florida which service growing communication traffic
between North and South America.
Reacting to the difficult telecommunications economic climate, the Company
announced on November 14, 2001, a restructuring plan to reduce ongoing operating
expenses and capital requirements at EPIK. The plan, currently in place, focused
EPIK on growing revenues from its existing lit Southeast network while
curtailing other initiatives. As a result, expected future cash operating
expenses and capital requirements were substantially reduced. For 2002, EPIK is
expected to show operating expenses of $41 to $45 million before depreciation
and amortization, the amount to depend in part on the extent of revenue growth.
Capital spending of $5 to $8 million is expected for discharge of previously
contracted obligations and for network maintenance, with additional capital
spending planned to be undertaken only as justified by new revenue-generating
customer contracts.
Although the Company is seeking to develop additional revenues at EPIK in 2002,
FECI estimates that without revenue growth beyond currently contracted backlog
in 2002, EPIK would operate within $5 to $8 million of a breakeven net cash flow
requirement (EBITDA after capital spending and income taxes). This result
incorporates the expected income tax benefit of the Company's consolidation of
EPIK's losses. Additional revenue in 2002 would entail additional capital
investment, and a consequent increased net cash requirement in 2002.
In the fourth quarter of 2001, the Company recorded cash restructuring charges
of $12.1 million before taxes. Also, the Company completed its previously
announced review of the carrying value of EPIK's assets and recorded non-cash
write-downs of $98.1 million before taxes for assets not required to operate the
lit Southeast network.
REVENUES - 2001 VERSUS 2000
EPIK's revenues for 2001 were $11.5 million, up from $3.4 million in 2000.
EPIK's revenues are primarily for lit services associated with its completed
Southeast network. During the year, primarily the second half, certain of EPIK's
customers experienced significant financial distress, including bankruptcies,
and, accordingly, revenue growth was less than previously anticipated. Also, for
this reason, EPIK's revenue backlog decreased to $101.9 million at December 31,
2001 from $184.8 million in 2000. From the backlog, EPIK is scheduled to
recognize revenues of $14.7 million in the year 2002, $2.4 million of which is
considered at credit risk. The foregoing factors and others, including
telecommunications industry instability, create uncertainties in respect of
EPIK's future revenues, profits and cash flows.
Revenues of $6.7 million from railway right-of-way leases for third party fiber
and conduit were similar to 2000 levels.
EXPENSES - 2001 VERSUS 2000
EPIK's operating expenses increased to $169.6 million for 2001 compared to $24.4
million for 2000. Of this $145.2 million increase, $110.2 million was related to
restructuring and asset impairment charges recorded in the fourth quarter of
2001. $12.1 million was cash restructuring charges related to termination
benefits for employees (approximately 105) and expected costs of terminating
redundant collocation and commercial realty leases. The remaining $98.1 million
of the $110.2 million charge relates to asset impairment reserves recorded for
dark fiber/collocation assets and excess materials (see Note 4 of Item 8 of this
Report). Operating expenses, excluding the restructuring and asset impairment
charges, increased $35.0 million, reflecting the progressive completion of
EPIK's operational network in 2001. Cost of service increased to $29.1 million
in 2001 from $2.4 million in 2000. Selling, general and administrative costs
increased to $30.3 million in 2001 from $22.0 million in 2000.
REVENUES - 2000 VERSUS 1999
EPIK's revenues were $3.4 million for 2000. Fourth quarter revenues were $2.4
million as significant new segments of the Southeast regional footprint became
operational. EPIK's revenue backlog increased over 450 percent in 2000 to over
$180.0 million, with 70.0 percent of the backlog from collocation and the
remainder from dark fiber, capacity and IP services.
28
Revenues from passive fiber and conduit right-of-way leases increased $1.7
million to $7.0 million in 2000. This increase results from favorable leasing
activities with major telecommunications companies, and a $0.8 million
settlement of a dispute with a telecommunications company over amounts due for
installations on FECR's property.
EXPENSES - 2000 VERSUS 1999
Costs of service expenses were $2.4 million for 2000, an increase of $2.4
million and 100 percent. During 2000, EPIK commenced certain network operations
accounting for the increase in this expense category. EPIK's selling, general
and administrative expenses increased to $22.0 million in 2000 from $3.3 million
in 1999 and were reflective of start-up costs, primarily wages, benefits,
professional services and sales and marketing expenses, necessary to execute its
business plan for the development of the Southeast regional footprint.
CORPORATE GENERAL & ADMINISTRATIVE
Corporate general and administrative costs for 2001 were generally comparable
with 2000. Corporate general and administrative expenses decreased $1.9 million
in 2000 due primarily to $2.5 million of spin-off (legal and consulting) costs
incurred and reflected in the 1999 results which did not recur in 2000.
NET INTEREST INCOME (EXPENSE)
Net interest expense increased $7.0 million in 2001 over 2000, and is expected
to increase further in 2002, reflecting increased borrowings, reduced interest
income from investments and, in 2002, reduced capitalization of interest due to
completion of the telecommunications network. Net interest income decreased $1.5
million from 1999 to 2000, primarily reflecting a decrease in cash equivalents
and investments.
OTHER INCOME
Other income decreased $2.3 million to $2.7 million in 2001 versus 2000
primarily because of a $2.4 million TTX special dividend received in 2000 which
did not recur in 2001. FECR owns one percent of TTX, a provider of intermodal
equipment. Dividends from TTX have historically been infrequent. Other income
increased $4.4 million to $5.0 million in 2000 versus 1999 due to the $2.4
million TTX dividend of 2000.
INCOME TAX
Income tax expenses represent an effective rate of 38.5 percent in 2001 compared
to an effective rate of 40.1 percent in 2000. The higher rate in 2000 was due
primarily to non-deductibility of FLX's goodwill write-off. Income tax expenses
represented an effective rate of 38.2 percent in 1999.
NET INCOME
As a result of the foregoing factors, the net loss was $61.4 million or ($1.69)
per diluted share for 2001 compared to net income of $25.8 million or $0.70 per
diluted share in 2000, and net income of $40.8 million or $1.12 per diluted
share in 1999.
29
SUMMARY OF OPERATING RESULTS
2001 VS. 2000
(dollars in thousands)
INFORMATION BY INDUSTRY SEGMENT
OPERATING REVENUES 2001 2000 $ Change
- ------------------ ------- ------- --------
Railway (a) 160,720 164,844 (4,124)
Trucking 36,224 31,601 4,623
Realty:
Flagler Realty Rental and Services (b) 63,034 54,196 8,838
Flagler Realty Sales 20,233 15,692 4,541
Other Rental 3,665 3,253 412
Other Sales 2,303 1,815 488
------- ------- -------
Total Realty 89,235 74,956 14,279
Telecommunications:
EPIK Communications 11,504 3,393 8,111
Right-of-way Leases 6,666 6,984 (318)
------- ------- -------
Total Telecommunications 18,170 10,377 7,793
Total Revenues (segment) 304,349 281,778 22,571
Intersegment Revenues (5,506) (5,502) (4)
------- ------- -------
Total Revenues (consolidated) 298,843 276,276 22,567
OPERATING EXPENSES
- ------------------
Railway (c) 119,530 121,181 (1,651)
Trucking (d) 42,483 *39,752 2,731
Realty:
Flagler Realty Rental and Services 50,316 45,632 4,684
Flagler Realty Sales 9,177 7,930 1,247
Other Rental 3,775 437 3,338
------- ------- -------
Total Realty 63,268 53,999 9,269
Telecommunications:
EPIK Communications **169,640 24,426 145,214
Right-of-way Leases 152 191 (39)
------- ------- -------
Total Telecommunications 169,792 24,617 145,175
Corporate General & Administrative (e) 7,590 7,045 545
------- ------- -------
Total Expenses (segment) 402,663 246,594 156,069
Intersegment Expenses (5,506) (5,502) (4)
------- ------- -------
Total Expenses (consolidated) 397,157 241,092 156,065
30
OPERATING PROFIT (LOSS) 2001 2000 $ Change
- ----------------------- -------- -------- --------
Railway 41,190 43,663 (2,473)
Trucking (6,259) (8,151) 1,892
Realty 25,967 20,957 5,010
Telecommunications (151,622) (14,240) (137,382)
Corporate General & Administrative (7,590) (7,045) (545)
-------- -------- --------
Segment & Consolidated Operating Profit (Loss) (98,314) 35,184 (133,498)
Net Interest Income (Expense) (4,177) 2,834 (7,011)
Other Income 2,676 4,998 (2,322)
-------- -------- --------
Income (Loss) before Taxes (99,815) 43,016 (142,831)
Provision for income taxes 38,429 (17,258) 55,687
-------- -------- --------
Net Income (Loss) (61,386) 25,758 (87,144)
======== ======== ========
EBITDA BY INDUSTRY SEGMENT (f)
2001 2000 $ Change
------- ------- --------
RAILROAD EBITDA 57,570 58,529 (959)
======= ======= ========
REALTY EBITDA:
EBITDA from Flagler operating properties rents 42,014 36,279 5,735
EBITDA from real estate services 768 -- 768
EBITDA (loss) from Flagler land rents/holding costs (2,718) (3,092) 374
Equity pickups on partnership rents 948 78 870
Less: unallocated corporate overhead (6,338) (5,895) (443)
-------- ------- --------
EBITDA from Flagler rental properties, net of overheads 34,674 27,370 7,304
EBITDA from Flagler real estate sales, net of overheads 11,056 7,762 3,294
-------- ------- --------
Total EBITDA - Flagler 45,730 35,132 10,598
======== ======== ========
EBITDA (loss) from other rental (68) 2,857 (2,925)
EBITDA from other real estate sales 2,303 1,815 488
Total EBITDA - real estate segment 47,965 39,804 8,161
======== ======= ========
TELECOM EBITDA:
EBITDA-EPIK only (146,531) (18,649) (127,882)
EBITDA-EPIK only, excluding restructuring
and asset impairment (36,322) (18,649) (17,673)
EBITDA-Telecommunications (29,656) (11,665) (17,991)
* Includes FLX's restructuring and other costs of $5,282.
** Includes EPIK's restructuring costs and asset impairments of $110,209.
31
SUMMARY OF OPERATING EXPENSES
2001 VS. 2000
(dollars in thousands)
RAIL OPERATING EXPENSES 2001 2000 $ Change
- ----------------------- -------- ------- --------
Compensation & Benefits 47,952 47,197 755
Fuel 12,913 13,851 (938)
Equipment Rents (net) 1,733 1,488 245
Car Hire (net) (1,108) (359) (749)
Depreciation 16,380 14,825 1,555
Purchased Services 9,236 8,616 620
Repairs Billed to/by Others (net) (4,527) (2,961) (1,566)
Load/Unload 7,473 7,392 81
Casualty & Insurance 3,767 3,523 244
Property Taxes 4,432 4,500 (68)
Materials 9,124 9,443 (319)
General & Administrative 9,381 10,932 (1,551)
Other 2,774 2,734 40
-------- ------- -------
Total Operating Expenses-Rail Segment 119,530 121,181 (1,651)
======== ======= =======
TRUCKING OPERATING EXPENSES
- ---------------------------
Compensation & Benefits 2,156 3,487 (1,331)
Fuel 1,117 1,659 (542)
Equipment Rents (net) 1,880 2,875 (995)
Depreciation 147 41 106
Purchased Services 21,068 12,161 8,907
Repairs Billed to/by Others (net) 896 808 88
Casualty & Insurance 1,650 2,611 (961)
Property Taxes 157 242 (85)
General & Administrative 7,469 9,751 (2,282)
Other 667 759 (92)
Intersegment Expenses 5,276 5,358 (82)
-------- ------- -------
Total Operating Expenses-Trucking Segment 42,483 39,752** 2,731
======== ======= =======
REALTY OPERATING EXPENSES
- -------------------------
Real Estate Taxes-Developed 6,093 5,775 318
Repairs & Maintenance-Recoverable 1,794 1,504 290
Services, Utilities, Management Costs 9,965 9,144 821
-------- ------- -------
Subtotal-Expenses subject to recovery 17,852 16,423 1,429
Realty Sales Expense 9,177 7,930 1,247
Real Estate Taxes-Undeveloped Land 2,919 3,265 (346)
Repairs & Maintenance-Non-recoverable 878 1,262 (384)
Depreciation & Amortization 21,996 18,461 3,535
SG&A-Non-recoverable 10,446 6,658 3,788
-------- ------- -------
Subtotal-Non-recoverable Expenses 45,416 37,576 7,840
-------- ------- -------
Total Operating Expenses-Realty Segment 63,268 53,999 9,269
======== ======= =======
TOTAL OPERATING EXPENSES-TELECOM SEGMENT *169,792 24,617 145,175
======== ======= =======
CORPORATE GENERAL & ADMINISTRATIVE 7,590 7,045 545
-------- ------- -------
TOTAL SEGMENT OPERATING EXPENSES 402,663 246,594 156,069
======== ======= =======
*-Includes EPIK's restructuring costs and asset impairments of $110,209.
