Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended ~~March~~June 3130, 2005

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

For the transition period from ___________ to _____________

Commission File Number 001-08728

FLORIDA EAST COAST INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)

Florida		59-2349968
(State or other jurisdiction of		(IRS Employer
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
incorporation or organization)		Identification No.)
One Malaga Street, St. Augustine, Florida (Address of principal executive offices)		32084 (Zip Code)
One Malaga Street, St. Augustine, Florida		32084
(Address of principal executive offices)		(Zip Code)

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

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

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

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

Class		Outstanding at ~~March~~June 3130, 2005
Common Stock-no par value		32,~~393~~568,~~174~~862 shares

FLORIDA EAST COAST INDUSTRIES, INC.

INDEX

		Page
		Numbers
~~PART I~~	PART I
~~FINANCIAL INFORMATION~~	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets - March 31, 2005 and December 31, 2004		2
	Consolidated Balance Sheets — June 30, 2005 and December 31, 2004		2
	Consolidated Statements of Income - Three Months Ended March 31, 2005 and 2004		3
	Consolidated Statements of Income — Three Months and Six Months Ended June 30, 2005 and 2004		3
	Consolidated Statements of Cash Flows - Three Months Ended March 31, 2005 and 2004		4
	Consolidated Statements of Cash Flows — Six Months Ended June 30, 2005 and 2004		4
	Notes to Consolidated Financial Statements		5 –— 12
Item 2.	Management’s Discussion and Analysis of the Consolidated Financial Condition and Results of Operations
	Comparison of First Quarter 2005 versus First Quarter 2004		13 – 19
	Comparison of Second Quarter 2005 versus Second Quarter 2004 and Six Months 2005 versus Six Months 2004,		13 — 24
	Changes in Financial Condition, Liquidity and Capital Resources		2025 – 2126
	Other Matters		2126 –— 2328
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		2328
Item 4.	Controls and Procedures		2328 — 29
PART II OTHER INFORMATION
	PART II
Item 1.	Legal Proceedings		24
	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		24
Item 1.	Legal Proceedings		30
Item 6.	Exhibits		25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
EX-10(b)
Item 4.	Submission of Matters to a Vote of Security Holders		31
EX-10(c).1
Item 6.	Exhibits		31
EX-10(c).2
EX-10(c).3
EX-10(c).4
EX-10(e)
EX-31.1
EX-31.2
EX-32.1

Item 1. Financial Statements

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

	March 31			December 31
	2005			2004
	(unaudited)
Assets
Current Assets:
Cash and cash equivalents (Note 12)		56,173			126,166
Accounts receivable (net)		31,381			32,435
Income tax receivable		—			4,238
Materials and supplies		3,646			1,822
Assets held for sale (Note 9)		6,498			6,900
Deferred income taxes		1,060			1,268
Prepaid expenses		5,734			5,008
Other current assets		3,524			3,133
Total current assets		108,016			180,970
Properties, Less Accumulated Depreciation		926,406			853,458
Other Assets and Deferred Charges		41,708			28,765
Total Assets		1,076,130			1,063,193
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses		37,609			47,578
Taxes payable (Note 11)		7,606			1,281
Deferred revenue		2,518			3,642
Short-term debt (Note 7)		4,970			4,789
Accrued casualty and other liabilities		956			1,230
Other accrued liabilities		14,989			11,001
Total current liabilities		68,648			69,521
Deferred Income Taxes		181,076			178,831
Long-Term Debt, net of current portion (Note 7)		336,687			338,065
Accrued Casualty and Other Liabilities		11,521			11,850
Shareholders’ Equity
Common Stock:		118,051			105,964
Common stock; no par value; 150,000,000 shares authorized; 38,836,349 shares issued and 32,393,174 shares outstanding at March 31, 2005 and 38,553,495 shares issued and 32,006,968 shares outstanding at December 31, 2004.
Retained earnings		580,264			573,808
Restricted stock deferred compensation		(15,086	)		(6,548	)
Treasury stock at cost (6,443,175 shares at March 31, 2005 and 6,546,527 shares at December 31, 2004) (Note 5)		(205,031	)		(208,298	)
Total shareholders’ equity		478,198			464,926
Total Liabilities and Shareholders’ Equity		1,076,130			1,063,193

CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

(Prior year’s results have been reclassified to conform to current year’s presentation.) See accompanying notes to consolidated financial statements (unaudited).


	June 30			December 31
	2005			2004
	(unaudited)
Assets
Current Assets:
Cash and cash equivalents (Note 12)		49,730			126,166
Accounts receivable (net)		33,516			32,435
Income tax receivable		—			4,238
Materials and supplies		3,239			1,822
Assets held for sale (Note 9)		14,890			6,900
Deferred income taxes		966			1,268
Prepaid expenses		4,995			5,008
Other current assets		3,956			3,133

Total current assets		111,292			180,970

Long Term Assets:
Properties, less accumulated depreciation		933,733			853,458
Building intangible assets, net (Note 9)		10,523			—
Prepaid commissions		10,726			8,658
Straight line rent		15,820			12,525
Other assets		5,899			7,582

Total long term assets		976,701			882,223

Total Assets		1,087,993			1,063,193


Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses		39,359			47,578
Taxes payable (Note 11)		14,296			1,281
Deferred revenue		2,748			3,642
Short-term debt (Note 7)		5,045			4,789
Accrued casualty and other reserves		789			1,230
Other accrued liabilities		9,097			11,001

Total current liabilities		71,334			69,521

Deferred Income Taxes		177,199			178,831

Long-Term Debt, net of current portion (Note 7)		335,397			338,065

Accrued Casualty and Other Liabilities		11,322			11,850

Shareholders’ Equity
Common Stock:		123,886			105,964
Common stock; no par value; 150,000,000 shares authorized; 39,064,787 shares issued and 32,568,862 shares outstanding at June 30, 2005 and 38,553,495 shares issued and 32,006,968 shares outstanding at December 31, 2004.
Retained earnings		588,716			573,808
Restricted stock deferred compensation		(12,614	)		(6,548	)
Treasury stock at cost (6,495,925 shares at June 30, 2005 and 6,546,527 shares at December 31, 2004) (Note 5)		(207,247	)		(208,298	)

Total shareholders’ equity		492,741			464,926

Total Liabilities and Shareholders’ Equity		1,087,993			1,063,193

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

See accompanying notes to consolidated financial statements (unaudited).

FLORIDA EAST COAST INDUSTRIES, INC. ~~CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share amounts) (unaudited)~~

	Three Months
	Ended March 31
	2005			2004
Operating revenues:
Railway operations		56,543			48,557
Realty rental and services		21,455			17,818
Realty sales		4,885			5,048
Total revenues		82,883			71,423
Operating expenses:
Railway operations		41,531			37,450
Realty rental and services		16,957			16,172
Realty sales		464			2,199
Corporate general & administrative		12,465			4,980
Total expenses		71,417			60,801
Operating profit		11,466			10,622
Interest income		407			196
Interest expense		(4,674	)		(3,946	)
Other income (Note 6)		6,252			2,697
		1,985			(1,053	)
Income before income taxes		13,451			9,569
Provision for income taxes		(5,380	)		(3,685	)
Income from continuing operations		8,071			5,884
Discontinued Operations (Note 2)
Income from operation of discontinued operations (net of taxes)		—			135
Gain on disposition of discontinued operations (net of taxes)		—			2,303
Income from discontinued operations		—			2,438
Net income		8,071			8,322
Earnings Per Share
Income from continuing operations – basic & diluted	$	0.25		$	0.16
Income from operation of discontinued operations – basic & diluted		—			—
Gain on disposition of discontinued operations – basic		—		$	0.07
Gain on disposition of discontinued operations – diluted		—		$	0.06
Net income – basic	$	0.25		$	0.23
Net income – diluted	$	0.25		$	0.22
Average shares outstanding – basic		31,868,687			36,578,461
Average shares outstanding – diluted		32,643,728			37,244,258

CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
(unaudited)

(Prior year’s results have been reclassified to conform to current year’s presentation, including discontinued operations.) See accompanying notes to consolidated financial statements (unaudited).


	Three Months						Six Months
	Ended June 30						Ended June 30
	2005			2004			2005			2004
Operating revenues:
Railway operations		58,891			50,102			115,434			98,659
Realty rental and services		22,267			17,798			43,722			35,615
Realty sales		1,894			2,613			6,779			7,661

Total revenues		83,052			70,513			165,935			141,935

Operating expenses:
Railway operations		42,968			37,435			84,499			74,885
Realty rental and services		18,742			15,501			35,699			31,671
Realty sales		357			1,918			821			4,117
Corporate general & administrative		3,189			3,753			15,654			8,733

Total expenses		65,256			58,607			136,673			119,406

Operating profit		17,796			11,906			29,262			22,529

Interest income		336			360			743			556
Interest expense		(5,073	)		(3,773	)		(9,747	)		(7,719	)
Other income (Note 6)		2,997			5,090			9,249			7,787

		(1,740	)		1,677			245			624

Income before income taxes		16,056			13,583			29,507			23,153
Provision for income taxes		(5,635	)		(5,229	)		(11,015	)		(8,914	)


Income from continuing operations		10,421			8,354			18,492			14,239

Discontinued Operations (Note 2)
(Loss) income from operation of discontinued operations (net of taxes)		(17	)		30			(17	)		164
(Loss) gain on disposition of discontinued operations (net of taxes)		—			(16	)		—			2,287

(Loss) income from discontinued operations		(17	)		14			(17	)		2,451


Net income		10,404			8,368			18,475			16,690


Earnings Per Share
Income from continuing operations — basic	$	0.32		$	0.23		$	0.58		$	0.39
Income from continuing operations — diluted	$	0.32		$	0.22		$	0.56		$	0.38
Income from operation of discontinued operations — basic & diluted		—			—			—		$	0.01
Gain on disposition of discontinued operations — basic & diluted		—			—			—		$	0.06

Net income — basic	$	0.32		$	0.23		$	0.58		$	0.46
Net income — diluted	$	0.32		$	0.22		$	0.56		$	0.45

Average shares outstanding — basic		32,139,301			36,664,203			32,003,994			36,621,332
Average shares outstanding — diluted		32,828,935			37,388,454			32,736,331			37,316,356

See accompanying notes to consolidated financial statements (unaudited).