**Includes FLX's restructuring and other costs of $5,282.
(Prior years results have been reclassified to conform to current year's
presentation.)
32
(a) Included intersegment revenues of $5,276 and $5,358 for the year ended
December 31, 2001 and 2000, respectively.
(b) Included intersegment revenues of $230 and $144 for the year ended
December 31, 2001 and 2000, respectively.
(c) Included intersegment expenses of $150 and $69 for the year ended
December 31, 2001 and 2000, respectively.
(d) Included intersegment expenses of $5,276 and $5,358 for the year ended
December 31, 2001 and 2000, respectively.
(e) Included intersegment expenses of $80 and $75 for the year ended
December 31, 2001 and 2000, respectively.
(f) EBITDA is defined as earnings before interest expense, income taxes,
depreciation and amortization.
SUMMARY OF OPERATING RESULTS
2000 VS. 1999
(dollars in thousands)
INFORMATION BY INDUSTRY SEGMENT
OPERATING REVENUES 2000 1999 $ Change
- ------------------ -------- -------- --------
Railway (a) 164,844 164,899 (55)
Trucking 31,601 29,011 2,590
Realty:
Flagler Realty Rental (b) 54,196 48,179 6,017
Flagler Realty Sales 15,692 77,608 (61,916)
Other Rental 3,253 2,979 274
Other Sales 1,815 803 1,012
-------- -------- --------
Total Realty 74,956 129,569 (54,613)
Telecommunications:
EPIK Communications 3,393 160 3,233
Right-of-way Leases 6,984 5,271 1,713
-------- -------- --------
Total Telecommunications 10,377 5,431 4,946
Total Revenues (segment) 281,778 328,910 (47,132)
Intersegment Revenues (5,502) (5,023) (479)
-------- -------- --------
Total Revenues (consolidated) 276,276 323,887 (47,611)
OPERATING EXPENSES
- ------------------
Railway (c) 121,181 130,370 (9,189)
Trucking (d) 39,752 30,223 9,529
Realty:
Flagler Realty Rental 45,632 37,824 7,808
Flagler Realty Sales 7,930 56,650 (48,720)
Other Rental 437 355 82
Other Sales -- -- --
-------- -------- --------
Total Realty 53,999 94,829 (40,830)
Telecommunications:
EPIK Communications 24,426 3,289 21,137
Right-of-way Leases 191 255 (64)
-------- -------- --------
Total Telecommunications 24,617 3,544 21,073
Corporate General & Administrative (e) 7,045 8,920 (1,875)
-------- -------- --------
Total Expenses (segment) 246,594 267,886 (21,292)
Intersegment Expenses (5,502) (5,023) (479)
-------- -------- --------
Total Expenses (consolidated) 241,092 262,863 (21,771)
33
2000 1999 $ Change
-------- -------- --------
OPERATING PROFIT (LOSS)
- -----------------------
Railway 43,663 34,529 9,134
Trucking (8,151) (1,212) (6,939)
Realty 20,957 34,740 (13,783)
Telecommunications (14,240) 1,887 (16,127)
Corporate General & Administrative (7,045) (8,920) 1,875
-------- -------- --------
Segment & Consolidated Operating Profit 35,184 61,024 (25,840)
Net Interest Income (Expense) 2,834 4,366 (1,532)
Other Income (net) 4,998 620 4,378
-------- -------- --------
Income before Taxes 43,016 66,010 (22,994)
Provision for Income Taxes (17,258) (25,231) 7,973
-------- -------- --------
Net Income 25,758 40,779 (15,021)
======== ======== ========
EBITDA BY INDUSTRY SEGMENT (f)
2000 1999 $ Change
------- ------- --------
RAILROAD EBITDA 58,529 49,148 9,381
======= ======= =======
REALTY EBITDA:
EBITDA from Flagler operating properties rents 36,279 32,391 3,888
EBITDA (loss) from Flagler land rents/holding costs (3,092) (2,329) (763)
Equity pickups on partnership rents 78 110 (32)
Less: unallocated corporate overhead (5,895) (4,046) (1,849)
------- ------- -------
EBITDA from Flagler rental properties, net of overheads 27,370 26,126 1,244
EBITDA from Flagler real estate sales, net of overheads 7,762 20,959 (13,197)
------- ------- -------
Total EBITDA - Flagler 35,132 47,085 (11,953)
------- ------- -------
EBITDA from other rental 2,857 2,671 186
EBITDA from other real estate sales 1,815 803 1,012
Total EBITDA - real estate segment 39,804 50,559 (10,755)
======= ======= =======
TELECOM EBITDA:
EPIK EBITDA (18,649) (3,120) (15,529)
======= ======= =======
EBITDA-Telecommunications (11,665) 2,150 (13,815)
======= ======= =======
34
SUMMARY OF OPERATING EXPENSES
2000 VS. 1999
(dollars in thousands)
RAIL OPERATING EXPENSES 2000 1999 $ Change
- ----------------------- -------- -------- --------
Compensation & Benefits 47,197 53,874 (6,677)
Fuel 13,851 9,706 4,145
Equipment Rents (net) 1,129 2,306 (1,177)
Depreciation 14,825 14,582 243
Purchased Services 8,616 8,958 (342)
Repairs Billed to/by Others (net) (2,961) (2,086) (875)
Load/Unload 7,392 8,010 (618)
Casualty & Insurance 3,523 5,698 (2,175)
Property Taxes 4,500 4,280 220
Materials 9,443 10,832 (1,389)
General & Administrative 10,932 10,590 342
Other 2,734 3,620 (886)
-------- -------- --------
Total Operating Expenses-Rail Segment 121,181 130,370 (9,189)
======== ======== ========
TRUCKING OPERATING EXPENSES
- ---------------------------
Compensation & Benefits 3,487 3,282 205
Fuel 1,659 1,092 567
Equipment Rents (net) 2,875 1,519 1,356
Depreciation 41 35 6
Purchased Services 12,161 10,910 1,251
Repairs Billed to/by Others (net) 808 972 (164)
Casualty & Insurance 2,611 1,947 664
Property Taxes 242 257 (15)
General & Administrative 9,751 4,833 4,918
Other 759 677 82
Intersegment Expenses 5,358 4,699 659
-------- -------- --------
Total Operating Expenses-Trucking Segment 39,752 30,223 9,529
======== ======== ========
REALTY OPERATING EXPENSES
- -------------------------
Real Estate Taxes-Developed 5,775 5,157 618
Repairs & Maintenance-Recoverable 1,504 1,271 233
Services, Utilities, Management Costs 9,144 8,085 1,059
-------- -------- --------
Subtotal-Expenses subject to recovery 16,423 14,513 1,910
Realty Sales Expense 7,930 56,650 (48,720)
Real Estate Taxes-Undeveloped Land 3,265 2,773 492
Repairs & Maintenance-Non-recoverable 1,262 558 704
Depreciation & Amortization 18,461 15,536 2,925
SG&A-Non-recoverable 6,658 4,799 1,859
-------- -------- --------
Subtotal-Non-recoverable Expenses 37,576 80,316 (42,740)
-------- -------- --------
Total Operating Expenses-Realty Segment 53,999 94,829 (40,830)
======== ======== ========
TOTAL OPERATING EXPENSES-TELECOM SEGMENT 24,617 3,544 21,073
======== ======== ========
CORPORATE GENERAL & ADMINISTRATIVE 7,045 8,920 (1,875)
-------- -------- --------
TOTAL SEGMENT OPERATING EXPENSES 246,594 267,886 (21,292)
======== ======== ========
(Prior years results have been reclassified to conform to current year's
presentation.)
35
(a) Included intersegment revenues of $5,358 and $4,699 for the year ended
December 31, 2000 and 1999, respectively.
(b) Included intersegment revenues of $144 and $324 for the year ended
December 31, 2000 and 1999, respectively.
(c) Included intersegment expenses of $69 and $136 for the year ended
December 31, 2000 and 1999, respectively.
(d) Included intersegment expenses of $5,358 and $4,699 for the year ended
December 31, 2000 and 1999, respectively.
(e) Included intersegment expenses of $75 and $188 for the year ended
December 31, 2000 and 1999, respectively.
(f) EBITDA is defined as earnings before interest expense, income taxes,
depreciation and amortization.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash generated by operating activities was $18.0 million, $134.5 million and
$56.0 million in the years ended December 31, 2001, 2000 and 1999, respectively.
The year-to-year fluctuations in net cash generated by operating activities
resulted mainly from changes in operating assets and liabilities due primarily
to temporary working capital fluctuations associated with construction of a
telecommunications network and certain related facilities during 2000 and 2001.
This construction was completed in late 2001. Net cash generated by operating
activities also was affected by sales of trading investments in 2000 and
purchases in 1999. Eliminating the changes in operating assets and liabilities
and in trading investments, net cash otherwise generated by operating activities
was $55.2 million, $59.6 million and $60.2 million in the years ended December
31, 2001, 2000 and 1999, respectively.
The Company's net interest income (expense), which is included in net cash
generated by operating activities, was ($4.2) million, $2.8 million and $4.4
million, before taxes, in the years ended December 31, 2001, 2000 and 1999,
respectively. Net interest expense increased reflecting increased borrowing and
reduced interest income. This trend is expected to continue in 2002 when the
Company also expects reduced capitalization of interest due to completion of
construction of the telecommunications network in late 2001.
Net cash generated by FECR's and Flagler's operating activities, taken together,
exceeded these businesses' maintenance capital needs by an estimated $43
million, $46 million and $31 million in the years ended December 31, 2001, 2000
and 1999, respectively. Although the amount of future cash generation by FECR
and Flagler is subject to uncertainty due to the vagaries of business
conditions, increases in interest expense and other factors, the Company expects
that FECR and Flagler will continue to generate cash in excess of their
maintenance capital needs, which may be used, among other things, for capital
expenditures intended to support the Company's growth.
In addition to cash generated by operating activities, cash was generated by
asset disposals, primarily building and land sales, in the amounts of $22.5
million, $17.6 million and $66.9 million, before taxes, in the years ended
December 31, 2001, 2000 and 1999, respectively. The Company undertakes building
and land sales opportunistically. While the magnitude and timing of future
building and land sales is not presently determinable, the Company expects that
future building and land sales will generate cash which may be used, among other
things, for capital expenditures intended to support the Company's growth.
During the years ended December 31, 2001, 2000 and 1999, respectively, the
Company invested approximately $52 million, $56 million and $72 million at
Flagler, including realty joint ventures, and approximately $156 million, $178
million and $6 million at EPIK in addition to the investment made to maintain
these businesses' operations. The additional capital investment was intended to
support the future growth of these businesses. Capital investment to support
future growth at FECR, as opposed to maintenance, has not been material.
In 2001, 2000 and 1999, the Company's capital investments at Flagler included
significant investments to develop real property and construct commercial
buildings for lease. The Company intends to continue to make such investments in
the future. The rate of such investments is expected to be determined by, among
other things, the timing and extent of marketplace demand. The Company expects
to make investments intended to support Flagler's future growth in the range of
$40 million to $70 million in 2002. The actual amount is expected to depend
primarily on the timing and extent of marketplace demand.
In 2001 and 2000, the Company's capital investments at EPIK were made primarily
to construct a telecommunications network and certain related facilities. This
construction was completed in late 2001. The Company presently does not expect
to make material capital expenditures to expand the network in 2002 or in the
36
foreseeable future. Capital expenditures estimated at $5 million to $8 million
are expected to be made in 2002 to maintain EPIK's business and to discharge
commitments pursuant to customer contracts executed prior to December 31, 2001.
The Company expects that further capital investment at EPIK in 2002 will be
undertaken only as warranted to fulfill new revenue-generating customer
contracts, which the Company is seeking. The amount and timing of cash receipts
from capital requirements associated with such possible future customer
contracts is not presently determinable.
The Company expects that net cash flow generated by FECR's and Flagler's
operating activities in the future will exceed the capital investment required
to sustain the Company's operations. Additional net cash flow is expected from
future building and land sales by the Company. The Company intends to seek to
pursue growth opportunities, particularly in the commercial realty business,
which are expected to have capital requirements that exceed the funds expected
to be generated by the Company's operating activities. To the extent the
associated capital requirements exceed funds available from operating activities
and from the Company's building and land sales, the Company may seek to finance
these investments through mortgage loans in the case of rental property
investments once such properties are leased up, or through its revolving credit
facility or other possible sources of external financing. No assurances can be
given as to the availability in future capital markets of these or other sources
of external financing on terms acceptable to the Company or otherwise. Any
reduction in cash generated by the Company's operating activities, which could
occur, for example, were demand for the Company's services to decline, may
reduce cash available for investment and reduce the availability and/or cost of
external capital for the Company.
During 2001, the Company placed $247 million of long-term, fixed rate,
non-recourse mortgages on certain of its commercial realty. It was and continues
to be the Company's intent to finance its long-lived rental properties, in part,
through long-term, fixed rate, non-recourse mortgage debt.
The Company has a $300 million revolving credit facility provided pursuant to an
agreement, as amended, between the Company and eleven banking institutions (the
"Credit Facility Agreement"). The description herein of the revolving credit
facility is qualified in its entirety by reference to the Credit Facility
Agreement, which is incorporated as Exhibit 10(b) to the Company's Reports on
Form 10-K for the years ended December 31, 2001 and December 31, 2000. At
December 31, 2001, the Company had $39 million drawn on the revolving credit
facility. Pursuant to the Credit Facility Agreement the Company agreed, among
other things, to maintain certain financial ratios. The Company believes the
most restrictive of such ratios to be the Global Debt/EBITDA ratio (the terms
Global Debt and EBITDA being defined in the Credit Facility Agreement). The
Credit Facility Agreement provides that at December 31, 2001, the Company's
Global Debt/EBITDA ratio shall be no greater than 4.00. At December 31, 2001,
the Company's actual Global Debt/EBITDA ratio was 1.08. Pursuant to the Credit
Facility Agreement the required Global Debt/EBITDA ratio varies in future
periods rising to 4.75 at March 31 and June 30, 2002, and declining to 3.50 at
March 31, 2003 and thereafter, all as more particularly set forth in the Credit
Facility Agreement. Although no assurances can be given as to the Company's
future compliance with the Global Debt/EBITDA ratio covenant or other financial
covenants, the Company has complied with the terms of the Credit Facility
Agreement at all times in the past and expects to continue to comply with them
in the future. The Company from time to time may seek to amend the Credit
Facility Agreement to accommodate changes in circumstances not foreseen at the
time the Credit Facility Agreement was made. An amendment to the Credit Facility
Agreement would be required if the Company wished to retain the revolving credit
facility while issuing materially greater mortgage financing than it had
outstanding at December 31, 2001. The agreement of the Company's banks would be
required if the Company wished to extend the revolving credit facility beyond
its initial term, which ends in 2004. Although no assurances can be given that
the Company's banks would agree to any amendment or extension that may be
proposed by the Company, or as to the terms of any such amendment or extension
if agreed to, amendments and extensions to agreements such as the Credit
Facility Agreement are common practice among banks and the Company believes its
relationship with its banks is satisfactory.
37
OTHER MATTERS
CRITICAL ACCOUNTING POLICIES
The Company has reviewed its accounting policies to identify those that are very
important to the portrayal of the Company's financial condition and results, and
that require management's most difficult, subjective or complex judgments (the
"Critical Accounting Policies"). The Company has determined that its accounting
policies governing impairment of long-lived assets and governing
telecommunications segment revenue recognition may be considered Critical
Accounting Policies.
Impairment of Long-lived Assets - The Company reviews the carrying value of its
property, plant and equipment for impairment whenever events or changes in
circumstances indicate the carrying value of an asset or asset grouping may not
be recoverable from the undiscounted future net cash flows expected to be
generated over its remaining useful life. In estimating expected future cash
flows, the Company makes significant estimates and judgments based in part on
available historical data, internal budgets and plans, industry demand
forecasts, competitive activity, cost data, growth rates, and other factors.
Uncertainties are particularly acute relating to forecasts of performance in the
telecommunications industry which has exhibited recent instability and for which
many prior forecasts by industry analysts can be seen, with the benefit of
hindsight, to have been inaccurate. Actual future net cash flows could vary
materially from the Company's estimates.
In 2001, the Company determined that events and changes in circumstances
indicated the carrying value of EPIK's long-lived telecommunications assets
might not be recoverable, particularly EPIK's dark fiber and collocation
facility assets, which exceed the current and expected future requirements of
EPIK's lit Southeast telecommunications network. The excess dark fiber and
collocation facility assets had been constructed in anticipation of third party
demand for such assets that has not developed to the extent anticipated.
Accordingly, the Company estimated the expected future net cash flows associated
with the excess dark fiber and collocation facility assets. These estimated net
cash flows, on an undiscounted basis, fell short of the carrying value of the
related assets and, accordingly, the Company incurred a charge to expense to
write down these assets' carrying value from $116.3 million to $44.9 million.
However, the difference between the sum of the estimated undiscounted net cash
flows and the related assets' carrying value was not large. Had the Company
determined that the estimated undiscounted future net cash flows exceeded the
related assets' carrying value, the Company would not have incurred a charge to
expense to write down these assets. The Company wrote down the excess dark fiber
and collocation facility assets to the estimated present value of future cash
flows expected to be received from the use of these assets, including income tax
benefits from the abandonment of certain assets. Actual cash flows recoverable
through future operation or abandonment of these assets may vary from the
Company's estimates.
The Company also estimated the expected future net cash flows associated with
EPIK's lit Southeast telecommunications network's long-lived assets. These
estimated net cash flows, on an undiscounted basis, exceeded the $205.4 million
carrying value of the related assets and, accordingly, the Company did not incur
an impairment charge in relation to these assets. Indeed, the sum of the lit
Southeast telecommunications network's long-lived assets' expected undiscounted
net cash flows exceeded these assets' carrying value over a broad range of
changes in the assumptions underlying the Company's estimates of future cash
flows. Accordingly, based on currently available information and the
aforementioned sensitivity testing, management believes that it is not
reasonably likely that the sum of the lit Southeast telecommunications network's
long-lived assets' expected undiscounted net cash flows would prove less than
these assets' carrying value. However, the telecommunications industry recently
has experienced rapid changes that were not generally predicted, the ultimate
effects of which cannot be forecast with confidence. In the event currently
unforeseen events should materially adversely affect the Company's future
estimates of the future net cash flows of EPIK's lit Southeast
telecommunications network, the Company may be required to write down these
assets' carrying value and the amount of such write down could be material.
Telecommunications Segment Revenue Recognition - Dark fiber, collocation and
bandwidth revenues are recognized beginning with the commencement of the related
rental and lease contracts. The Company uses the straight-line basis for
recording such revenues over the life of the lease contract. Any advance
payments called for in the lease agreement are deferred and included in deferred
revenues. The Company does not recognize revenues on dark fiber swaps of a
like-kind nature. Instead, the historical "carryover basis" is reassigned to the
38
fiber received in a like-kind swap. In certain instances, the Company has
exchanged dark fiber for non-like kind assets such as conduit and uninstalled
fiber-optic cable. The Company accounts for exchanges of non-like kind assets by
recording the received asset at its fair market value. Any resulting gain is
deferred at the time of exchange and recognized as revenue on a straight-line
basis over the life of the dark fiber lease contract. This revenue's effect on
reported profit tends to be offset by the acquired asset's depreciation expense.
These revenue recognition policies follow generally accepted accounting
principles.
The Company understands that generally accepted accounting principles may permit
revenues from transactions similar to the Company's transactions to be
recognized immediately which would result in the recognition of materially
larger initial revenues than have been recognized by the Company. However, the
Company does not utilize generally accepted accounting principles that permit
"up-front" revenue recognition.
In addition, EPIK recognizes certain revenues from customers that EPIK believes
have become credit risks only as these revenues are collected.
OFF-BALANCE SHEET ARRANGEMENTS
Flagler participates in joint ventures with another realty company. At December
31, 2001, these joint ventures included five completed buildings in Flagler's
Beacon Station and Weston office parks with a sixth building under development.
These joint ventures provide for funding requirements from each joint venture
partner of one-half of agreed upon construction costs and one-half of cash
requirements, if any, for operating the buildings (including post construction
capital expenditures). At December 31, 2001, there was no debt associated with
any of the joint ventures. During 2001, Flagler funded no operating cash
requirements. At December 31, 2001, Flagler's total investment in these joint
ventures was $27.4 million.
The Company and its subsidiaries have entered into operating leases that are
disclosed in the next section, "Contractual Obligations and Commercial
Commitments."
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
PAYMENTS DUE BY PERIOD
(dollars in thousands)
LESS
CONTRACTUAL CASH THAN 1 2-3 4-5 AFTER 5
OBLIGATIONS TOTAL YEAR YEARS YEARS YEARS
---------------------- ------- ------ ------- ------ -------
Long-Term Debt 285,241 2,457 44,496 6,342 231,946
-----------------------------------------------------------------------------------------------------------------------
Capital Leases -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------
Operating Leases 222,477 14,200 27,720 20,986 159,571
-----------------------------------------------------------------------------------------------------------------------
Unconditional
Purchase Obligations 4,292 4.292 -- -- --
-----------------------------------------------------------------------------------------------------------------------
Other Long-Term
Obligations 2,000 -- 2,000 -- --
-----------------------------------------------------------------------------------------------------------------------
Total Contractual
Cash Obligations 514,010 20,949 74,216 27,328 391,517
The Company's principal operating lease is a lease of certain real property in
South Florida. The lease is for 35 years with six 10-year renewals at the
Company's option. Future minimum payments under the lease are $2 million in 2002
and $122 million in total.
39
AMOUNT OF COMMITMENT
EXPIRATION PER PERIOD
(dollars in thousands)
OTHER TOTAL LESS
COMMERCIAL AMOUNTS THAN 1 2-3 4-5 OVER 5
COMMITMENTS COMMITTED YEAR YEARS YEARS YEARS
---------------------- --------- ------ ------- ------ -------
Lines of Credit -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------
Standby Letters of
Credit 12,152 1,292 115 720 10,025
------------------------------------------------------------------------------------------------------------------------
Guarantees -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------
Standby Repurchase
Obligations -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------
Other Commercial
Commitments 10,000 2,500 2,500 2,500 2,500
------------------------------------------------------------------------------------------------------------------------
Total Commercial
Commitments 22,152 3,792 2,615 3,220 12,525
TRADING ACTIVITIES THAT INCLUDE NON-EXCHANGE TRADED CONTRACTS ACCOUNTED FOR AT
FAIR VALUE
The Company does not participate in trading of non-exchange traded contracts
accounted for at fair value.
EFFECTS OF TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
The Company does not have transactions with related and certain other parties
other than those transactions with Officers and Directors that are described in
the Company's Proxy Statement for the Annual Meeting of the Shareholders.
ENVIRONMENTAL LIABILITIES
The Company is subject to proceedings arising out of environmental laws and
regulations, which primarily relate to the disposal and use of fuel and oil used
in the transportation business. It is the Company's policy to accrue and charge
against earnings environmental cleanup costs when it is probable that a
liability has been incurred and an amount can be reasonably estimated. As
assessments and cleanups proceed, these accruals are reviewed and adjusted.
Compliance with the federal, state, and local laws and regulations relating to
the protection of the environment has not affected the Company's capital
additions, earnings or competitive position, nor does management anticipate any
future problems will adversely affect the Company's financial situation based
upon the information available today.
Environmental expenditures for capital improvements and ongoing operations and
maintenance have historically been insignificant to the operations of the
Company. Management does not anticipate any changes in these expenditures. These
expenditures are expected to be funded from current operations.
40
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary market risk exposure has historically been interest rate
risk primarily related to the Company's investment portfolio. The portfolio was
comprised primarily of fixed rate municipal securities with active secondary or
resale markets to ensure portfolio liquidity. The Company had not used
derivative financial instruments to hedge its investment portfolio. At December
31, 2001, the Company had no investments in its investment portfolio.
The Company maintains a revolving credit facility whose interest rate floats
with the current market rate, and the rate the Company pays, approximately 2.75
percent at December 31, 2001, approximates the Company's fair market value of
borrowing.