FLORIDA EAST COAST INDUSTRIES, INC. ~~CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited)~~

	Three Months
	Ended March 31
	2005			2004
Cash Flows from Operating Activities
Net income		8,071			8,322
Adjustments to reconcile net income to cash generated by operating activities:
Depreciation and amortization		12,871			13,156
Gain on disposition of properties		(4,421	)		(6,598	)
Deferred taxes		2,453			4,096
Stock compensation expense		6,316			2,747
Changes in operating assets and liabilities:
Accounts receivable		1,054			(1,100	)
Prepaid expenses		(726	)		540
Other current assets		(3,100	)		(3,121	)
Other assets and deferred charges		(929	)		(2,123	)
Accounts payable		(9,923	)		(5,859	)
Taxes payable		7,763			4,056
Income tax refund		2,800			—
Other current liabilities		2,864			(2,250	)
Accrued casualty and other long-term liabilities		(603	)		(1,466	)
Net cash generated by operating activities		24,490			10,400
Cash Flows from Investing Activities
Purchases of properties		(97,010	)		(19,254	)
Proceeds from disposition of assets		4,885			17,648
Net cash used in investing activities		(92,125	)		(1,606	)
Cash Flows from Financing Activities
Payment of mortgage debt		(1,197	)		(690	)
Payment of dividends		(1,615	)		(1,476	)
Purchase of common stock		(1,461	)		(732	)
Proceeds from exercise of options		2,269			2,249
Payment for stock repurchase		(84	)		—
Other		(270	)		(80	)
Net cash used in financing activities		(2,358	)		(729	)
Net (Decrease) Increase in Cash and Cash Equivalents		(69,993	)		8,065
Cash and Cash Equivalents at Beginning of Period		126,166			125,057
Cash and Cash Equivalents at End of Period		56,173			133,122
Supplemental Disclosure of Cash Flow Information
Cash (received) paid for income taxes		(2,800	)		1,200
Cash paid for interest		5,472			4,357

CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

(Prior year’s results have been reclassified to conform to current year’s presentation.) See accompanying notes to consolidated financial statements (unaudited).


	Six Months
	Ended June 30
	2005			2004
Cash Flows from Operating Activities
Net income		18,475			16,690
Adjustments to reconcile net income to cash generated by operating activities:
Depreciation and amortization		26,324			24,806
Gain on disposition of properties		(5,958	)		(7,268	)
Deferred taxes		(1,330	)		5,181
Stock compensation expense		7,192			4,010
Changes in operating assets and liabilities:
Accounts receivable		(1,081	)		(4,104	)
Prepaid expenses		13			1,800
Other current assets		(4,297	)		(3,647	)
Other assets and deferred charges		(3,531	)		(4,084	)
Accounts payable		(8,119	)		(3,157	)
Taxes payable		14,453			12,557
Income tax refund		2,800			—
Other current liabilities		(2,498	)		(3,664	)
Accrued casualty and other long-term liabilities		(969	)		(1,000	)

Net cash generated by operating activities		41,474			38,120

Cash Flows from Investing Activities
Purchases of properties		(124,325	)		(47,676	)
Proceeds from disposition of assets		6,779			20,261

Net cash used in investing activities		(117,546	)		(27,415	)

Cash Flows from Financing Activities
Payment of mortgage debt		(2,412	)		(1,394	)
Payment of dividends		(3,567	)		(1,476	)
Proceeds from exercise of options		9,654			3,135
Stock repurchase program payments		(2,289	)		—
Purchase of common stock		(1,750	)		(1,352	)

Net cash used in financing activities		(364	)		(1,087	)

Net (Decrease) Increase in Cash and Cash Equivalents		(76,436	)		9,618
Cash and Cash Equivalents at Beginning of Period		126,166			125,057

Cash and Cash Equivalents at End of Period		49,730			134,675


Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes (2005 net of refund)		5,200			4,700

Cash paid for interest		10,983			8,905

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

See accompanying notes to consolidated financial statements (unaudited).

FLORIDA EAST COAST INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. General

In the opinion of management, the accompanying unaudited consolidated financial statements reflect all accruals and adjustments considered necessary to present fairly the Company’s financial position as of ~~March~~June 3130, 2005 and December 31, 2004, and the results of operations and cash flows for the three-month and six-month periods ended ~~March~~June 3130, 2005 and 2004. Results for interim periods are not necessarily indicative of the results to be expected for the year. The consolidated balance ~~sheet~~ sheet as of December 31, 2004 included herein has been derived from the Company’s audited ~~consolidated~~ consolidated financial statements for the year ended December 31, 2004. These interim financial ~~statements~~ statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ~~ended~~ ended December 31, 2004 filed with the Securities and Exchange Commission.

Certain prior year amounts have been reclassified to conform to the current year’s presentation, including discontinued operations.

Note 2. Discontinued Operations

Real Estate

In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), components of Flagler Development Company (Flagler) that meet certain criteria have been accounted for as discontinued operations. Therefore, income or loss attributable to the operations and sale of the components classified as discontinued operations are presented in the statement of income as discontinued operations, net of applicable income taxes.

Discontinued operations for 2004 include the gains on the sales and the related operations of an office building and an industrial building.

	Three Months						Six Months
	Ended March 31
	Ended June 30						Ended June 30
(dollars in thousands)	2005			2004			2005			2004
Summary of Operating Results of Discontinued Operations
Flagler realty rental revenues		—			~~551~~179			—			731
Flagler realty rental expenses		—25			~~332~~133			25			465
Operating income		—			219
(Loss) income before income taxes		(25	)		46			(25	)		266
Interest income		—			—
Income tax		8			(16	)		8			(102	)
Income before income taxes		—			219
(Loss) income from discontinued operations		(17	)		30			(17	)		164
Income tax		—			(84	)
(Loss) gain on disposition of discontinued operations (net of taxes of $9 thousand for the three months ended June 30, 2004, and $1.4 million for the six months ended June 30, 2004.)		—			(16	)		—			2,287
Income from discontinued operations		—			135
Gain on disposition of discontinued operations (net of taxes of $1,446 for the three months ended March 31, 2004.)		—			2,303

Note 3. Commitments and Contingencies

Florida East Coast Industries, Inc. (the Company or FECI) is the defendant and plaintiff in various lawsuits resulting from its operations. In the opinion of management, appropriate provision has been made in the financial statements for the estimated liability that may result from disposition of such matters. The Company maintains comprehensive liability insurance for bodily injury and property claims, but is self-insured or maintains a significant self-insured retention for these exposures, particularly at Florida East Coast Railway, LLC. (FECR or Railway). These lawsuits are related to alleged bodily injuries sustained by Railway employees or third parties, employment related matters such as alleged wrongful termination and commercial or contract disputes.

Note 3. Commitments and Contingencies

Florida East Coast Industries, Inc. (the Company or FECI) is the defendant and plaintiff in various lawsuits resulting from its operations. In the opinion of management, appropriate provision has been made in the financial statements for the estimated liability that may result from disposition of such matters. The Company maintains comprehensive liability insurance for bodily injury and property claims, but is self-insured or maintains a significant self-insured retention (i.e., deductible) for these exposures, particularly at Florida East Coast Railway, LLC. (FECR or Railway). These lawsuits are related to alleged bodily injuries sustained by Railway employees or third parties, employment related matters such as alleged wrongful termination and commercial or contract disputes.

The Company is subject to proceedings and consent decrees arising out of its 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~~In ~~Company~~the ~~has~~second ~~accrued~~quarter ~~$250~~2005,~~000,~~ ~~which~~the isCompany ~~its~~learned ~~estimated~~that ~~share~~the ofcosts ~~the~~for ~~total~~implementation ~~estimated~~of ~~cleanup~~the ~~costs~~clean ~~for~~up ~~the~~are ~~site.~~higher ~~The~~than ~~cleanup~~estimated isdue ~~expected~~ to beweather ~~substantially~~impacts ~~completed~~and bychanges ~~the~~in ~~end~~design. Based on a review of ~~2005.~~the Itproject isand ~~possible~~consultation ~~that~~with the ~~remediation~~project ~~costs~~manager, ~~could~~the beCompany ~~higher~~increased ~~than~~its reserve ~~anticipated,~~by ~~however~~$80,000 ~~based~~for ~~upon~~this ~~management’s~~matter ~~evaluation~~for ofits ~~the~~share ~~PRPs~~(estimated at $330, ~~which~~000) ~~include~~of the ~~City~~increased ofcosts. ~~Jacksonville,~~The ~~CSX~~clean up ~~Transportation,~~is ~~Inc.,~~expected ~~and~~to ~~the~~be ~~federal~~completed ~~government,~~by the ~~Company~~ ~~does~~end ~~not~~of ~~expect~~2005. toIt ~~incur~~is ~~additional~~possible ~~material~~that ~~amounts,~~costs ~~even~~will ~~though~~increase further but based on currently available information, the Company ~~may~~does ~~have joint~~not ~~and~~anticipate ~~several liability~~material increases.

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.

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.

On February 24, 2004, the Broward County Commission approved the negotiated termination of a long-term ground lease between the County and the Company. The settlement terminated all agreements affecting the Company in respect to the leased premises including a claim by the city of Hollywood for payments in-lieu of taxes. During the third quarter of 2003, the Company recorded a charge of $16.4 million ($10.1 million after tax), reflecting management’s estimate of the cost of terminating the ground lease. Final costs of terminating the ground lease, including the settlement with the city, were $16.9 million. The additional costs of $0.5 million are included in the 2004 second quarter operating results.

Note 4. 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. Applying the treasury stock method,: the “in-the-money” stock options resulted in the dilution of ~~775~~732,~~041~~337 shares and ~~665~~695,~~797~~024 shares at ~~March~~June 3130, 2005 and 2004, respectively. “Out-of-the-money” shares were ~~544~~303,~~943~~439 shares and 1,~~433~~359,~~854~~838 shares at ~~March~~June 3130, 2005 and 2004, respectively.