The fair value of the Company's mortgage notes and revolving credit agreement
are estimated based on current rates available to the Company for debt of the
same remaining maturities. At December 31, 2001, the Company considers the
carrying value of the mortgage notes and its revolving credit agreement to be a
reasonable estimation of their fair value.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Board of Directors and Shareholders
Florida East Coast Industries, Inc.:
We have audited the consolidated balance sheets of Florida East Coast
Industries, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of income, changes in shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2001. In connection with our audits of the
consolidated financial statements, we also audited the financial statement
schedule as listed in the accompanying Index on Page 64 of this Report on Form
10-K for the year 2001. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Florida East Coast
Industries, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Jacksonville, Florida
February 8, 2002
42
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2001, 2000 and 1999
(dollars in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
2001 2000 1999
----------- ----------- -----------
OPERATING REVENUES 298,843 276,276 323,887
OPERATING EXPENSES (Note 4) (397,157) (241,092) (262,863)
----------- ----------- -----------
OPERATING PROFIT (LOSS) (98,314) 35,184 61,024
NET INTEREST INCOME (EXPENSE) (4,177) 2,834 4,366
OTHER INCOME (Note 14) 2,676 4,998 620
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (99,815) 43,016 66,010
PROVISION FOR INCOME TAXES (Note 7) 38,429 (17,258) (25,231)
----------- ----------- -----------
NET INCOME (LOSS) (61,386) 25,758 40,779
=========== =========== ===========
PER SHARE DATA:
Cash Dividends $ 0.10 $ 0.10 $ 0.10
=========== =========== ===========
Basic Net Income (Loss) Per Share ($ 1.69) $ 0.71 $ 1.12
=========== =========== ===========
Diluted Net Income (Loss) Per Share ($ 1.69) $ 0.70 $ 1.12
=========== =========== ===========
AVERAGE SHARES OUTSTANDING-BASIC 36,397,353 36,364,867 36,301,527
AVERAGE SHARES OUTSTANDING-DILUTED 36,397,353 36,705,908 36,508,631
(Prior years results have been reclassified to conform to current year's
presentation.)
See accompanying notes to consolidated financial statements.
43
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(dollars in thousands)
2001 2000
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents 14,089 18,444
Short-Term Investments (Note 6) -- 12,942
Accounts Receivable (net) (Note 3) 31,219 34,513
Income Tax Receivable 10,105 --
Materials and Supplies 3,703 3,653
Other Current Assets (Notes 4 & 7) 22,545 8,772
---------- ----------
Total Current Assets 81,661 78,324
OTHER INVESTMENTS (Note 6) -- 1,304
PROPERTIES, LESS ACCUMULATED DEPRECIATION (Note 5) 1,064,899 989,283
OTHER ASSETS AND DEFERRED CHARGES 54,110 42,627
---------- ----------
TOTAL ASSETS 1,200,670 1,111,538
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable 58,202 81,814
Income Taxes -- 4,834
Short-Term Debt (Note 15) 2,457 --
Accrued Casualty and Other Liabilities (Note 9) 1,987 2,647
Other Accrued Liabilities 16,746 5,568
---------- ----------
Total Current Liabilities 79,392 94,863
DEFERRED INCOME TAXES (Note 7) 103,673 136,170
LONG-TERM DEBT (Note 15) 282,784 88,000
DEFERRED REVENUE 41,802 31,336
ACCRUED CASUALTY AND OTHER LIABILITIES (Note 9) 8,850 13,065
COMMITMENTS AND CONTINGENCIES (NOTES 9 AND 15)
SHAREHOLDERS' EQUITY:
Common Stock: (Note 2) 66,533 65,762
Class A Common Stock, no par value; 50,000,000 shares authorized; 17,720,687 shares
issued and 16,921,603 shares outstanding at December 31, 2001, and 17,674,811
shares issued and 16,875,727 outstanding at December 31, 2000
Class B Common Stock, no par value; 100,000,000 shares authorized; 19,609,216 shares
issued and outstanding at December 31, 2001 and 2000
Retained Earnings 628,346 693,384
Accumulated Other Comprehensive Income-Unrealized Gain (Loss) on Securities (net)
(Notes 6 and 11) -- 13
Restricted Stock Deferred Compensation (Note 12) (1,355) (1,700)
Treasury Stock at Cost (799,084 shares) (9,355) (9,355)
---------- ----------
Total Shareholders' Equity 684,169 748,104
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,200,670 1,111,538
========== ==========
See accompanying notes to consolidated financial statements.
44
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(dollars in thousands, except per share amounts)
ACCUMULATED RESTRICTED
OTHER STOCK
COMMON STOCK RETAINED COMPREHENSIVE DEFERRED TREASURY
SHARES AMOUNT EARNINGS INCOME COMPENSATION STOCK TOTAL
----------- ------ -------- ------------- ------------ -------- -------
Balance at December 31, 1998 37,125,444 62,000 634,126 1,217 (1,157) (9,355) 686,831
Comprehensive Income:
Net Income -- -- 40,779 -- -- -- --
Net unrealized loss on securities,
net of reclassification adjustment
(see Note 12) -- -- -- (900) -- -- --
Total Comprehensive Income -- -- -- -- -- -- 39,879
Dividends declared on common
stock ($.10) per share -- -- (3,636) -- -- -- (3,636)
Exercise of stock options 32,000 880 880
Restricted stock granted, net of
amortization (see Note 12) 36,800 1,169 -- -- (682) -- 487
----------- ------ ------- ----- ------ ------ -------
Balance at December 31, 1999 37,194,244 64,049 671,269 317 (1,839) (9,355) 724,441
Class A common stock canceled (19,609,216)
Class B common stock issued 19,609,216
Comprehensive Income:
Net Income -- -- 25,758 -- -- -- --
Net unrealized loss on securities,
net of reclassification adjustment
(see Note 12) -- -- -- (304) -- -- --
Total Comprehensive Income -- -- -- -- -- -- 25,454
Dividends declared on common
stock ($.10) per share -- -- (3,643) -- -- -- (3,643)
Exercise of stock options 52,484 1,467 1,467
Restricted stock purchased/granted,
net of amortization (see Note 12) 37,299 246 -- -- 139 -- 385
----------- ------ ------- ----- ------ ------ -------
Balance at December 31, 2000 37,284,027 65,762 693,384 13 (1,700) (9,355) 748,104
Comprehensive Income:
Net (Loss) -- -- (61,386)
Total Comprehensive (Loss) -- -- (13) (61,399)
Dividends declared on common
stock ($.10) per share -- -- (3,652) (3,652)
Exercise of stock options 3,334 104 104
Other (4,203) (106) (106)
Restricted stock purchased/granted,
net of amortization (see Note 12) 46,745 773 345 1,118
----------- ------ ------- ----- ------ ------ -------
Balance at December 31, 2001 37,329,903 66,533 628,346 -- (1,355) (9,355) 684,169
=========== ====== ======= ===== ====== ====== =======
See accompanying notes to consolidated financial statements.
45
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2000 and 1999
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: 2001 2000 1999
-------- -------- --------
Net Income (Loss) (61,386) 25,758 40,779
Adjustments to Reconcile Net Income to Cash Generated by Operating Activities:
Depreciation and Amortization 53,468 41,730 32,830
Non-cash restructuring and impairment charges 108,135 -- --
Gain on Disposition of Assets (13,359) (9,604) (16,846)
Sales (Purchase) of Trading Investments (net) -- 34,100 (9,962)
Realized Loss (Gains) on Investments -- (438) 1,517
Deferred Taxes (32,345) 1,816 1,429
Stock Compensation Plans 663 385 487
Changes in Operating Assets and Liabilities:
Accounts Receivable 3,294 (9,383) 4,152
Other Current Assets (4,093) 580 3,303
Other Assets and Deferred Charges (5,787) (13,360) (3,441)
Accounts Payable (23,612) 49,934 2,428
Income Taxes Receivable/Payable (14,939) 2,425 963
Other Current Liabilities 1,037 1,021 (1,253)
Accrued Casualty, Deferred Revenues and Other Long-Term Liabilities 6,902 9,544 (392)
-------- -------- --------
Net Cash Generated by Operating Activities 17,978 134,508 55,994
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Properties (247,150) (273,677) (110,060)
Purchases of Investments -- (1,900) (133,296)
Maturities and Redemption of Investments 14,311 40,404 124,451
Proceeds from Disposition of Assets 22,536 17,571 66,932
-------- -------- --------
Net Cash used in Investing Activities (210,303) (217,602) (51,973)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Dividends (3,652) (3,643) (3,636)
Proceeds from Sale of Restricted Stock (net) 349 -- --
Proceeds from Stock Options Exercised 104 1,466 880
Proceeds from Mortgage Debt 247,000 -- --
Payment of Long-Term Debt (759) -- --
Debt Issuance Costs (6,072) -- --
Proceeds from (pay down on) Line of Credit (net) (49,000) 88,000 --
-------- -------- --------
Net Cash provided by (used in) Financing Activities 187,970 85,823 (2,756)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,355) 2,729 1,265
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 18,444 15,715 14,450
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR 14,089 18,444 15,715
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Income Taxes 8,880 13,136 22,632
-------- -------- --------
Cash Paid for Interest 12,157 632 377
-------- -------- --------
Property Contributed to Partnerships, net of Cash Receipts 4,590 5,495 7,762
-------- -------- --------
See accompanying notes to consolidated financial statements.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
1. NATURE OF BUSINESS
The principal operations of Florida East Coast Industries, Inc. (the Company or
FECI) and its subsidiaries primarily relate to the transportation of goods by
rail and truck, the development, leasing, management and sale of real estate,
and the "carriers' carrier" telecommunications business which offers bandwidth
capacity, dark fiber leases and collocation services to telecommunications
providers. The Company's rail subsidiary, Florida East Coast Railway, L.L.C.
(FECR), operates only within the state of Florida, with approximately 49 percent
of its revenues derived from local moves along the Company's line. Approximately
44 percent of the rail segment's revenues were derived from five of its largest
customers, with approximately $30,500,000, $29,400,000 and $26,900,000, 19
percent, 18 percent and 17 percent, in 2001, 2000 and 1999, respectively,
generated by one significant customer. The Company's trucking subsidiary,
Florida Express Carriers, Inc. (FLX), has operating rights within the
forty-eight states but primarily operates within the Southeast. The Company's
realty subsidiary, Flagler Development Company (Flagler), presently operates in
Florida with business parks in Jacksonville, Orlando and the South Florida
markets. Flagler's operating properties are Class "A" office space and high
quality commercial/industrial facilities. EPIK Communications, Incorporated's
(EPIK), Southeast regional footprint runs primarily in the states of Florida and
Georgia. EPIK provides bandwidth, dark fiber, collocation and wave services as a
wholesale "carriers' carrier." EPIK, in 2001, completed the build-out of its
Southeast network. At December 31, 2001, EPIK's customers were purchasing
predominately lit bandwidth services, with the largest customers being wireless
communication service providers.
2. RECAPITALIZATION AND MAJORITY STOCKHOLDER
On October 9, 2000, the St. Joe Company (St. Joe) and FECI completed the
recapitalization of FECI, and St. Joe implemented the pro-rata spin-off to St.
Joe shareholders of St. Joe's approximately 54 percent interest in FECI. Under
the terms of the recapitalization, which was approved along with certain
corporate governance provisions at a special meeting of FECI shareholders on
March 8, 2000, St. Joe received a new class of FECI common stock, Class B common
stock (NYSE: FLA.b) for each share of FECI common stock it owned. St. Joe then
distributed the Class B common stock to its shareholders, after which it no
longer has an equity interest in FECI.
All shares of FECI common stock, other than Class B common stock, have been
redesignated as FECI Class A common stock. The Class A common stock will
continue trading on the NYSE under the symbol FLA. The holders of Class A common
stock (and holders of voting preferred stock, if any) are entitled to elect the
number of directors which equals 20 percent of the members of the Board,
provided that if 20 percent is not a whole number, then the Class A shareholders
elect the nearest lower whole number. The holders of Class B common stock elect
the remaining directors, subject to the voting limitations set forth in the
Company's Amended and Restated Articles of Incorporation. Except with respect to
voting rights for the election or removal of Directors, the Class A and Class B
common stocks are identical. Terms of the recapitalization, including the
shareholders' agreement, are contained in the Special Shareholders' Meeting
Proxy Statement filed with the Securities and Exchange Commission on February 4,
2000 on Form 14A.
Alfred I. duPont Testamentary Trust owns 58.5 percent of the Class B common
stock, and the Nemours Foundation owns 10.7 percent of the Class A and 2.6
percent of the Class B common stock as of March 15, 2002. The holdings of the
Trust, together with the holdings of Class A common stock and Class B common
stock held by the Nemours Foundation, together equal 37.7 percent of the
Company's outstanding common stock as of March 15, 2002.
St. Joe Company and affiliates continue to provide certain real estate services
to the Company under existing service agreements, expiring in October 2003.
These services include property management, development management and
construction coordination and leasing services. Amounts paid to St. Joe and
affiliates for these services in 2001, 2000 and 1999 were:
47
SERVICE 2001 2000 1999
------- ----- ----- -----
(dollars in thousands)
Asset Management Fees -- 1,579 2,648
Property Management Fees 3,305 2,956 2,916
Development Fees 1,597 1,630 2,538
Construction Coordination Fees & Leasing Commissions 3,772 2,665 2,308
Commissions on Real Estate Sales 1,089 657 1,017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
REVENUE RECOGNITION
Railway Revenues: Rail revenue is recognized as freight moves from origin to
destination.