Note 5. Dividends and Stock Repurchase

On ~~February~~June 172, 2005, the Company declared a dividend of $0.0506 per share on all issued and ~~outstanding~~ outstanding common stock, payable ~~March~~June 1830, 2005 to shareholders of record as of ~~March~~June 416, 2005, a 20% increase over the last quarterly dividend. 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.

On August 13, 2004, the Company purchased 5.5 million shares of common stock from The Alfred I. duPont Testamentary Trust and The Nemours Foundation for $34.50 per share or approximately $191 million. These repurchased shares are shown on the Consolidated Balance Sheets as Treasury Stock. ~~This transaction used the remaining $72 million that existed under the previous $75 million~~

~~stock~~This transaction used the remaining $72 million that existed under the previous $75 million stock repurchase authorization. As a result, on August 4, 2004, the Board of Directors authorized ~~the~~ the expenditure of $40 million to repurchase common stock from time to time through a program of ~~open~~ open market purchases and/or privately negotiated transactions. As of ~~March~~June 3130, 2005, $02.13 million of of stock had been repurchased through this program.

Note 6. Other Income

	Three Months						Six Months
	Ended March 31
	Ended June 30						Ended June 30
(dollars in thousands)	2005			2004			2005			2004
Pipe & wire crossings/signboards		1,~~695~~248			13,~~029~~435			2,943			4,464
Fiber lease income		1,~~750~~827			1,~~692~~807			3,577			3,499
Air rights income		~~3,049~~—			—			3,049			—
Other (net)		(~~242~~78	)		(24152	)		(320	)		(176	)
		6,252			2,697
		2,997			5,090			9,249			7,787

FECR generates income from the grant of licenses and leases to use railroad property and rights-of-way for outdoor advertising, parking lots and lateral crossings of wires and pipes by municipalities and utility and telecommunications companies. This income is recorded in other income as “pipe and wire crossings/signboards” as it is earned. FECR generates other income from leases to telecommunications companies for the installation of fiber optic and other facilities on the ~~Railroad~~Railway right-of-way. This income is recorded in other income as “fiber lease income” as it is earned. Included in first quarter 2005 results is one-time income associated with the sale of air rights and related surface and sub-surface easements and licenses on approximately 300 feet of the Railway’s right-of-way.

Note 7. Debt

Flagler has issued $352 million of mortgage notes due on varying dates from 2008 through 2011. At ~~March~~June 3130, 2005, ~~approximately~~ $~~342~~340.4 million was outstanding on these notes. The notes are collateralized by buildings and properties having a carrying value at ~~March~~June 3130, 2005 of $~~297~~293.3 5 million, net of accumulated depreciation of $~~133~~138.0 million. The mortgage notes carry both fixed rates (various ranging from 5.27% —to 7.39%) and variable rates (1.0% over the 90 day LIBOR index; – 3.9154% at ~~March 31~~June 30, 2005). Repayments of principal and interest are payable monthly based upon a thirty-year amortization schedule.

The fair value of the Company’s mortgage notes is estimated based on current rates available to the Company for debt of the same remaining maturities. At ~~March~~June 3130, 2005, the Company considers the estimated fair market value of the mortgage notes to be $~~361~~367.14 million.

On February 22, 2005, the Company entered into a new unsecured $150 million, 5-year revolving credit agreement with a syndication of banks. The new credit facility provides a more favorable interest rate and terms and replaces the Company’s previous $200 million credit agreement. The Company will pay (quarterly) commitment fees, as applicable under the agreement, at a range of 12.5 -to 25.0 basis points. The Company’s ~~new~~ revolving credit agreement requires the maintenance of ~~certain~~ certain financial ratios (interest coverage and leverage) and maintenance of minimum established levels of net worth. In addition there are various established limitations (dollars and otherwise) on certain types of liens, investments (including loans and advances) and acquisitions, limitation on on transactions with affiliates, merger and sales of all or substantially all of the assets; and ~~use~~ use of proceeds. Some of the above covenants provide specific 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. At ~~March~~June 3130, 2005, there were no borrowings outstanding on this facility.

Note 8. 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. In December 2004, the Financial Accounting Standards Board delayed the implementation of SFAS 123R (Shared-Based Payment) until January 1, 2006. The Company estimates the adoption of this guidance will not materially effect the 2006 financial statements of the Company. The Company has not granted options since 2003. The amount of unvested options at December 31, 2005 is estimated at approximately 25,000 shares.

In a first quarter 2004 transaction (the “Transaction”) initiated at the request of the Board of Directors, the Company cancelled vested, in-the-money stock options (the “Options”) to acquire 144,000 shares of the Company’s common stock held by the Company’s former Chief Executive Officer (“CEO”), Robert W. Anestis. The embedded value of the Options (fair market value less strike price) was $2 million. The embedded value, less applicable tax withholding, was paid in common stock. The CEO was issued 36,407 shares (valued at $35.06 per share, which was the closing price on February 27, 2004). Because the original stock option award was cancelled and the Company replaced this award with FECI common stock, in accordance with FASB Interpretation No. 44, the Company was required to recognize compensation expense in the amount of $2 million with respect to the Transaction.

The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), to stock-based employee compensation:

	Three Months						Six Months
	Ended Mach 31
	Ended June 30						Ended June 30
(dollars in thousands, except per share amounts)	2005			2004			2005			2004
Net income – as reported		8,071			8,322
Net income — as reported		10,404			8,368			18,475			16,690
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all stock option awards (net of related tax effects)		(~~110~~92	)		(190	)		(206	)		(380	)
Pro forma net income		710,~~961~~312			8,~~132~~178			18,269			16,310
Earnings per share:
Basic – as reported	$	0.25		$	0.23
Basic — as reported	$	0.32		$	0.23		$	0.58		$	0.46
Basic – pro forma	$	0.25		$	0.22
Basic — pro forma	$	0.32		$	0.22		$	0.57		$	0.45
Diluted – as reported	$	0.25		$	0.22
Diluted — as reported	$	0.32		$	0.22		$	0.56		$	0.45
Diluted – pro forma	$	0.24		$	0.22
Diluted — pro forma	$	0.31		$	0.22		$	0.56		$	0.44

During the first quarter of 2005, Mr. Adolfo Henriques was appointed Chairman, President, and ~~Chief~~ Chief Executive Officer of the Company succeeding Mr. Robert W. Anestis. Mr. Robert W. Anestis received termination benefits related to the termination provisions of his employment agreement. These benefits totaled $7.7 million in the quarter and included $4.2 million of additional equity compensation ($1.9 million due to the accelerated vesting of equity compensation), $3.3 million of severance payments and $0.2 million of other benefits. Mr. Adolfo Henriques received grants of 25,500 shares (immediate vesting) and 80,000 shares (3-year vesting) of stock, which were issued from Treasury stock.

Note 9. Realty Acquisitions, Land Sales, and Associated Costs

Flagler utilizes Statement of Financial Accounting Standard No. 141, “Business Combinations” (SFAS 141) to account for the costs of acquiring buildings. This statement provides a framework for allocating the costs of acquisition to tangible assets, financial assets, and separately identifiable intangible assets, less acquired liabilities, using the purchase method of accounting.

During the first quarter of 2005, Flagler purchased two buildings: one for $41.5 million with approximately 240,000 rentable square feet and 5.1 acres of land and one for $19.5 million with

~~approximately~~Note ~~107,000 rentable square feet and 8~~9.0 ~~acres~~Realty ofAcquisitions, ~~land.~~Land ~~The majority ($50.1 million) of acquisition costs of these buildings were allocated to various tangible assets (including land~~Sales, ~~land~~ ~~improvements, building~~ and ~~parking~~Associated ~~decks) with the remaining costs allocated to financial~~Costs assets (e.g. above or below market value of in-place leases) and intangible assets (e.g. customer relationship intangible). Financial assets and intangible assets are generally amortized over the remaining life (approximately 3.5 to 8 years) of the underlying tenant leases.

InFlagler ~~accordance~~utilizes ~~with~~ Statement of Financial Accounting Standard No. 66141, “~~Accounting~~Business ~~for Sale of Real Estate,~~Combinations” (SFAS 66 141) ~~revenue~~to account for ~~realty~~the ~~land~~costs ~~sales~~of isacquiring ~~recognized~~buildings. ~~upon~~This ~~the~~statement ~~closing~~provides ofa ~~sales~~framework ~~contracts~~for ~~and~~allocating ~~when~~the ~~collection~~costs of ~~the~~acquisition ~~sales~~to ~~proceeds~~tangible isassets, ~~reasonably~~financial ~~assured.~~assets, ~~During~~and ~~the~~separately identifiable ~~current~~intangible ~~period~~assets, ~~all sales~~less ~~proceeds~~acquired ~~were~~liabilities, ~~received~~using inthe ~~cash~~purchase atmethod ~~closing~~of accounting.

~~The~~During ~~net~~the ~~book~~first ~~value~~quarter of 2005, Flagler purchased two buildings: ~~and~~one ~~land~~for is$41.5 million ~~presented~~with approximately ~~separately~~240,000 inrentable ~~the~~square ~~Consolidated~~feet ~~Balance~~and ~~Sheets when~~5.1 ~~assets~~acres ~~meet~~of ~~the~~land ~~criteria~~and one for ~~classification~~$19.5 million aswith approximately ~~“assets~~107,000 ~~held~~rentable ~~for~~square ~~sale”~~feet inand ~~accordance~~8.0 ~~with~~acres ~~SFAS 144~~of land. The majority (i$50.~~e.,~~1 million) aof acquisition ~~sales~~costs ~~contract~~for isthese ~~executed~~buildings ~~and~~were ~~significant~~allocated ~~non-refundable~~to ~~monies~~various ~~are~~tangible ~~provided~~assets by(including ~~the~~land, ~~buyer.)~~land ~~Not~~improvements, ~~all~~ building and ~~land~~parking ~~sales,~~decks) ~~particularly~~with ~~less~~the ~~significant~~remaining ~~dispositions,~~costs ~~meet~~allocated ~~the~~to financial ~~criteria~~assets ~~described~~(e.g., above. Ator ~~March 31,~~below ~~2005,~~market avalue ~~large~~of ~~land~~in-place ~~parcel~~leases) and ~~several~~intangible ~~small~~assets ~~land~~(e.g., ~~parcels~~customer ~~under~~relationship ~~contract~~intangible). ~~for~~Financial ~~sale~~assets and intangible assets are ~~included~~generally inamortized ~~this~~over ~~category~~the remaining life (approximately 3.5 to 8 years) of the underlying tenant leases.

In accordance with Statement of Financial Accounting Standard No. 66, “Accounting for Sale of Real Estate,” (SFAS 66) revenue for realty land sales is recognized upon the closing of sales contracts and when collection of the sales proceeds is reasonably assured as well as other factors.

The net book value of buildings and land is presented separately in the Consolidated Balance Sheets when assets meet the criteria for classification as “assets held for sale” in accordance with SFAS 144. Not all building and land sales, particularly less significant dispositions, meet the criteria described above. At June 30, 2005, two large land parcels, which are expected to close in fourth quarter of 2005, and several small land parcels under contract for sale are included in this category.

The Company capitalizes all infrastructure costs (including costs of infrastructure assets deeded to governmental authorities) into the basis of the properties benefiting from such infrastructure and allocates these costs to individual parcels on a relative fair value basis as required by Statement of Financial Accounting Standard No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects.” (SFAS 67)

Note 10. 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 two reportable operating segments, both within the same geographic area. These are the railway and realty segments.

The railway segment provides freight transportation along the east coast of Florida between Jacksonville and Miami.

The realty segment is engaged in the acquisition, development, leasing, management, operation and selected sale of commercial and industrial property, as well as undeveloped land.

FECR generates other income from leases to telecommunications companies for the installation of fiber optic and other facilities on the railroad right-of-way. In addition, FECR generates revenues from the grant of licenses and leases to use railroad property and rights-of-way for outdoor advertising, parking lots and lateral crossings of wires and pipes by municipalities and utility and telecommunications companies. These miscellaneous rents are included in other income in the accompanying statement of operations. From time-to-time other non-operating sources of income are generated from the right-of-way. These items are included in other income as they occur and are earned (See Note 6 of the financial statements for additional information).

In addition, ~~FECI and~~ FECR generate revenues and expenses from the rental, leasing, and sale of ~~buildings~~ buildings and properties that are ancillary to the railroad’s operations. These revenues and expenses are included in the realty segment.

The Company’s reportable segments are strategic business units that offer different products and services and are managed separately.

Information by industry segment:

	Three Months						Six Months
	Ended March 31
	Ended June 30						Ended June 30
(dollars in thousands)	2005			2004			2005			2004
Operating Revenues
Railway operations		5658,~~543~~891			4850,~~557~~102			115,434			98,659
Realty:
Flagler realty rental and services		2021,~~573~~440			17,~~016~~106			42,013			34,121
Flagler realty sales		~~200~~1,273			42,~~031~~526			1,473			6,557
Other rental		~~882~~827			~~802~~692			1,709			1,494
Other sales		~~4,685~~621			~~1,017~~87			5,306			1,104
Total realty		2624,~~340~~161			2220,~~866~~411			50,501			43,276
Total revenues		82,883			71,423
Total revenues *		83,052			70,513			165,935			141,935
Operating Expenses
Railway operations		4142,~~531~~968			37,~~450~~435			84,499			74,885
Realty:
Flagler realty rental and services		1618,~~574~~173			1514,~~345~~442			34,747			29,785
Flagler realty sales		55357			21,~~199~~918			412			4,117
Other rental		~~383~~569			~~827~~1,059			952			1,886
Other sales		~~409~~—			—			409			—
Total realty		1719,~~421~~099			1817,~~371~~419			36,520			35,788
Corporate general & administrative		123,~~465~~189			43,~~980~~753			15,654			8,733
Total expenses		71,417			60,801
Total expenses *		65,256			58,607			136,673			119,406
Operating Profit (Loss)
Railway operations		15,~~012~~923			1112,~~107~~667			30,935			23,774
Realty		85,~~919~~062			42,~~495~~992			13,981			7,488
Corporate general & administrative		(123,~~465~~189	)		(43,~~980~~753	)		(15,654	)		(8,733	)
Operating profit		1117,~~466~~796			1011,~~622~~906			29,262			22,529
Interest income		~~407~~336			~~196~~360			743			556
Interest expense		(45,~~674~~073	)		(3,~~946~~773	)		(9,747	)		(7,719	)
Other income		62,~~252~~997			25,~~697~~090			9,249			7,787
		1,985			(1,053	)
		(1,740	)		1,677			245			624
Income before income taxes		1316,~~451~~056			913,~~569~~583			29,507			23,153
Provision for income taxes		(5,~~380~~635	)		(35,~~685~~229	)		(11,015	)		(8,914	)
Income from continuing operations		810,~~071~~421			58,~~884~~354			18,492			14,239
Discontinued Operations
Income from operation of discontinued operations (net of taxes)		—			135
(Loss) income from operation of discontinued operations (net of taxes)		(17	)		30			(17	)		164
Gain on disposition of discontinued operations (net of taxes)		—			2,303
(Loss) gain on disposition of discontinued operations (net of taxes)		—			(16	)		—			2,287
Net Income		810,~~071~~404			8,~~322~~368			18,475			16,690

~~(Prior~~* For ~~year’s~~the ~~results~~periods ~~have~~presented, ~~been~~there ~~reclassified~~are tono ~~conform~~inter-segment torevenues ~~current~~and ~~year’s presentation,~~expenses ~~including discontinued operations.)~~

Note 11. Taxes Payable

(dollars in thousands)	~~March~~June 3130, 2005		Dec. 31, 2004
Federal income tax		12,~~490~~898		—
State income tax		—		—
Property taxes		510,~~711~~992		855
Other		~~405~~406		426
Taxes payable		714,~~606~~296		1,281

Increases in property taxes results from payment of these taxes in the fourth quarter of each year.

Note 12. Cash Deposits and §1031 Escrow Funds

Cash and cash equivalents at ~~March~~June 3130, 2005 consisted of $255.2 million held in §1031 escrow funds ~~for~~ for possible tax-deferred reinvestment in other property, and $3144.05 million of funds on hand and invested in money market funds and short-term securities.

At December 31, 2004, $91.4 million of §1031 escrow funds were available for reinvestment. During the first ~~quarter~~six months of 2005, $6971.61 million of these funds were used for reinvestment in ~~replacement~~ replacement property at Flagler and FECR, and $120.23 million expired with no qualifying replacement property purchased. ~~The~~In ~~remaining~~ addition, $205.62 million ~~will~~of beland ~~held~~sale inproceeds were added to the §1031 escrow funds ~~which,~~during ~~unless~~2005. ~~qualifying~~If ~~property~~not isreinvested ~~purchased~~in replacement properties, these proceeds will expire at various dates through ~~June~~December 2005, at which time the unused monies will be used for general purposes of the Company. ~~Management currently anticipates that approximately $18 million of these funds will not be~~ ~~re-invested. During the quarter, $4.6 million of land sale proceeds were added to the §1031 escrow funds.~~

Note 13. Engineering Study

During 2003, FECR commenced an “engineering and economics” based study of its principal right-of-way and equipment assets to develop a multi-year maintenance and replacement plan and ~~associated~~ associated estimates of the assets’ remaining lives. The engineering studies segregated the equipment and right-of-way assets into the following major groupings: locomotives, rolling stock and equipment (e.g. hoppers, flatcars, auto racks, trailers, etc.), bridges, and track structure (rail, ties, ballast, and other track material). During the third and fourth quarters of 2004, the ~~engineering~~ engineering studies (including associated estimated depreciation lives) for locomotives and rolling stock were completed. During the first quarter of 2005, the engineering study for Bridges was finalized. The finalization of the track structure engineering study is expected during the third quarter of 2005.

The Bridge study covered FECR’s 72 bridges or approximately 13,000 linear feet of bridge assets (30% ~~was~~were inspected during the study). The vast majority of FECR’s bridges are short spanned (i.e. 200 feet or less). FECR’s bridges are generally constructed of steel (majority) and concrete materials. The Bridge study indicated no substantive change in the depreciable lives and generally, bridges would continue to be depreciated over a 61.5-year life. No material change in annual depreciation is expected. The Bridge study also indicated that while FECR’s bridge assets are in acceptable operational condition based on the Company’s continuing maintenance and inspection programs, FECR is entering a 10 –to 20 year period where, based on the age and construction ~~materials~~ materials used, certain bridges will be studied further, monitored and possibly replaced. The management team does not expect any replacement costs for bridges to materially alter its normative annual capital budget, however this estimate is subject to change, and such changes could be material. FECR’s 2005 capital program includes $3.79 million for bridge replacement and repairs. This study did not include the downtown Jacksonville Bridge, which will be evaluated separately (due to its scale and design) and is expected to be finished in the ~~second~~third quarter of 2005.

The locomotive and rolling stock study indicated no substantive change in the annual maintenance or capital replacement programs. FECR will continue its general practice of maintaining locomotives and rolling stock for the entirety of their useful operating life.

From the locomotive engineering study, FECR identified three major sub-components of its locomotive assets: Hulk/Chassis, Locomotive engine and Combos (i.e. wheel assemblies, electric

From the locomotive engineering study, FECR identified three major sub-components of its locomotive assets: Hulk/Chassis, Locomotive engine and Combos (e.g., wheel assemblies, electric motors, etc.) The replacement and resulting depreciable lives for each of these sub-components is 50 years, 7 years and 3 years, respectively. Annual depreciation is expected to increase approximately 10.6% or $0.3 million as a result of the study. These depreciable lives were implemented in the fourth quarter of 2004.

From the rolling stock ~~and equipment~~ engineering study, FECR identified three major sub-components of its rolling stock assets: Hulk/Chassis, wheel assemblies (i.e.g., trucks), and doors. The replacement and resulting depreciable lives for each of these sub-components is 40- to 50 years, 7 years and 7 years, respectively. ~~Equipment~~General FECR equipment, which was included in the rolling stock study, has depreciable lives ~~are~~of 10- to 20 years. Annual depreciation is expected to increase approximately 10.6% or $0.4 million as a result of the study. These depreciable lives were implemented in the first quarter of 2005.