Trucking Revenues: Revenue is recognized upon completion of transportation
services at destination.
Realty Land Sales: Revenue is recognized upon closing of sales contracts for
sale of land or upon settlement of legal proceedings such as condemnations.
Realty Rental Income: Revenue is recognized upon commencement of rental and
lease contracts. The Company uses the straight-line basis for recording the
revenues over the life of the lease contract.
Dark Fiber, Collocation and Bandwidth Revenues: Revenue is recognized beginning
upon commencement of rental and service contracts. The Company uses the
straight-line basis for recording the revenues over the life of the lease
contract. Any advance payments called for in the lease agreement are deferred
and included in deferred revenues. Revenue for credit risk customers is
recognized upon collection of the related receivable.
Dark Fiber Swaps: No revenue is recognized on dark fiber swap transactions,
which are treated as like kind exchanges. Historical "carryover basis" is
reassigned to the fiber received.
Non-Like Kind Exchanges: The fair market value of goods received in non-like
kind exchanges for dark fiber is compared to the historical net book basis of
assets exchanged with any resulting gain included in deferred revenues and
recognized as revenue on a straight-line basis over the life of the dark fiber
lease contract.
BAD DEBT RESERVES
Bad debt reserves are recorded by management based upon the Company's various
businesses' historical experience of bad debts to sales, analysis of accounts
receivable aging, and specific identification of customers in financial
distress; i.e., bankruptcy, poor payment record, etc. At December 31, 2001,
consolidated bad debt reserve was $3.7 million versus $1.6 million at December
31, 2000. The increase in 2001 primarily relates to credit risk customers at
EPIK and additional reserves at FLX.
MATERIALS AND SUPPLIES
New materials and supplies are stated principally at average cost which is not
in excess of replacement cost. Used materials are stated at an amount which does
not exceed estimated realizable value.
PROPERTIES
Railway and trucking properties are stated at historical cost and are
depreciated and amortized on the straight-line method over the estimated useful
lives. The Railway uses the mass asset method of accounting for fixed assets.
48
The majority of road properties' depreciation is based on lives ranging from 10
to 40 years, and equipment properties on lives varying from 3 to 27.5 years.
Gains and losses on normal retirements of these items are credited or charged to
accumulated depreciation.
Real estate properties are stated at historical cost. Depreciation is computed
using the straight-line method over estimated asset lives of 15 years for land
improvements and 12 to 40 years for buildings and building improvements. Tenant
improvements are depreciated over the term (1-15 years) of the related lease
agreement for book purposes.
Telecommunications assets are stated at historical cost and depreciated on the
straight-line method over their estimated asset lives of 40 years for certain
buildings and 3-20 years for all other network assets. Materials considered
excess to EPIK's capital build requirements identified at December 31, 2001 and
held for disposal, were valued at expected disposal proceeds and were included
in other current assets (see Note 4).
The Company reviews property, plant and equipment for impairment whenever events
or changes in circumstances indicate carrying value may not be recoverable.
Recoverability is measured by comparison of the carrying amount to the
undiscounted net cash flows expected to be generated by the asset (see Note 4).
The Company capitalizes interest during the construction of new facilities
(e.g., buildings, network, etc.) and it is amortized over the life of the asset.
During 2001 and 2000, $9.0 million and $0.6 million, respectively, of interest
was capitalized.
EARNINGS PER SHARE
The diluted weighted-average number of shares includes the net shares that would
be issued upon the exercise of "in the money" stock options using the treasury
stock method.
CASH AND CASH EQUIVALENTS
For purposes of cash flows, cash and cash equivalents include cash on hand, bank
demand accounts, money market accounts and overnight repurchase agreements
having original maturities of less than three months.
INCOME TAXES
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS 109),
"Accounting for Income Taxes." Under SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
JOINT VENTURES
The Company holds certain investments in four realty partnerships for the
purpose of developing, leasing and managing real estate with an unaffiliated
partner. The Company holds an undivided 50 percent equity ownership interest in
each of these joint ventures and, accordingly, recognizes its pro rata share of
partnership earnings (loss) each period under the equity method of accounting.
The Company's recorded investment in these joint ventures was $27.4 million and
$20.7 million at December 31, 2001 and 2000, respectively, and is recorded in
other assets and deferred charges. The joint ventures carried no third party
debt during the years ended December 31, 2001 and 2000.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities, and
49
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual future results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25), and related interpretations in accounting for
stock options. As such, compensation expenses would be recorded on the date of
the grant only if the current market price of the underlying stock exceeded the
exercise price. Compensation expenses for grants of restricted stock are
recognized over the applicable vesting period.
COMPREHENSIVE INCOME
SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and net unrealized gains (losses) on
available-for-sale securities and is presented in the consolidated statements of
shareholders' equity and comprehensive income. SFAS No. 130 requires only
additional disclosures in the consolidated financial statements. It does not
affect the Company's financial position or results of operations.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible
Assets." This Statement, effective for fiscal years beginning after December 15,
2001, establishes standards for recognizing and measuring goodwill and other
intangible assets. Management believes the adoption of this Statement will not
affect the financial position or results of operations of the Company.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." This Statement, effective for
fiscal years beginning after June 15, 2002, requires an enterprise to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of a tangible
long-lived asset. The enterprise is also to record corresponding increase to the
carrying amount of the long-lived asset. Management believes that this Statement
will not have a material effect on the financial position or results of
operations of the Company.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." This
Statement, effective for fiscal years beginning after December 15, 2001,
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to
be Disposed of," and addresses the financial accounting and reporting for the
impairment or disposal of long-lived assets. Management believes that the
adoption of this Statement will not have a material effect on the financial
position or results of operations of the Company.
4. RESTRUCTURING, ASSET IMPAIRMENT AND SPECIAL CHARGES
On November 14, 2001, the Company announced a restructuring plan to reduce
ongoing operating expenses and capital requirements at its telecommunications
subsidiary, EPIK, and a review of the carrying value of EPIK's
telecommunications assets. The plan entailed refocusing EPIK's resources on
growing revenues on its completed, lit Southeast telecommunications network and
curtailing capital expenditures and operating expenses related to other growth
activities. The plan and the review were both responses to reduced growth
expectations in the telecommunications industry.
As a result of the restructuring plan, the Company has recorded pretax charges
to operating expenses for restructuring and asset impairments of $110.2 million.
The charge was comprised of $12.1 million of restructuring expenses and $98.1
million of asset write-downs.
50
The restructuring costs include $5.3 million in expenses related to terminating
the employment of 105 management and other employees and $6.5 million in
expenses relating to terminating certain collocation and commercial realty
leases.
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," governs accounting for potential impairment of
long-lived constructed assets. SFAS 121 requires valuation of assets at the
lowest level of asset groups with identifiable cash flows that are largely
independent of the cash flows of other groups of assets. It is on this basis
that EPIK's long-lived assets were divided into two groups: (i) Southeast
Network Services and (ii) Excess Dark Fiber and Collocation. For those groups of
assets whose carrying value exceeds their expected undiscounted future cash
flows, an impairment charge is required. Impairment is measured as the excess of
the net book value over the fair value of the assets.
The expected undiscounted future cash flows associated with Southeast Network
Services asset group exceeded the related assets' carrying value and,
accordingly, no impairment was recorded. With respect to the second long-lived
asset group, Excess Dark Fiber and Collocation, the expected undiscounted future
cash flows were less than the assets' carrying value and, accordingly, the
assets were written down to the estimated present value of future cash flows
expected to be received from the use of these assets, including income tax
benefits from the abandonment of certain assets. This resulted in an asset
impairment of $71.4 million.
In addition, the Company identified materials and equipment not yet placed into
service that were excess to EPIK's needs given EPIK's refocused growth strategy
and curtailed capital program. These assets had a cost basis that exceeded their
fair value by $23.0 million. Fair value was determined on the basis of recent
secondary market cash sales of similar materials and equipment in like
circumstances. The fair market value of these materials, $7.3 million, was
included in other current assets. EPIK plans to sell these materials during
2002.
During 2000, the Company's trucking subsidiary, FLX, incurred restructuring
charges and other costs, including expenses associated with relocation of FLX's
headquarters from Cincinnati, Ohio, to Jacksonville, Florida, as well as force
reductions and severance payments, and the addition of new facilities and staff
at the new headquarters. The costs and charges also included the restructuring
of the existing terminal network, the opening of an additional terminal in
Charlotte, North Carolina, and a charge for the impairment of goodwill
associated with the original acquisition of FLX. The total amount of the pre-tax
charges is $5.3 million.
Included in the charges was $3.1 million for the impairment of goodwill, $0.3
million for buyout of lease commitments on headquarters' and operational
buildings abandoned in the reorganization, and employee severance costs of $0.1
million. The $3.1 million of goodwill was non-deductible for federal income tax
purposes. Other costs included additional equipment lease cost of $0.9 million,
recruiting, relocation and other costs of assembling the new management team of
$0.4 million, costs of $0.1 million to consolidate information technology
operations and systems to FECI's service provider, along with other
miscellaneous costs of $0.4 million.
In 1999, the Company incurred special charges of approximately $8.2 million
related to a work force reduction, including curtailment of a supplemental
executive retirement plan first adopted in late 1998, and inventory reductions
arising from a modification to the Company's inventory management practices.
51
5. PROPERTIES
Properties consist of:
(dollars in thousands) 2001 2000
------- -------
FECR PROPERTIES:
- ----------------
Road Equipment 390,521 368,457
Buildings 1,436 1,436
Equipment 198,490 192,538
Land and Land Improvements 5,796 5,112
Fiber 3,200 3,200
Construction in Progress 59 3,959
------- -------
599,502 574,702
Less Accumulated Depreciation 240,141 230,450
------- -------
359,361 344,252
======= =======
FLX PROPERTIES:
- ---------------
Equipment 2,641 1,424
Buildings 57 --
Construction in Progress 77 --
------- -------
2,775 1,424
Less Accumulated Depreciation 1,029 743
------- -------
1,746 681
======= =======
EPIK PROPERTIES:*
- -----------------
Equipment 9,742 1,501
Buildings 21,012 1,860
Land and Land Improvements 257 177
Network 203,747 87,346
Construction in Progress 30,521 124,161
------- -------
265,279 215,045
Less Accumulated Depreciation 14,352 2,790
------- -------
250,927 212,255
======= =======
FLAGLER PROPERTIES:
- -------------------
Land and Land Improvements 175,666 182,411
Buildings 331,597 286,303
Construction in Progress 25,981 23,006
------- -------
533,244 491,720
Less Accumulated Depreciation 86,575 68,206
------- -------
446,669 423,514
======= =======
CORPORATE:
- ----------
Equipment 12,211 11,965
Construction in Progress 302 588
------- -------
12,513 12,553
Less Accumulated Depreciation 6,317 3,972
------- -------
6,196 8,581
======= =======
*Included in 2001 and 2000 amounts are $20.2 and $23.3 million, respectively, of
assets (primarily fiber, uninstalled at the time of the exchange), which were
obtained in exchange for the use under long-term agreements of installed dark
fiber and collocation space.
Real estate properties, having a net book value of $309.4 million at December
31, 2001, are leased under non-cancelable operating leases with expected
aggregate rental revenues of $258.9 million, which are due in years 2002-2006 in
the amounts of $49.7, $42.8, $35.0, $30.3 and $23.3 million, respectively, and
$77.8 million thereafter.
52
Telecommunications properties are committed under long-term agreements (which
includes right-of-way leases) with customers who are to pay expected aggregate
rentals of $196.9 million, which are due in years 2002-2006 in the amounts of
$20.9, $17.8, $16.4, $14.9, $13.8 million, respectively, and $113.1 million
thereafter.
6. INVESTMENTS
The Company had no investments in securities at December 31, 2001. At December
31, 2000, the Company had available-for-sale investments in tax exempt and other
debt securities of $12,942 and $1,304, respectively. These investments had a
cost basis of $14,225. The related unrealized gain of $21 was recorded, net of
tax, in accumulated other comprehensive income.
7. INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 2001, 2000
and 1999 was as follows:
(dollars in thousands) 2001 2000 1999
------- ------ ------
Current:
Federal (5,381) 13,039 20,306
State (694) 2,403 3,496
------- ------ ------
(6,075) 15,442 23,802
Deferred:
Federal (30,880) 1,681 1,150
State (1,474) 135 279
------- ------ ------
(32,354) 1,816 1,429
Income Taxes (38,429) 17,258 25,231
======= ====== ======
Income tax expense for the period ended December 31, 2000 and 1999 excludes the
tax effect of unrealized gains on available-for-sale securities of $121 and
$526, respectively, which were reported in shareholders' equity.