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

Note 14. Supplemental Employee Retirement Plan

Effective March 28, 2005, The Company established and adopted a Supplemental Executive Retirement Plan (the “Plan”). The purpose of this Plan is to provide specified benefits to a select group of management or highly compensated employees who contribute materially to the continued growth, development, and future business success of the Company. This Plan shall be un-funded for tax purposes and for purposes of Title I of ERISA. The sole participant in the Plan at this time is Adolfo Henriques.

Mr. Henriques’ employment agreement provides for an initial contribution to his account of $500,000, a second contribution of $130,000 on January 1, 2006 with succeeding annual contributions equal to 20% of his annual base salary. The balances in the account will be credited with annual earnings equal to the product of the greater of 5%, or the applicable federal rate (based on the long term rate for January of each year) times the account balance. Mr. Henriques will be 100% vested in his account balance on the second anniversary of employment. Cost of the plan will be accounted for in accordance with Statement of Financial Accounting Standard No. 87, “Employers’ Accounting for Pensions” (SFAS 87).

Item 2. ~~Management’s Discussion and Analysis of the Consolidated Financial Condition and Results of Operations~~

Management’s Discussion and Analysis of the Consolidated
Financial Condition and Results of Operations

Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include the Company’s present expectations or beliefs concerning future events. These statements may be identified by the use of words like “plan,” “expect,” “aim,” “believe,” “project,” “anticipate,” “intend,” “estimate,” “may,” “will,” “should,” “could,” and other expressions that indicate future events and trends. Such forward-looking statements may include, without limitation, statements that the Company does not expect that lawsuits, review of open tax years by the IRS, environmental costs, commitments, including future contractual obligations, contingent liabilities, financing availability, labor negotiations or other matters will have a material adverse effect on its consolidated financial condition, statements concerning future capital needs and sources of such capital funding, statements concerning future intentions with respect to the payment of dividends, execution of a share repurchase program, and other potential capital distributions, number of shares to be repurchased, availability of cash to fund the stock repurchase, ability to reinvest (tax deferred) sales proceeds into qualifying §1031 properties, future growth potential of the Company’s lines of business, performance of the Company’s product offerings, other similar expressions concerning matters that are not historical facts, and projections relating to the Company’s financial results. The Company cautions that such statements are necessarily based on certain assumptions, which are subject to risks and uncertainties that could cause actual results to materially differ from those contained in these forward-looking statements. Important factors that could cause such differences include, but are not limited to, the changing general economic conditions (particularly in the state of Florida, the southeast US and the Caribbean) as they relate to economically sensitive products in freight service and building rental activities; ability to manage through economic recessions or downturns in customers’ business cycles; industry competition; possible future changes in the Company’s structure, lines of business, business and investment strategies, and related implementation; legislative or regulatory changes; technological changes; volatility of fuel prices (including volatility caused by military actions); changes in levels of preventive and capital maintenance and depreciation rates resulting from future railway right-of-way and equipment life studies; changes in the ability of the Company to complete its financing plans, changes in interest rates, the settlement of future contractual obligations as estimated in time and amount (customary to the Company’s historical cost structure) including labor direct negotiations, mediation and in one instance, mutually agreed binding arbitration in a satisfactory way; changes in insurance markets, including increases in insurance premiums and deductibles; the availability and costs of attracting and retaining qualified independent third party contractors; liability for environmental remediation and changes in environmental laws and regulations; the ultimate outcome of environmental investigations or proceedings and other types of claims and litigation; natural events such as weather conditions, hurricanes, floods, earthquakes and forest fires; discretionary government decisions affecting the use of land and delays resulting from weather conditions and other natural occurrences, like hurricanes, that may affect construction or cause damage to assets; the ability of buyers to terminate contracts to purchase real estate from the Company prior to the expiration of inspection periods ; failure or inability of third parties to fulfill their commitments or to perform their obligations under agreements; costs and availability of land and construction materials; buyers’ inability or unwillingness to close transactions, particularly where buyers only forfeit deposits upon failure to close; the Company’s future taxable income and other factors that may affect the availability and timing of utilization of the Company’s deferred tax assets; uncertainties, changes or litigation related to tax laws, regulations and the application thereof that could limit the tax benefits of the EPIK sale or of other possible transactions involving the Company; and other risks inherent in the real estate and other businesses of the Company.

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

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

to the forward-looking statements in this Report that reflect events or circumstances after the date hereof, or reflects the occurrence of unanticipated events.

Results of Operations

Consolidated Results ~~First Quarter~~

~~FECI~~Second ~~reported~~Quarter consolidated revenues of $82.9 million for the first quarter of 2005 compared to $71.4 million in the first quarter of 2004, an increase of 16.0%. The Company reported income from continuing operations of $8.1 million and ~~$5.9 million~~Six for the quarters ended March 31, 2005 and 2004, respectively. Consolidated revenues increased in 2005 by $11.5 million due to improved revenues at FECR ($7.9 million) and from Flagler’s realty rental and services’ revenue ($3.6 million). 2005 income from continuing operations increased by $2.2 million compared to 2004, primarily as the result of the above-mentioned revenue increases, off-set by an increase ($7.5 million) in corporate general and administrative expenses, primarily transition costs associated with the succession of the Chief Executive Officer, for the quarter. The Company reported net income of $8.1 million, or, $0.25 per diluted share, compared with net income of $8.3 million, or $0.22 per diluted share, in the first quarter of 2004. Net income for 2004 included a gain on disposition of $2.3 million related to the sale of a building in March 2004. Months

~~Railway~~FECI reported consolidated revenues of $83.1 million for the second quarter of 2005 compared to ~~First~~$70.5 million ~~Quarter~~in the second quarter of 2004, an increase of 17.8%. The Company reported income from continuing operations of $10.4 million and $8.4 million for the quarters ended June 30, 2005 and 2004, respectively. Consolidated revenues increased in 2005 by $12.6 million due to improved revenues at FECR ($8.8 million) and from Flagler’s realty rental and services’ revenue ($4.3 million). 2005 income from continuing operations increased by $2.0 million compared to 2004, primarily as the result of the above-mentioned revenue increases. The Company reported net income of $10.4 million, or, $0.32 per diluted share, compared with net income of $8.4 million, or $0.22 per diluted share, in the second quarter of 2004.

~~FECR’s~~For ~~traffic~~the ~~volume~~six ~~and~~months ended June 30, 2005, FECI reported consolidated revenues of $165.9 million, compared to $141.9 million for the ~~three~~same period in 2004. The Company reported income from continuing operations of $18.5 million and $14.2 million for the six months ended ~~March~~June 3130, 2005 and 2004, respectively,. ~~are~~The ~~shown~~Company ~~below~~reported net income of $18.5 million, Inor ~~addition~~$0.56 per diluted share, ~~FECR’s~~for ~~quarterly~~the six ~~operating~~months ~~expenses~~ended ~~are~~June 30, ~~presented~~2005, compared to net income of $16.7 million, or $0.45 per diluted ~~below~~share, for the prior year period.

~~TRAFFIC Three Months Ended March 31 (dollars and units in thousands)~~ Railway

	2005		2004		Percent			2005		2004		Percent
Commodity	Units		Units		Variance			Revenues		Revenues		Variance
Rail Carloads
Crushed stone (aggregate)		35.9		32.3		11.1			17,028		15,109		12.7
Construction materials		1.8		1.3		38.5			1,322		800		65.3
Vehicles		6.3		6.1		3.3			4,909		4,708		4.3
Foodstuffs & kindred		3.5		3.0		16.7			2,968		2,306		28.7
Chemicals & distillants		0.9		1.0		(10.0	)		1,100		1,124		(2.1	)
Paper & lumber		1.8		1.3		38.5			1,925		1,376		39.9
Other		4.4		4.2		4.8			2,852		2,531		12.7
Total carload		54.6		49.2		11.0			32,104		27,954		14.8
Intermodal		74.7		64.9		15.1			23,283		19,643		18.5
Total freight units/revenues		129.3		114.1		13.3			55,387		47,597		16.4
Ancillary revenue		—		—		—			1,156		960		20.4
Railway segment revenue		—		—		—			56,543		48,557		16.4

Second Quarter

FECR’s traffic volume and revenues for the three months ended June 30, 2005 and 2004, respectively, are shown below. In addition, FECR’s quarterly operating expenses are presented below.

TRAFFIC

Three Months Ended June 30
(dollars and units in thousands)


	2005		2004		Percent		2005		2004		Percent
Commodity	Units		Units		Variance		Revenues		Revenues		Variance
Rail Carloads
Crushed stone (aggregate)		36.6		33.5		9.3		18,192		15,664		16.1
Construction materials		1.8		1.3		38.5		1,318		895		47.3
Vehicles		5.8		5.7		1.8		4,732		4,498		5.2
Foodstuffs & kindred		3.5		3.0		16.7		3,061		2,347		30.4
Chemicals & distillants		1.0		1.0		—		1,222		1,166		4.8
Paper & lumber		1.9		1.3		46.2		2,060		1,517		35.8
Other		3.8		3.1		22.6		2,578		2,101		22.7

Total carload		54.4		48.9		11.2		33,163		28,188		17.6
Intermodal		76.1		69.1		10.1		24,729		21,195		16.7

Total freight units/revenues		130.5		118.0		10.6		57,892		49,383		17.2
Ancillary revenue		—		—		—		999		719		38.9

Railway segment revenue		—		—		—		58,891		50,102		17.5

RAILWAY OPERATING EXPENSES

	THREE MONTHS ENDED
	Three Months
	MARCH 31
	Ended June 30
(dollars in thousands)	2005			2004
Compensation & benefits		1514,~~216~~396			13,~~363~~899
Fuel		5,~~357~~966			3,~~713~~736
Equipment rents (net)		1,~~120~~134			~~830~~778
Car hire (net)		(~~893~~419	)		(~~308~~552	)
Depreciation		5,~~371~~399			54,~~022~~962
Purchased services		2,~~460~~373			2,~~497~~162
Repairs to/by others (net)		(~~810~~749	)		(~~554~~663	)
Load/unload		2,~~226~~241			12,~~930~~001
Casualty & insurance		1,~~055~~558			1,~~497~~460
Property taxes		1,535			1,431
Materials		3,~~076~~248			2,~~784~~688
General & administrative expenses		2,~~027~~185			2,~~267~~167
Outside contractor delivery costs		3,~~109~~488			2,~~426~~793
Other		~~682~~613			~~552~~573
Total operating expenses		4142,~~531~~968			37,~~450~~435

Railway segment revenues increased $8.8 million to $58.9 million in second quarter 2005 from $50.1 million in second quarter 2004. Carload revenues increased $5.0 million (~~Prior~~Rate/Length ~~year~~of Haul — $1.8 million; Volume — $3.2 million) in second quarter 2005 over 2004. FECR continues to transport record levels of aggregate business increasing revenues $2.5 million in 2005 over second quarter 2004 due primarily to our two largest customers. Foodstuffs and Kindred products increased $0.7 million due to base growth as well as the addition of a new customer. Hurricane relief products continued to be shipped on our lines as evidenced by the increased revenues ($0.4 million and $0.5 million) in both Construction Materials and Paper and Lumber commodities. Intermodal revenues experienced its eighth consecutive quarter-over-quarter growth as revenues increased $3.5 million (Rate/Length of Haul — $1.4 million; Volume — $2.1 million) to $24.7 million from $21.2 million in second quarter 2004, an increase of 16.7%. The majority of this increase was from FECR’s ~~results~~local ~~have~~intermodal, which continued it’s strong growth with increasing levels of business from our International, Retail, and Parcel LTL segments. As a result of our intermodal increase, Drayage revenues also experienced growth of $0.6 million over second quarter. In general, pricing has been ~~reclassified~~favorable toacross ~~conform~~the Railroad Industry due to current ~~year’s~~market ~~presentation~~conditions and tight capacity.) Included in the 2005 and 2004 revenues, respectively, is $2.6 million and $1.0 million in fuel surcharges for increased fuel prices. The variance of $1.6 million in fuel surcharge year over year is included in the Rate/Length of Haul variances above.

Operating ~~Revenues~~expenses ~~grew~~increased $75.96 million to $5643.50 million compared to $4837.~~6 million in 2004. Carload revenues increased $~~4.2 million in first quarter ~~2005 over~~ 2004~~, an increase of 14~~.~~8%.~~ ~~FECR continues~~Compensation toand ~~transport~~benefits ~~record~~increased ~~levels of aggregate business, increasing revenues~~ $10.95 million ~~or 12.7%~~primarily indue ~~first~~to ~~quarter~~general ~~2005~~wage increases ~~over~~and ~~2004~~variable ~~due~~compensation ~~primarily~~expenses to(stock ~~our~~compensation ~~two~~costs ~~largest~~and ~~customers~~bonus). ~~Hurricane~~Diesel ~~relief~~fuel ~~products~~increased ~~continued~~$2.2 million todue, bein ~~shipped~~part, onto ~~our~~an ~~lines~~increase asin ~~evidenced~~fuel byprice ~~increased~~of ~~revenues (~~$01.57 million ~~and $0~~.~~5 million)~~ This increase in fuel ~~both~~expense ~~Construction~~is ~~Materials~~offset ~~and~~by ~~Paper~~fuel ~~and~~surcharges ~~Lumber~~included ~~commodities,~~in ~~respectively~~revenue. ~~Foodstuffs~~Outside ~~and~~contractor ~~Kindred~~delivery ~~products~~ costs increased $0.7 million ~~due~~in tosecond ~~base~~quarter ~~growth~~2005 inover ~~existing~~2004 ~~customers~~due ~~as well~~to as the ~~addition~~increased ofbusiness aand ~~new~~increased costs ~~customer.~~for ~~Intermodal~~driver ~~revenues~~services. ~~experienced~~Second ~~its seventh consecutive~~ quarter~~-over-quarter~~ ~~growth~~equipment asrents ~~revenues~~ increased $30.74 million ~~to $23.3 million~~ from ~~$19.6 million~~second ~~in first~~ quarter 2004,. anThis increase ofis ~~18.5%.~~due ~~The~~to ~~majority~~increased ofrates ~~this~~on ~~increase~~freight ~~was~~cars ~~from~~and ~~FECR’s~~additional ~~local~~trailers being ~~intermodal,~~rented. ~~which~~Materials ~~continued~~increased ~~its~~$0.6 million ~~strong~~primarily ~~growth~~due ~~with~~to ~~increasing~~increased ~~levels~~freight ofcar ~~business~~wheel ~~from our~~replacement ~~international~~ and ~~motor~~repairs ~~carriers~~required ~~segments.~~by ~~Drayage~~rules ~~revenues~~of ~~also~~the ~~experienced~~American ~~growth~~Association asof ~~intermodal traffic~~Railroads, ~~increased in~~ the ~~first~~Company ~~quarter~~raising ofits repair ~~2005.~~standards ~~Included~~for inowned ~~the~~equipment, ~~2005~~ and ~~2004~~the ~~revenues, respectively~~replacement isof ~~$2.0 million~~certain ~~and~~wheels ~~$0.6 million~~manufactured in ~~fuel~~2005 ~~surcharges~~by a ~~for~~certain ~~increased fuel prices~~vendor.

~~Operating~~As ~~expenses~~of ~~increased $4.0~~June ~~million~~30, to2005 ~~$41.5 million~~the ~~compared~~Railway tohad ~~$37.5 million~~made inforward ~~first quarter~~purchases ~~2004.~~of ~~Compensation~~fuel ~~and~~commitments ~~benefit~~for ~~expenses increased $1~~5.94 million ~~due primarily to general~~ ~~wage~~gallons ~~increases~~for ~~and~~delivery ~~variable~~July 1, ~~compensation~~2005 ~~expenses~~through ~~(stock compensation costs and bonus). Diesel fuel increased $1.6~~June ~~million~~30, ~~due~~2006 tofor an ~~increase~~average inpurchase ~~fuel~~ price of $1.~~4 million,~~433 ~~which is mostly offset by~~per ~~fuel~~gallon ~~surcharges~~before intaxes ~~revenue~~and freight. ~~Outside~~This ~~contracted~~represents ~~drayage expenses increased $0~~48.~~7 million~~3% inof ~~first quarter~~the ~~2005~~estimated ~~over~~consumption ~~2004~~for ~~due to~~ the ~~increased~~six months ~~business~~ending ~~and~~December 31, ~~increased~~2005 ~~costs~~ for ~~driver~~an ~~services.~~average ~~First quarter~~purchase ~~2005~~price ~~car~~of ~~hire net expenses decreased approximately~~ $01.~~6 million~~390 ~~from~~and ~~the~~represents ~~first~~23.87% ~~quarter~~ of ~~2004. During~~ the ~~first~~estimated ~~quarter~~consumption ~~2005, FECR entered into an additional long-term agreement whereby FECR will receive car hire rents~~ for ~~cars~~the ~~owned~~six bymonths ~~outside~~ending ~~parties but managed by FECR. Additionally~~June 30, ~~certain~~2006 ~~FECR~~for ~~equipment~~an ~~rates~~average ~~increased~~purchase inprice ~~the first quarter contributing to this~~of ~~favorable variance~~$1.522.

As of March 31, 2005, the Railway had made forward purchases of fuel commitments for 4.5 million gallons for delivery from April 1, 2005 through March 31, 2006 for an average purchase price of $1.222 per gallon before taxes and freight. This represents 35.3% of the estimated consumption for the nine months ending December 31, 2005 for an average purchase price of $1.196 and represents 13.6% of the estimated consumption for the three months ending March 31, 2006 for an average purchase price of $1.4332.

During 2003, FECR commenced an “engineering and economics” based study of its principal right-of-~~way~~ ways and equipment assets, to develop a multi-year maintenance and replacement plan and ~~associated~~ ~~estimates~~associated estimate of ~~the~~ assets’ remaining lives. The engineering studies segregated the equipment ~~and~~ and right-of-way assets into the following major groupings: locomotives, rolling stock and ~~equipment~~ equipment (e.g. hoppers, flatcars, auto racks, trailers, etc.), bridges, and track ~~structure~~ structures (rail, ties, ballast, and other track material). During the third and fourth quarters of 2004, the ~~engineering~~ engineering studies (including associated estimated depreciation lives) for locomotives and rolling stock were completed. During ~~the~~ first quarter of 2005, the engineering study for Bridges was finalized. The finalization of the track structure engineering study is expected during ~~the~~ third quarter of 2005.

The locomotive and rolling stock studies generally indicated no significant changes in capital maintenance or replacement programs. Annual depreciation is anticipated to increase $0.3 million for locomotives and $0.4 million for rolling stock and equipment as a result of the studies. The Bridge study indicated no substantive change in ~~the~~ depreciable lives and generally, bridges would continue to be depreciated over a 61.5-year life. No material change in annual depreciation is expected. The Bridge study also indicated that while FECR’s bridge assets are in acceptable operational condition based on the Company’s continuing maintenance and inspection programs, FECR is entering a 10 –to 20 year period where, based on the age and construction materials used, certain bridges will be studied further, monitored and possibly replaced. The management team does not expect any replacement costs for bridges to materially alter its normative annual capital budget, however, this estimate is subject to change, and such changes could be material. FECR’s 2005 ~~capital~~ capital program includes $3.79 million for bridge replacement and repairs. ~~This~~The ~~study~~downtown ~~did~~Jacksonville Bridge was not ~~include~~part of the ~~Jacksonville~~ ~~Bridge~~above study, which will be evaluated separately (due to its scale and design), and is expected to be finished in the ~~second~~ third quarter of 2005. (See also Note 13 of the Financial Statements in Part 1, Item 1 of this report).