Income tax expense (benefit) attributable to income from continuing operations
differed from the amounts computed by applying the statutory federal income tax
rate to pretax income as a result of the following:
(dollars in thousands) 2001 2000 1999
------- ------ ------
Amount computed at statutory federal rate (34,935) 15,055 23,104
Effect of dividends received exclusion and tax-free interest -- (1,206) (1,188)
Effect of goodwill impairment and amortization exclusion -- 1,213 152
State taxes (net of federal benefit) (3,526) 1,520 2,333
Other (net) 32 676 830
------- ------ ------
(38,429) 17,258 25,231
======= ====== ======
53
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at December 31, 2001 and
2000 are as follows:
(dollars in thousands) 2001 2000
-------- --------
Deferred Tax Assets:
Allowance for doubtful accounts 1,421 1,328
Accrued casualty and other liabilities 4,036 4,016
Deferred revenue 4,038 --
Fair value adjustment on assets held-for-sale 8,470 --
Restructuring charges 5,005 --
Other 18 415
-------- --------
Total deferred tax asset 22,988 5,759
-------- --------
Deferred Tax Liabilities:
Properties, principally due to differences in depreciation & impairments 82,543 101,716
Deferred gain on land sales 32,938 29,395
Straight-line rent 2,026 1,974
Other 5,884 5,431
-------- --------
Total deferred tax liabilities 123,391 138,516
-------- --------
Net deferred tax liabilities 100,403 132,757
======== ========
There was no valuation allowance provided for deferred tax assets as of December
31, 2001 and 2000 as the Company believes the results of future operations will
generate sufficient taxable income to realize the deferred tax assets.
Deferred tax assets of $3,270 and $3,413 at December 31, 2001 and 2000,
respectively, were included in other current assets.
8. SEGMENT INFORMATION
The Company follows Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information" (SFAS 131).
SFAS 131 provides guidance for reporting information about operating segments
and other geographic information based on a management approach. The accounting
policies of the segments are the same as those described in the Summary of
Significant Accounting Policies. Under the provisions of SFAS 131, the Company
has four reportable operating segments all within the same geographic area.
These are the railway segment, trucking segment, realty segment, and the
telecommunications segment.
The railway segment provides rail freight transportation along the east coast of
Florida between Jacksonville and Miami. The trucking segment is operated by FLX,
which provides truckload transportation for a wide range of general commodities
primarily in the southeast United States. The realty segment is engaged in the
development, leasing, management, operation and selected sale of commercial and
industrial property. EPIK, based in Orlando, Florida, operates as a carriers'
carrier, providing wholesale carrier services including bandwidth (private
lines), wave services, Internet protocol services, collocation and dark fiber.
The Company's railway subsidiary generates revenues from leases to other
telecommunications companies for the installation of fiber optic and other
facilities on the railroad right-of-way, which are included in the
telecommunications segment. Also, the railway subsidiary generates revenues and
expenses from the rental, leasing, and sale of buildings and properties that are
ancillary to the railroad's operations. These revenues and expenses are included
in the realty segment.
The Company evaluates the railway and trucking segments' performance based on
operating profit or loss from operations before other income and income taxes.
Operating profit is operating revenue less directly traceable costs and
expenses. The Company evaluates the realty segment based on EBITDA and operating
profit. The Company evaluates the telecommunications segment's performance,
specifically EPIK's, based on EBITDA and more broadly (i.e., the segment
inclusive of right-of-way leases) by operating profit or loss.
54
EBITDA is defined as earnings before interest expense, income taxes,
depreciation and amortization.
Intersegment revenues for transactions between the railway and trucking segments
are based on quoted rates, which are believed to approximate the cost that would
have been incurred had similar services been obtained from an unrelated third
party.
The Company's reportable segments are strategic business units that offer
different products and services and that are managed separately.
INFORMATION BY INDUSTRY SEGMENT FOLLOWS:
(dollars in thousands)
OPERATING REVENUES 2001 2000 1999
- ------------------ -------- -------- --------
Railway (a) 160,720 164,844 164,899
Trucking 36,224 31,601 29,011
Realty:
Flagler Realty Rental and Services (b) 63,034 54,196 48,179
Flagler Realty Sales 20,233 15,692 77,608
Other Rental 3,665 3,253 2,979
Other Sales 2,303 1,815 803
-------- -------- --------
Total Realty 89,235 74,956 129,569
Telecommunications:
EPIK Communications 11,504 3,393 160
Right-of-way Leases 6,666 6,984 5,271
-------- -------- --------
Total Telecommunications 18,170 10,377 5,431
Total Revenues (segment) 304,349 281,778 328,910
Intersegment Revenues (5,506) (5,502) (5,023)
-------- -------- --------
Total Revenues (consolidated) 298,843 276,276 323,887
======== ======== ========
OPERATING PROFIT (LOSS)
- -----------------------
Railway 41,190 43,663 ***34,529
Trucking (6,259) **(8,151) (1,212)
Realty 25,967 20,957 34,740
Telecommunications *(151,622) (14,240) 1,887
Corporate General & Administrative (7,590) (7,045) (8,920)
-------- -------- --------
Segment & Consolidated Operating Profit (98,314) 35,184 61,024
Net Interest Income (Expense) (4,177) 2,834 ***4,366
Other Income 2,676 4,998 620
-------- -------- --------
Income (Loss) before Taxes (99,815) 43,016 66,010
Provision for income taxes 38,429 (17,258) (25,231)
-------- -------- --------
Net Income (Loss) (61,386) 25,758 40,779
======== ======== ========
*Restructuring costs and asset impairment charges of $110,209 are
included in operating expenses for the year ended December 31, 2001.
**Restructuring and other costs of $5,282 are included in operating
expenses for the year ended December 31, 2000.
***Special charges of $7,487 and $762 are included in operating expenses
and other income, respectively, for the year ended December 31, 1999.
55
(dollars in thousands) 2001 2000 1999
---------- ---------- --------
RAILROAD EBITDA 57,570 58,529 49,148
- --------------- ========== ========== ========
REALTY EBITDA:
- --------------
EBITDA from Flagler operating properties rents 42,014 36,279 32,391
EBITDA from real estate services 768 -- --
EBITDA (loss) from Flagler land rents/holding costs (2,718) (3,092) (2,329)
Equity pickups on partnership rents 948 78 110
Less: unallocated corporate overhead (6,338) (5,895) (4,046)
---------- ---------- --------
EBITDA from Flagler rental properties, net of overheads 34,674 27,370 26,126
EBITDA from Flagler real estate sales, net of overheads 11,056 7,762 20,959
---------- ---------- --------
Total EBITDA - Flagler 45,730 35,132 47,085
---------- ---------- --------
EBITDA from other rental (68) 2,857 2,671
EBITDA from other real estate sales 2,303 1,815 803
---------- ---------- --------
Total EBITDA - real estate segment 47,965 39,804 50,559
========== ========== ========
TELECOM EBITDA:
- ---------------
EBITDA-EPIK (146,531) (18,649) (3,120)
EBITDA-EPIK only, exc. restructuring
and asset impairment (36,322) (18,649) (3,120)
EBITDA-Telecommunications (29,656) (11,665) 2,150
IDENTIFIABLE ASSETS:
- --------------------
Transportation-Railway 386,601 374,471 361,144
Transportation-Trucking 7,966 6,814 5,386
Realty 495,733 461,371 465,402
Telecommunications 268,906 219,157 (3,346)
Corporate 41,464 49,725 82,292
---------- ---------- --------
1,200,670 1,111,538 910,878
========== ========== ========
CAPITAL EXPENDITURES:
- ---------------------
Transportation-Railway 32,576 31,992 24,834
Transportation-Trucking 1,710 616 101
Realty 56,845 61,982 72,477
Telecommunications 155,471 177,544 6,060
Corporate 548 1,543 6,588
---------- ---------- --------
247,150 273,677 110,060
========== ========== ========
DEPRECIATION & AMORTIZATION:
- ----------------------------
Transportation-Railway 16,578 15,057 14,583
Transportation-Trucking* 335 3,652 639
Realty 22,145 18,462 15,499
Telecommunications 11,607 2,383 263
Corporate 2,803 2,176 1,846
---------- ---------- --------
53,468 41,730 32,830
========== ========== ========
*Includes amortization of goodwill of $-0-, $3,465,000 and $469,000 for
2001, 2000 and 1999, respectively.
(a) Included intersegment revenues of $5,276, $5,358 and $4,699 for the
years ended December 31, 2001, 2000 and 1999, respectively.
(b) Included intersegment revenues of $230, $144 and $324 for the years
ended December 31, 2001, 2000 and 1999, respectively.
56
9. ACCRUED CASUALTY AND OTHER LIABILITIES
The Company is a defendant and plaintiff in various lawsuits resulting from its
operations. In the opinion of management, adequate provision has been made in
the financial statements for the estimated liability, which may result from
disposition of such matters. The Company maintains comprehensive liability
insurance for bodily injury and property claims, but also maintains a
significant self-insured retention for these exposures, particularly at the
Railway.
The Company is subject to proceedings and consent decrees arising out of
historic disposal of fuel and oil used in the transportation business. It is the
Company's policy to accrue environmental cleanup costs when it is probable that
a liability has been incurred and an amount can be reasonably estimated. As
assessments and cleanups proceed, these accruals are reviewed and adjusted.
The Company is participating, together with several other potentially
responsible parties (PRPs), in the remediation of a site in Jacksonville,
Florida pursuant to an agreement with the United States Environmental Protection
Agency (USEPA). The site previously accepted waste oil from many businesses. The
Company has accrued its estimated share of the total estimated cleanup costs for
the site. Based upon management's evaluation, the Company does not expect to
incur additional amounts, even though the Company may have joint and several
liability.
FECR is investigating sites where contaminants from historic railroad operations
may have migrated off-site through the movement of groundwater or contaminated
soil. FECR, if required as a result of the investigation, will develop an
appropriate plan of remediation, with possible alternatives including natural
attenuation and groundwater pumping and treatment. Historic railroad operations
at the Company's main rail facilities have resulted in soil and groundwater
impacts. In consultation with the Florida Department of Environmental Protection
(FDEP), the Company operates and maintains groundwater treatment systems at its
primary facilities.
FECR is one of several PRPs alleged to have contributed to the environmental
contamination at and near the Miami International Airport. The allegations are
contained in a lawsuit filed by Miami-Dade County but not officially served on
the Railway. The Company does not currently possess sufficient information to
reasonably estimate the amount of remediation liability, if any, it may have in
regard to this matter. While the ultimate results of the claim against FECR
cannot be predicted with certainty, based on information presently available,
management does not expect that resolution of this matter will have a material
adverse effect on the Company's financial position, liquidity or results of
operation.
The Company monitors a small number of sites leased to others, or acquired by
the Company or its subsidiaries. Based on management's ongoing review and
monitoring of the sites, and the ability to seek contribution or indemnification
from the PRPs, the Company does not expect to incur material additional costs,
if any.
EPIK owns a site in Jacksonville, Florida at which field investigation indicates
some contamination of soil and groundwater by petroleum products. EPIK is
vigorously pursuing relief against PRPs, including a large petroleum and
gasoline service company. Based on the information currently available, the
Company does not believe the costs of remediation, even if borne by the Company,
will be material.
It is difficult to quantify future environmental costs as many issues relate to
actions by third parties or changes in environmental regulations. However, based
on information presently available, management believes that the ultimate
disposition of currently known matters will not have a material effect on the
financial position, liquidity or results of operations of the Company.
EPIK is involved as a creditor in several bankruptcy proceedings involving
certain of its customers.
10. RETIREMENT PLANS
The Company sponsors three 401(k) plans. Contributions are at the employee's
discretion with upper limits of 10.0 percent of compensation before taxes,
subject to maximum limits imposed by the IRS ($10,500 in 2001),
57
and an additional contribution up to 10.0 percent of after-tax compensation,
also subject to maximum limits imposed by the IRS. Total contributions in 2001,
including the Company's match if any, were limited by IRS regulations to
$30,000.
401(K) PLAN FOR SALARIED EMPLOYEES
The amounts of matching contributions by the Company for this plan covering the
years 2001, 2000 and 1999 were approximately $0.7 million, $0.4 million and $0.4
million, respectively. In accordance with the terms of the plan, the Company
matched the employee's contributions $1.00 for $1.00 up to the first $1,200
contributed by the employee in 2001. For employee contributions in excess of
$1,200, the Company matched $0.25 for every $1.00 in pretax employee
contributions.
401(K) PLAN FOR HOURLY WAGE EMPLOYEES AND/OR EMPLOYEES COVERED BY COLLECTIVE
BARGAINING AGREEMENT
This is a non-contributory plan that was instituted in April 1995.
401(K) PLAN FOR FLORIDA EXPRESS CARRIERS, INC.