~~FECR~~In isthe asecond ~~party~~quarter, tothe ~~Collective~~Company ~~Bargaining~~successfully ~~Agreements~~concluded ~~(CBAs)~~arbitration with ~~three~~its ~~national~~largest ~~labor~~union, ~~unions. All~~the ~~agreements~~United ~~are~~Transportation ~~currently~~Union ~~amendable~~(UTU). The ~~Company~~UTU isrepresents inapproximately ~~various~~250 ~~stages~~train ofand ~~negotiations~~engine ~~with~~service ~~collective~~employees. ~~bargaining~~The ~~representatives~~new ofagreement ~~these~~becomes ~~unions,~~amendable ~~including~~on ~~direct negotiations~~December 31, ~~mediation~~2008. ~~and in~~Annual ~~one~~wage ~~instance,~~increases ~~mutually agreed binding arbitration, which was held in April 2005 with a decision~~will ~~expected~~average inapproximately ~~June 2005.~~3% ~~The~~per ~~Company~~year ~~anticipates~~over athe ~~satisfactory~~term ~~resolution~~ of ~~these~~the ~~negotiations and proceedings~~agreement.

~~Realty~~The Company remains in various stages of collective bargaining with two of the three national labor ~~First~~unions ~~Quarter~~on the property. The employees represented by the International Brotherhood of Electrical Workers (IBEW) have ratified three (3) agreements during the second quarter 2005, now amendable starting in 2008, and are voting on another three (3) agreements expected to be completed during the third quarter of 2005. The Company and the Brotherhood of Maintenance of Way (BMWE) are in mediation, with talks scheduled for August 2005 and final agreement anticipated by year-end.

REALTY SEGMENT REVENUES

	Three Months
	Ended March 31
(dollars in thousands)	2005		2004
Rental revenues – Flagler		16,164		14,323
Services fee revenues		29		31
Rental income – straight-line rent adjustments		2,058		1,116
Operating expense recoveries		2,015		1,308
Rental revenues – undeveloped land		260		218
Other		47		20
Total rental revenue – Flagler properties		20,573		17,016
Rental revenues – other realty operations		882		802
Total rental revenues		21,455		17,818
Building and land sales – Flagler		200		4,031
Building and land sales – other realty operations		4,685		1,017
Total building and land sales revenues		4,885		5,048
Total realty segment revenues		26,340		22,866

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

Six Months

FECR’s traffic volume and revenues for the six months ended June 30, 2005 and 2004, respectively, are shown below. Also, FECR’s six-month operating expenses are presented below.

TRAFFIC

Six Months Ended June 30
(dollars and units in thousands)


	2005		2004		Percent			2005		2004		Percent
Commodity	Units		Units		Variance			Revenues		Revenues		Variance
Rail Carloads
Crushed stone (aggregate)		72.5		65.8		10.2			35,220		30,773		14.5
Construction materials		3.6		2.6		38.5			2,640		1,695		55.8
Vehicles		12.1		11.8		2.5			9,641		9,206		4.7
Foodstuffs & kindred		7.0		6.0		16.7			6,029		4,653		29.6
Chemicals & distillants		1.9		2.0		(5.0	)		2,322		2,290		1.4
Paper & lumber		3.7		2.6		42.3			3,985		2,893		37.7
Other		8.2		7.3		12.3			5,430		4,632		17.2

Total carload		109.0		98.1		11.1			65,267		56,142		16.3
Intermodal		150.8		134.0		12.5			48,012		40,838		17.6

Total freight units/revenues		259.8		232.1		11.9			113,279		96,980		16.8
Ancillary revenue		—		—		—			2,155		1,679		28.4

Railway segment revenue		—		—		—			115,434		98,659		17.0

RAILWAY OPERATING EXPENSES


	Six Months
	Ended June 30
(dollars in thousands)	2005			2004
Compensation & benefits		29,612		27,262
Fuel		11,323		7,449
Equipment rents (net)		2,254		1,608
Car hire (net)		(1,312	)	(860	)
Depreciation		10,770		9,984
Purchased services		4,833		4,659
Repairs to/by others (net)		(1,559	)	(1,217	)
Load/unload		4,467		3,931
Casualty & insurance		2,613		2,957
Property taxes		3,070		2,862
Materials		6,324		5,472
General & administrative expenses		4,212		4,434
Outside contractor delivery costs		6,597		5,219
Other		1,295		1,125

Total operating expenses		84,499		74,885

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

Railway segment revenues increased $16.7 million to $115.4 million through June 30, 2005 from $98.7 million through June 30, 2004. Carload revenues increased $9.1 million (Rate/Length of Haul — $2.9 million; Volume — $6.2 million) over 2004 levels which is driven by record levels of aggregate business increasing revenue $4.4 million in 2005 over 2004. Foodstuffs and Kindred products increased $1.4 million due to growth in the existing customer base as well as the addition of a new customer in third quarter 2004. Hurricane relief products continued to be shipped during the first half of 2005 as evidenced by the increased revenues ($0.9 million and $1.1 million) in both Construction Materials and Paper and Lumber commodities, respectively. Intermodal revenues increased $7.2 million (Rate/Length of Haul — $2.1 million; Volume — $5.1 million) for the first six months of 2005 over the same period 2004. Leading the way was our Local Intermodal business attributed to our International shippers, Retail, and Parcel LTL segments. Included in the 2005 and 2004 revenues for the six months ending June 30, respectively is $4.7 million and $1.7 million in fuel surcharges for increased fuel prices. The variance in fuel surcharge year over year of $3.0 million is included in the Rate/Length of Haul variances above.

Operating expenses increased $9.6 million to $84.5 million for the six months ended June 30, 2005, compared with $74.9 million for the same period last year. Compensation and benefits increased $2.4 million due to general wage increases, and variable compensation expenses (stock compensation costs and bonus). Fuel expense increased $3.9 million of which $3.2 million is related to price increases. Outside contractor delivery costs increased $1.4 million due to increased business and increased costs for driver services. Materials increased $0.9 million primarily due to increased freight car wheel replacement and repairs required by rules of the American Association of Railroads, the Company raising its own repair standards, the replacement of certain defective wheels manufactured in 2005 by a vendor, and the increased price of steel. Equipment rents increased $0.6 million due to increased rates and volume. Load/Unload expenses increased $0.5 million due to increased lift volumes.

Realty
Second Quarter

REALTY SEGMENT REVENUES


	Three Months
	Ended June 30
(dollars in thousands)	2005		2004
Rental revenues — Flagler		16,941		14,791
Services fee revenues		201		50
Rental income — straight-line rent adjustments		2,073		766
Operating expense recoveries		1,999		929
Rental revenues — undeveloped land		208		210
Other		18		360

Total rental revenue — Flagler properties		21,440		17,106
Rental revenues — other realty operations		827		692

Total rental revenues		22,267		17,798

Building and land sales — Flagler		1,273		2,526
Building and land sales — other realty operations		621		87

Total building and land sales revenues		1,894		2,613


Total realty segment revenues		24,161		20,411

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

REALTY SEGMENT EXPENSES

	Three Months
	Ended March 31
	Ended June 30
(dollars in thousands)	2005		2004
Real estate taxes – developed		2,368		2,098
Real estate taxes — developed		2,562		2,070
Repairs & maintenance – recoverable		671		548
Repairs & maintenance — recoverable		721		711
Services, utilities, management costs		34,~~921~~100		23,~~987~~102
Total expenses subject to recovery – Flagler properties		6,960		5,633
Total expenses subject to recovery — Flagler properties		7,383		5,883
Real estate taxes – Flagler undeveloped land		917		1,005
Real estate taxes — Flagler undeveloped land		1,080		900
Repairs & maintenance – non-recoverable		195		298
Repairs & maintenance — non-recoverable		336		253
Depreciation & amortization – (operating prop – Flagler)		6,035		6,741
Depreciation & amortization — (operating prop — Flagler)		7,179		5,448
Depreciation & amortization – (non-operating prop – Flagler)		1,005		518
Depreciation & amortization — (non-operating prop — Flagler)		412		578
SG&A – non-recoverable – Flagler		1,462		1,150
SG&A — non-recoverable — Flagler		1,783		1,380
Total – non-recoverable expenses – Flagler properties		9,614		9,712
Total — non-recoverable expenses — Flagler properties		10,790		8,559
Total rental expenses – Flagler properties		16,574		15,345
Total rental expenses — Flagler properties		18,173		14,442
Real estate taxes – other undeveloped land		67		64
Real estate taxes — other undeveloped land		67		64
Depreciation & amortization – other		10		38
Depreciation & amortization — other		14		10
SG&A – non-recoverable – other		306		725
SG&A — non-recoverable — other		488		985
Total rental expenses – other realty operations		383		827
Total rental expenses — other realty operations		569		1,059
Total rental expenses		1618,~~957~~742		1615,~~172~~501
Realty sales expenses – Flagler		55		2,199
Realty sales expenses — Flagler		357		1,918
Realty sales expenses – Other realty operations		409		—
Realty sales expenses — other realty operations		—		—
Total realty sales		~~464~~357		21,~~199~~918
Total operating expenses		1719,~~421~~099		1817,~~371~~419

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

Results from Continuing Operations

Flagler rental and services revenues increased $34.63 million or 2025.93% from $17.01 million in the second quarter of 2004 to $2021.64 million in the second quarter of 2005. Operating properties revenue increased $3.4.3 million compared to ~~first~~second quarter 2004. Same store occupancy increased to 96% at ~~March~~ June 3130, 2005 compared to ~~March~~June 3130, 2004 occupancy of 8991%. Same store revenues increased $1.1 million compared to the prior year, mainly related to occupancy improvements. Properties beginning operations in 2004 contributed an additional revenue of $0.98 million during ~~first~~second quarter 2005. One build-to-suit property completed induring the first quarter 2005 generated ~~first~~second quarter revenues of $0.7 9 million and two properties acquired in 2005 ~~contributed~~generated an additional $01.84 million. ~~Income from land~~ ~~rents remained consistent year-over-year.~~

For all leases renewed during the twelve month period ending ~~March~~June 3130, 2005, beginning cash rental rates decreased by approximately 4% on a weighted average basis compared to the ending rate of the expiring leases. Straight-line rental rates over the new lease term increased approximately 21% on a weighted average basis compared to straight-line rental rates ofon ~~the~~ expiring leases.