The Company matched employee contributions $0.25 for each $1.00 contributed up
to contributions totaling 6.0 percent of employee's compensation in 2001. The
amounts of the Company's matching contributions were approximately $15,700,
$20,693 and $19,000 for 2001, 2000 and 1999, respectively.
PENSION PLAN
The Company adopted a non-funded defined benefit plan covering nine previous
officers of the Company in 1998. The benefits are based on years of service and
the employee's compensation during the five years before retirement. The Company
curtailed this plan in 1999, causing no additional benefits to accrue to covered
officers. At December 31, 2001 and 2000, accrued liabilities were $3.7 million
and $3.8 million, respectively, related to the contract benefit obligation. The
Company incurred benefit cost, primarily related to interest, of $0.4 million
and $0.3 million in 2001 and 2000, respectively
11. COMPREHENSIVE INCOME
Comprehensive income (loss) is net income (loss) for the year plus the change in
unrealized holding gains (losses) on available-for-sale securities, net of the
related income tax benefits and reclassification adjustments. For the years
ended December 31, 2001, 2000 and 1999, total comprehensive income (loss) was
($61,399), $25,454 and $39,879, respectively.
58
12. STOCK-BASED COMPENSATION
The 1998 Stock Incentive Plan (the Plan), as amended, allows the Company to
grant to employees and directors various stock awards, including stock options,
which are granted at exercise prices not less than the fair market value at the
date of grant and restricted stock. A maximum of 2.6 million shares was approved
to be issued under the Plan. On December 31, 2001, options for 2,388,899 shares
have been granted.
The stock options may be granted over a period not to exceed 10 years and
generally vest from one to five years from the date of grant. The changes in
outstanding options are as follows:
WEIGHTED-AVERAGE EXERCISE
SHARES UNDER OPTION PRICE PER SHARE
------------------- -------------------------
Balance at December 31, 1998 651,872 29.807
========= ======
Granted 531,100 32.277
Exercised (32,000) 29.807
--------- ------
Balance at December 31, 1999 1,150,972 30.959
========= ======
Granted 436,470 40.190
Exercised (52,484) 29.505
Forfeited (139,730) 31.822
--------- ------
Balance at December 31, 2000 1,395,228 33.214
========= ======
Granted 760,105 25.064
Exercised (3,334) 31.332
Forfeited (3,500) 36.821
--------- ------
Balance at December 31, 2001 2,148,499 30.338
========= ======
Stock options outstanding and exercisable on December 31, 2001 are as follows:
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE EXERCISE PRICE REMAINING CONTRACTUAL
PRICES PER SHARE SHARES UNDER OPTION PER SHARE LIFE IN YEARS
- ----------------- ------------------- ---------------- ---------------------
Outstanding:
21.15-29.94 1,348,572 26.03 9.11
29.95-39.75 551,977 36.25 9.06
39.76-48.44 247,950 43.36 9.21
---------- ------ -----
2,148,499 30.34 9.11
Exercisable:
21.15-29.94 457,781 28.79 9.07
29.95-39.75 257,993 35.20 9.18
39.76-48.44 108,753 43.86 9.21
---------- ------ -----
824,527 32.78 9.12
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25), and related interpretations in accounting
for the Plan and, therefore, no compensation expense has been recognized for
stock options issued under the Plan. For companies electing to continue the use
of APB 25, SFAS No. 123, "Accounting for Stock-Based Compensation," requires pro
forma disclosures determined through the use of an option-pricing model as if
the provisions of SFAS No. 123 had been adopted.
59
The weighted-average fair value at date of grant for options granted during
2001, 2000 and 1999 was estimated at $8.37, $19.30 and $22.34 per share,
respectively. The fair value of the option grants was estimated on the date of
the grant using the Black-Scholes option-pricing model with the following
assumptions:
2001 2000 1999
---- ---- ----
Expected dividend yield .37% .28% .31%
Expected volatility 37% 38% 48%
Risk-free interest rate 4.4% 5.0% 6.2%
Expected term in years 3.8 6.3 6.3
If the Company had adopted the provisions of SFAS No. 123, reported net income
and earnings per share would have been as follows:
52 WEEKS ENDED 52 weeks ended 52 weeks ended
--------------- --------------- --------------
12/31/01 12/31/00 12/31/99
--------------- --------------- --------------
Net Income (Loss) (in thousands) (66,078) 20,091 36,642
Earnings Per Share:
Basic ($1.82) $0.55 $1.01
Diluted ($1.82) $0.55 $1.00
During 2001 and 2000, the Company also awarded 12,300 and 11,500 shares,
respectively, of restricted stock under the Plan, with a weighted-average fair
value at the date of grant of $30.53 and $38.27, respectively, per share.
Substantially all of these restricted shares vest ratably over five years of
continued employment. Compensation expense related to this award was $663,000
and $304,000 for 2001 and 2000, respectively.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
(dollars in thousands, except per share amounts)
2001 2000
---------------------------------------- ----------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- ------- ------- -------- ------- -------
Operating Revenues 75,761 74,934 80,249 67,899 75,673 70,145 65,299 65,159
Operating Expenses 186,415 70,766 76,291 63,685 68,112 65,564 54,497 52,919
Net Interest Income
(Expense) (3,070) (1,468) 502 (141) 338 746 563 1,187
Other Income 1,178 471 364 663 1,749 496 (65) 2,818
Net Income (69,088) 1,968 2,864 2,870 5,787 2,099 7,033 10,839
Diluted Net Income Per Share ($1.90) $0.05 $0.08 $0.08 $0.16 $0.06 $0.19 $0.29
14. OTHER INCOME
(dollars in thousands)
2001 2000 1999
----- ----- ------
Dividend Income - 2,581 1,072
Pipe & Wire Crossings/Signboards 2,265 1,577 1,189
Gain (Loss) on Investments 47 (438) (1,517)
Other (net) 364 1,278 (124)
----- ----- ------
2,676 4,998 620
===== ===== ======
60
15. DEBT AND OTHER COMMITMENTS
In September 2001, Flagler issued $87 million of mortgage notes due October 1,
2008. At December 31, 2001, approximately $86.9 million was outstanding on these
notes. The notes are collateralized by buildings and properties having a
carrying value at December 31, 2001 of approximately $94 million, net of
accumulated depreciation of $21 million. Blended interest and principal
repayments on the notes are payable monthly based on a fixed 6.95 percent
weighted-average interest rate on the outstanding principal amount of the
mortgage notes and a thirty-year amortization period. The net proceeds were used
to repay existing indebtedness under the Company's revolving credit facility.
In June 2001, Flagler issued $160 million of mortgage notes due July 2011. At
December 31, 2001, $159.3 million was outstanding on these notes. The notes are
collateralized by buildings and properties having a carrying value at December
31, 2001 of approximately $139 million, net of accumulated depreciation of $51
million. Blended interest and principal repayments on the notes are payable
monthly based on a fixed 7.39 percent weighted-average interest rate on the
outstanding principal amount of the mortgage notes and a thirty-year
amortization period. The net proceeds were used to repay existing indebtedness
under the Company's revolving credit facility.
The annual maturities of long-term debt at December 31, 2001, excluding
outstanding borrowing under the Company's revolving credit agreement, are as
follows:
YEAR AMOUNT
---- ------
2002 $ 2,457,000
2003 2,652,000
2004 2,844,000
2005 3,057,000
2006 3,285,000
Thereafter 231,946,000
The Company has a $300 million revolving credit agreement with certain financial
institutions, for which the Company presently pays (quarterly) commitment fees,
as applicable under the agreement, at a range of 20-50 basis points. The
borrowings under the credit agreement are secured by the capital securities of
FECR, FLX and the Class A shares of EPIK. The Company's revolving credit
agreement contains various covenants which, among other things, require the
maintenance of certain financial ratios related to fixed charge coverage and
maximum leverage; establish minimum levels of net worth; establish limitations
on indebtedness, certain types of payments, including dividends, liens and
investments; and limit the use of proceeds of asset sales. Some of the above
covenants provide specific exclusion of EPIK's financial results, as well as
exclusion of certain financing and investing activities at Flagler. Borrowings
under the credit agreement bear interest at variable rates linked to the LIBOR
Index. Interest on borrowings is due and payable on the "rollover date" for each
draw. Outstanding borrowings can be paid at any time by the borrower, or at the
conclusion of the facility's term (March 31, 2004). At December 31, 2001, there
were $39 million of direct borrowings outstanding under the facility at an
average interest rate of approximately 2.75 percent. Such borrowings would be
payable in year 2004 unless the agreement was extended.
61
The Company is obligated under several non-cancelable operating leases covering
its facilities and equipment. The lease terms are from 4 to 7 years. Future
minimum payments under the leases are as follows:
YEAR AMOUNT
---- ------
2002 $14,200,000
2003 15,831,000
2004 11,889,000
2005 11,910,000
2006 9,076,000
Thereafter 159,571,000
At December 31, 2001, the Company had commitments for letters of credit
outstanding in the amount of $12.6 million, primarily as collateral on certain
real estate properties.
The fair value of the Company's mortgage notes and revolving credit agreement
are estimated based on current rates available to the Company for debt of the
same remaining maturities. At December 31, 2001, the Company considers the
carrying value of the mortgage notes and its revolving credit agreement to be a
reasonable estimation of their fair value.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Election of Directors-Nominees,"
"Section 16(a) Beneficial Ownership Reporting Compliance," and "Executive
Employment Agreements," in the Company's definitive Proxy Statement for its 2002
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (the Proxy Statement), containing the information required by this
Item 10 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Compensation Committee Report,"
"Compensation of Executive Officers," "Option Grants in Last Fiscal Year,"
"Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values," "Executive Employment Agreements," "Change in Control Agreements,"
"Compensation of Directors," and "Performance Graph" in the Proxy Statement
contains the information required in this Item 11 and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement contains the
information required in this Item 12 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement contains the information required in this
Item 13 and is incorporated herein by reference.
62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements and schedules listed in the accompanying Index to
Financial Statements and Financial Statement Schedule are filed as part of
this Report.
2. EXHIBITS
The Exhibits listed on the accompanying Index to Exhibits are filed as part
of this Report.
(b) REPORTS ON FORM 8-K
1. The Registrant furnished information under Item 9 on Form 8-K on February
14, 2001, reporting information the Registrant elected to disclose through
Form 8-K pursuant to Regulation FD. The information concerned a presentation
to be made by Mr. Robert W. Anestis, Chairman, President and Chief Executive
Officer of Florida East Coast Industries, Inc. at the Deutsche Banc Alex
Brown Global Transportation Conference, held February 14-16, 2001 at the
Ritz Carlton, Naples, Florida.
63
FLORIDA EAST COAST INDUSTRIES, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
[ITEM 14(A)]
Reference
---------
Form 10-K
---------
Page Nos.
---------
Consolidated Statements of Income for each of the
three years ended December 31, 2001 43
Consolidated Balance Sheets at December 31, 2001 and 2000 44
Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income for each of the three years in the
period ended December 31, 2001 45
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2001 46
Notes to Consolidated Financial Statements 47-62
Independent Auditors' Report 42
Financial Statement Schedule:
III-Real Estate and Accumulated Depreciation 70-71
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or the notes thereto.
Financial statements and schedules of FECI (not consolidated) are omitted since
it is primarily a holding company and all subsidiaries included in the
consolidated financial statements being filed, in the aggregate, do not have
minority equity interests and/or indebtedness to any person other than the
Company or its consolidated subsidiaries in amounts which together exceed five
percent of the total assets as shown by the consolidated balance sheet at the
end of any year covered by this Report.
64
FLORIDA EAST COAST INDUSTRIES, INC.
INDEX TO EXHIBITS
(ITEM 13[A] 3.)
PAGE
S-K ITEM 601 DOCUMENTS NUMBERS
- ------------ --------- -------
(3) (i) Amended and Restated Articles of Incorporation *
(3) (ii) Amended and Restated By-Laws *
(4) Stock Purchase Rights #
(10) (a) Employment Agreement, Change in Control Agreement, Basic
Stock Option Agreement and Restricted Stock Agreement dated
December 11, 2001, with a commencement date of January 2,
2002, between FECI and Bradley D. Lehan ****
(10) (b) Credit and Pledge Agreements, as amended, dated March 22,
2001, between Florida East Coast Industries, Inc., Bank of
America, N.A., First Union National Bank and SunTrust Bank **
(10) (c) Distribution and Recapitalization Agreement ##
(10) (d) Shareholders' Agreement dated as of October 26, 1999 among
Alfred I. duPont Testamentary Trust, Nemours Foundation and
Florida East Coast Industries, Inc. ###
(10) (e) Various Promissory Notes and Mortgage Security Agreements
dated June 28, 2001 and September 27, 2001, covering certain
Flagler buildings at various office parks ***
(10) (f) FECI 1998 Stock Incentive Plan document ****
(10) (g) Representative "Change in Control Agreement" between FECI and
certain FECI Executive Officers *****
(20) Shareholders' letters dated October 9, 2000, with attached
Summary of Rights Plan-Term Sheet **
(21) Subsidiaries of Florida East Coast Industries, Inc. 68
(23) Independent Auditors' Consent Letter 72
(24) Power of Attorney 69
65
*Amended and Restated Articles of Incorporation and Amended and Restated By-Laws
of the Registrant, incorporated by reference to Appendices D and E,
respectively, to the definitive Proxy Statement on Schedule 14A filed with the
Securities and Exchange Commission on February 4, 2000 (Registration No.
001-08728).
**These documents filed on Form 10-K with the Securities and Exchange Commission
on March 30, 2001 and March 26, 2002.
***These documents filed on Form 10-Q with the Securities and Exchange
Commission on August 14, 2001 and November 8, 2001.
****These documents filed on Form 10-K with the Securities and Exchange
Commission on March 26, 2002.
*****This document filed on Form 10-Q with the Securities and Exchange
Commission on November 8, 2001.
#Stock Purchase Rights and Rights Agreement, incorporated by reference to
Exhibit 1 to Florida East Coast Industries, Inc.'s Registration Statement on
Form 8A, filed with the Securities and Exchange Commission on October 4, 2000.
##Distribution and Recapitalization Agreement, incorporated by reference to
Appendix A to the definitive Proxy Statement on Schedule 14A, filed with the
Securities and Exchange Commission on February 4, 2000 (Registration No.
001-08728).
###Shareholders' Agreement, incorporated by reference to Appendix C to the
definitive Proxy Statement on Schedule 14A, filed with the Securities and
Exchange Commission on February 4, 2000 (Registration No. 001-08728).
66
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 15, 2002.
FLORIDA EAST COAST INDUSTRIES, INC.
- -----------------------------------
(Registrant)
By: /s/ Richard G. Smith
----------------------------------------------------
Richard G. Smith, Executive Vice President
and Chief Financial Officer
/s/ Mark A. Leininger
----------------------------------------------------
Mark A. Leininger
Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated:
R.W. Anestis* Heidi J. Eddins*
- ------------------------------------------------- ---------------------------------------------------------
R.W. Anestis, Chairman, President, Chief Heidi J. Eddins, Executive Vice President, General
Executive Officer and Director Counsel and Secretary
R.S. Ellwood* J.N. Fairbanks*
- ------------------------------------------------- ---------------------------------------------------------
R.S. Ellwood, Director J.N. Fairbanks, Director
D.M. Foster* A.C. Harper*
- ------------------------------------------------- ---------------------------------------------------------
D.M. Foster, Director A.C. Harper, Director
A. Henriques* G.H. Lamphere*
- ------------------------------------------------- ---------------------------------------------------------
A. Henriques, Director G.H. Lamphere, Director
J. Nemec* H.H. Peyton*
- ------------------------------------------------- ---------------------------------------------------------
J. Nemec, Director H.H. Peyton, Director
W.L. Thornton*
- -------------------------------------------------
W.L. Thornton, Director
Date: March 15, 2002
--------------
*Such signature has been affixed pursuant to Power of Attorney.
67
21. Listing of parent and subsidiaries wholly owned, unless otherwise noted, by
Florida East Coast Industries, Inc. as of December 31, 2001:
Name of Subsidiary State of Incorporation/Organization
- ------------------ -----------------------------------
Florida East Coast Railway, L.L.C. Florida
Railroad Track Construction Corporation Florida
(100% owned by Florida East Coast Railway)
Florida East Coast Deliveries, Inc. Florida
(100% owned by Florida East Coast Railway)
Flagler Development Company Florida
Gran Central - Deerwood North, L.L.C. Delaware
(100% owned by Flagler Development Company)
Florida Express Carriers, Inc. Florida
Florida Express Logistics, Inc. Florida
(100% owned by Florida Express Carriers, Inc.)
EPIK Communications Incorporated
(100% common stock owned by Florida East Coast
Industries; 100% preferred stock owned by Florida East
Coast Railway) Delaware
EPIK Leasing Company Delaware
(100% owned by EPIK Communications Incorporated)
68
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each of the undersigned Directors of Florida
East Coast Industries, Inc., a Florida corporation ("Corporation"), which is
about to file with the Securities and Exchange Commission, Washington, D.C.
20549, under the provisions of the Securities Exchange Act of 1934, as amended,
a Report on Form 10-K for the fiscal year ended December 31, 2001, hereby
constitutes and appoints R.W. Anestis and Heidi J. Eddins as his true and lawful
attorneys-in-fact and agent, and each of them with full power to act, without
the other in his stead, in any and all capacities, to sign the 2001 Report of
Florida East Coast Industries, Inc., on Form 10-K and to file on behalf of the
Corporation such Report and amendments with all exhibits thereto, and any and
all other information and documents in connection therewith, with the Securities
and Exchange Commission, hereby granting unto said attorneys-in-fact and agent,
and each of them, full power and authority to do and perform any and all acts
and things requisite and ratifying and confirming all that each said
attorneys-in-fact and agent or any one of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands on the date
indicated below:
/s/ R. W. Anestis /s/ Heidi J. Eddins
- ------------------------------------ ------------------------------------------
R.W. Anestis, Chairman, President, Heidi J. Eddins, Executive Vice President,
Chief Executive Officer and Director General Counsel and Secretary
/s/ R.S. Ellwood /s/ J.N. Fairbanks
- ------------------------------------ ------------------------------------------
R.S. Ellwood, Director J.N. Fairbanks, Director
/s/ D.M. Foster /s/ A.C. Harper
- ------------------------------------ ------------------------------------------
D.M. Foster, Director A.C. Harper, Director
/s/ A. Henriques /s/ G.H. Lamphere
- ------------------------------------ ------------------------------------------
A. Henriques, Director G.H. Lamphere, Director
/s/ J. Nemec /s/ H.H. Peyton
- ------------------------------------ ------------------------------------------
J. Nemec, Director H.H. Peyton, Director
/s/ W.L. Thornton
- ------------------------------------
W.L.Thornton, Director
Date: March 15, 2002
--------------
69
FLORIDA EAST COAST INDUSTRIES, INC.
SCHEDULE III (CONSOLIDATED) - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001, 2000 AND 1999
(dollars in thousands)
Initial Cost to Company Carried at Close of Period
----------------------- --------------------------
Depreciable
-----------
Life Used
---------
Costs In Calculation
----- --------------
Capitalized Date in
----------- ---- --
Subsequent to Land & Land Buildings and Accumulated Capitalized Latest Income
------------- ----------- ------------- ----------- ----------- -------------
Description Land Acquisition Improvements Improvements Total Depreciation or Acquired Statement
----------- ---- ----------- ------------ ------------ ----- ------------ ----------- ---------
Duval County
Office Building 1,713 125,009 19,504 107,218 126,722 24,896 1985 3 to 40 years
Office/Showroom/Warehouses 362 41,051 5,974 35,439 41,413 12,531 1987 3 to 40 years
Office/Warehouses 332 11,438 3,834 7,936 11,770 2,618 1994 3 to 40 years
Front Load Warehouse 19 3,080 347 2,752 3,099 542 1998 3 to 40 years
Rail Warehouse 18 2,885 326 2,577 2,903 535 1998 3 to 40 years
Land w/Infrastructure 1,493 12,945 13,558 880 14,438 2,222 Various 3 to 40 years
Unimproved Land & Misc. Assets 6,126 290 6,416 - 6,416 - 1998 3 to 40 years
St. Johns County
Unimproved Land 801 3,282 4,083 - 4,083 4 various 15 years
Flagler County
Unimproved Land 997 3,512 4,509 - 4,509 11 various 15 years
Volusia County
Unimproved Land 1,606 3,807 5,413 - 5,413 31 various 15 years
Brevard County
Unimproved Land 4,014 7,363 11,377 - 11,377 - various 15 years
Indian River County
Unimproved Land 1 - 1 - 1 - various 15 years
St. Lucie County
Unimproved Land 398 245 643 - 643 - various 15 years
Martin County
Land w/ Infrastructure 390 2,949 3,339 - 3,339 391 various 15 years
Unimproved Land 1 - 1 - 1 - various 15 years
Okeechobee County
Unimproved Land 2 - 2 - 2 - various 15 years
Putnam County
Unimproved Land 2 - 2 - 2 - various 15 years
Palm Beach County
Unimproved Land 125 48 173 - 173 - various 15 years
Broward County
Rail Warehouse 26 2,776 26 2,776 2,802 9 1986 3 to 40 years
Land w/ Infrastructure 1,289 - 1,289 - 1,289 - 1992 3 to 40 years
Unimproved Land 3,171 6,156 9,327 - 9,327 - various 3 to 40 years
Manatee County
Unimproved Land 72 1 73 - 73 - various 15 years
70
FLORIDA EAST COAST INDUSTRIES, INC.
SCHEDULE III (CONSOLIDATED) - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001, 2000 AND 1999
(dollars in thousands)
Initial Cost to Company Carried at Close of Period
----------------------- --------------------------
Depreciable
-----------
Life Used
---------
Costs in Calculation
----- --------------
Capitalized Date in
----------- ---- --
Subsequent to Land & Land Buildings and Accumulated Capitalized Latest Income
------------- ----------- ------------- ----------- ----------- -------------
Description Land Acquisition Improvements Improvements Total Depreciation or Acquired Statement
----------- ---- ----------- ------------ ------------ ----- ------------ ----------- ---------
Dade County
Double Front Load Warehouse 727 6,607 2,058 5,276 7,334 2,211 1993 3 to 40 years
Rail Warehouses 1,373 13,127 3,908 10,592 14,500 4,456 1988 3 to 40 years
Office/Showroom/Warehouses 1,744 19,280 5,827 15,197 21,024 7,202 1988 3 to 40 years
Office Building 840 8,486 841 8,485 9,326 696 2000 3 to 40 years
Office/Warehouses 3,456 41,383 9,052 35,787 44,839 7,595 1990 3 to 40 years
Front Load Warehouses 3,089 24,624 8,773 18,940 27,713 7,757 1991 3 to 40 years
Office/Service Center 254 3,057 899 2,412 3,311 817 1994 3 to 40 years
Transit Warehouse 347 5,026 527 4,846 5,373 460 various 3 to 40 years
Land w/Infrastructure 9,079 12,138 20,426 791 21,217 2,311 various 3 to 40 years
Unimproved Land & Misc.
Assets 5,071 11,972 17,043 - 17,043 2 various 3 to 40 years
Orange County
Office Building 367 57,979 5,421 52,925 58,346 6,483 1998 3 to 40 years
Office/Showroom/Warehouses 195 20,905 18,220 2,880 21,100 2,958 1998 3 to 40 years
Land w/Infrastructure 130 1,797 1,818 109 1,927 110 1995 3 to 40 years
Unimproved Land &
Misc. Assets 9,367 7,560 16,927 - 16,927 - 1999 3 to 40 years
-------- ----------- ----------- -------- -------- ----------
TOTALS 58,997 460,778 201,957 317,818 519,775 86,848
======== =========== =========== ======== ======== ==========
Notes:
(A) The aggregate cost of real estate owned at December 31, 2001 for federal
income tax purposes is approximately $434,223.
(B) Reconciliation of real estate owned (dollars in thousands):
2001 2000 1999
---- ---- ----
Balance at Beginning of Year 477,299 427,448 418,502
Amounts Capitalized 55,955 64,633 73,761
Amounts Retired or Adjusted (13,479) (14,782) (64,815)
------------ ---------- ------------
Balance at Close of Period 519,775 477,299 427,448
============ ========== ============
(C) Reconciliation of accumulated depreciation (dollars in thousands):
Balance at Beginning of Year 68,647 52,770 51,987
Depreciation Expense 19,670 16,028 14,064
Amounts Retired or Adjusted (1,469) (151) (13,281)
------------ ----------- -----------
Balance at Close of Period 86,848 68,647 52,770
============ =========== ===========
71
Exhibit 23
Independent Auditors' Consent
The Board of Directors
Florida East Coast Industries, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-53144) on Form S-8 of Florida East Coast Industries, Inc. of our report
dated February 8, 2002, relating to the consolidated balance sheets of Florida
East Coast Industries, Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of income, changes in shareholders' equity and
comprehensive income, and cash flows for the three years ended December 31,
2001, and the related schedule, which report appears in the December 31, 2001
Annual Report on Form 10-K of Florida East Coast Industries, Inc.
KPMG LLP
Jacksonville, Florida
March 26, 2002
72