Flagler held 63 finished buildings with 7.2 million square feet and overall occupancy of 9495% at ~~March~~ June 3130, 2005. “Same store” properties include 6.4 million square feet atand 96% occupancy at quarter-end ~~March 31,~~ 2005 compared to 8991% at ~~March 31,~~quarter-end 2004.

Flagler sales revenue decreased tofrom $0.2.5 million in ~~2005~~2004 ~~from~~to $41.03 million in ~~2004.~~2005 ~~Prior~~due ~~year~~to ~~sales~~decreased ~~included the sale of two parcels of~~ land sales.

17Flagler operating expenses increased $3.7 million or 25.8% to $18.2 million for the three months ended June 30, 2005.

Expenses related to operating properties increased by $3.3 million from $11.4 million in 2004 to $14.7 million in 2005. Same store operating properties expenses increased by $0.5 million mainly related to occupancy improvements. Properties beginning operations in 2004 contributed additional expenses of $0.6 million. One build-to-suit project completed during the first quarter contributed $0.2 million of expenses. Two properties that were issued certificates of occupancy in April 2005 had expenses of $0.2 million. Two properties acquired in 2005 had second quarter expenses of $1.7 million.

Unallocated overhead expenses increased by $0.1 million compared to prior year. Land holdings expenses increased by $0.2 million. This increase of $0.2 million in land holding expenses is composed of a $0.7 million increase mainly related to real estate taxes on owned and acquired land and depreciation expense on infrastructure including the interchange asset, partially offset by a reimbursement from the City of Jacksonville. The total reimbursement received in June 2005 from the City of Jacksonville was $0.7 million, of which $0.5 million was applied against depreciation expense on infrastructure assets. The remaining $0.2 million of the reimbursement was recorded as other non-operating income.

Flagler’s cost of real estate sales decreased from $1.9 million in 2004 to $0.4 million in 2005 due to decreased land sales in 2005.

Operating profit from operating properties increased $1.1 million to $6.4 million in the second quarter 2005 compared to $5.3 million in the second quarter 2004. Same store operating profits increased by $0.6 million. Properties that began operations in 2004 generated increases in operating profit of $0.2 million. One build-to-suit completed in 2005 generated operating profit of $0.7 million. Properties acquired in 2005 generated $0.3 million in operating losses during the quarter. Two properties that were issued certificates of occupancy in April 2005 had operating losses of $0.2 million mainly related to depreciation expenses on the shell construction during the lease up stage of these assets.

~~Flagler~~Six ~~operating expenses increased $1.3 million or 8.0% to $16.6 million for the three months~~Months ended March 31, 2005 compared to $15.3 million during the three months ended March 31, 2004. Properties acquired in 2005 contributed $0.8 million in expenses for the quarter. One build-to-suit property completed during the first quarter contributed $0.1 million in expenses. Existing properties operating expenses experienced a net decrease of $0.4 million during first quarter. This net decrease is comprised of a $1.3 million increase primarily in leasing related operating expenses mainly related to occupancy improvements, offset by a $1.1 million decrease in depreciation expense associated with the write-off of $1.5 million in tenant improvements during 2004. Unallocated overhead expenses increased by $0.2 million compared to prior year. Depreciation expense related to infrastructure increased by $0.5 million.

Flagler’s ~~cost~~revenues ofand ~~land~~operating ~~sales~~expenses ~~decreased~~for ~~from~~the ~~$2.2 million~~six inmonths ~~2004~~ended ~~to $0.1~~June ~~million~~30, in 2005, asand ~~there~~2004, ~~was~~respectively, aare ~~small~~presented ~~sale of land during the quarter~~below.

~~Operating~~REALTY ~~profit~~SEGMENT ~~from operating properties increased $3.0 million to $7.2 million in the first~~REVENUES quarter of 2005 compared to $4.2 million in the first quarter of 2004. This includes the impact of $1.5 million in tenant improvement write-offs in 2004. Same store operating profits increased $2.1 million quarter over quarter also including the impact of the 2004 write-off. Properties that began operations during 2004 generated an additional $0.3 million in operating profits. Properties completed and acquired in 2005 generated $0.6 million in operating profit during first quarter 2005.


	Six Months
	Ended June 30
(dollars in thousands)	2005		2004
Rental revenues — Flagler		33,105		29,114
Services fee revenues		230		81
Rental income — straight-line rent adjustments		4,131		1,882
Operating expense recoveries		4,014		2,237
Rental revenues — undeveloped land		468		428
Other		65		379

Total rental revenue — Flagler properties		42,013		34,121
Rental revenues — other realty operations		1,709		1,494

Total rental revenues		43,722		35,615

Building and land sales — Flagler		1,473		6,557
Building and land sales — other realty operations		5,306		1,104

Total building and land sales revenues		6,779		7,661


Total realty segment revenues		50,501		43,276

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

REALTY SEGMENT EXPENSES


	Six Months
	Ended June 30
(dollars in thousands)	2005		2004
Real estate taxes — developed		4,930		4,168
Repairs & maintenance — recoverable		1,392		1,259
Services, utilities, management costs		8,021		6,089

Total expenses subject to recovery — Flagler properties		14,343		11,516

Real estate taxes — Flagler undeveloped land		1,997		1,905
Repairs & maintenance — non-recoverable		531		551
Depreciation & amortization — (operating prop — Flagler)		13,238		12,190
Depreciation & amortization — (non-operating prop — Flagler)		1,393		1,095
SG&A — non-recoverable — Flagler		3,245		2,528

Total — non-recoverable expenses — Flagler properties		20,404		18,269

Total rental expenses — Flagler properties		34,747		29,785

Real estate taxes — other undeveloped land		134		128
Depreciation & amortization — other		24		48
SG&A — non-recoverable — other		794		1,710

Total rental expenses — other realty operations		952		1,886

Total rental expenses		35,699		31,671

Realty sales expenses — Flagler		412		4,117
Realty sales expenses — other realty operations		409		—

Total realty sales		821		4,117


Total operating expenses		36,520		35,788

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

Results from Continuing Operations

Flagler rental and services revenues increased $7.9 million or 23.1% from $34.1 million during the six months ended June 30, 2004 to $42.0 million during the six months ended June 30, 2005. Operating properties revenue increased $7.8 million compared to first six months of 2004. Same store occupancy increased to 96% at June 30, 2005 compared to June 30, 2004 occupancy of 91%. Same store revenues increased $2.2 million compared to the prior year, mainly attributable to occupancy improvements. Properties beginning operations in 2004 contributed additional revenue of $1.7 million during first six months of 2005. One build-to-suit property completed during the first quarter 2005 generated 2005 revenues of $1.6 million and two properties acquired in 2005 generated an additional $2.2 million. Income from land rents remained flat.

Flagler held 63 finished buildings with 7.2 million square feet and occupancy of 95% at June 30, 2005. Same store properties include 6.4 million square feet and 96% occupancy at June 30, 2005 compared to 91% at June 30, 2004.

Flagler sales revenue decreased from $6.6 million in 2004 to $1.5 million in 2005.

Flagler operating expenses increased $4.9 million or 16.7% to $34.7 million for the six months ended June 30, 2005.

Expenses related to operating properties increased by $3.7 million from $24.0 million in 2004 to $27.7 million in 2005. Same store operating properties expenses decreased by $0.4 million. This decrease in same store expenses is composed of an increase ($0.8 million) of mainly variable expenses related to increased occupancy, offset by a $1.2 million decrease in depreciation expense. The decrease in depreciation expense is associated with a write-off of $1.5 million of tenant improvements during the first quarter 2004 related to the remodeling of Dupont Center. Properties beginning operations in 2004 contributed additional expenses of $1.1 million. One build-to-suit project completed during the first quarter contributed $0.3 million of expenses. Two properties that were issued certificates of occupancy in April 2005 had expenses of $0.2 million. Two properties acquired in 2005 had expenses of $2.5 million.

Unallocated overhead expenses increased by $0.5 million compared to prior year. Land holdings expenses increased by $0.7 million. This increase of $0.7 million in land holding expenses is composed of a $1.2 million increase mainly related to real estate taxes on owned and acquired land and depreciation expense on infrastructure including the interchange asset, partially offset by a reimbursement from the City of Jacksonville. The total reimbursement received in June 2005 from the City of Jacksonville was $0.7 million, of which $0.5 million was applied against depreciation expense on infrastructure assets. The remaining $0.2 million of the reimbursement was recorded as other non-operating income.

Operating profit from operating properties increased $4.0 million to $13.6 million in 2005 compared to $9.6 million in 2004. Same store operating profits increased by $2.7 million. Properties that began operations in 2004 generated increases in operating profit of $0.6 million. One build-to-suit completed in 2005 generated operating profit of $1.3 million. Two properties acquired in 2005 generated $0.3 million in operating losses. Two properties that were issued certificates of occupancy in April 2005 had operating losses of $0.2 million mainly related to depreciation expenses on the shell construction during the lease up stage of these assets.

Flagler’s cost of land sales decreased from $4.1 million in 2004 to $0.4 million in 2005.

Results from Discontinued Operations

In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (SFAS 144) effective for financial statements issued for fiscal years beginning after December 15, 2001, components of Flagler that meet certain criteria have been accounted for as discontinued operations. Therefore, income or loss attributable to the operations and sale of the components classified as discontinued operations are presented in the summary of operating results as discontinued operations, net of applicable income taxes.

~~In March 2004, Flagler sold a 60,000-sq. ft. build-to-suit office building for $12.6 million for a~~22 pre-tax gain of $3.7 million, or $2.3 million, net of applicable taxes. The gain on the sale of this property, as well as the operating results of this and an office building sold in the third quarter of 2004, are included in discontinued operations for the three months ended March 31, 2004.

	Three Months
	Ended March 31
(dollars in thousands)	2005		2004
Summary of Operating Results of Discontinued Operations
Flagler realty rental revenues		—		551
Flagler realty rental expenses		—		332
Operating income		—		219
Interest income		—		—
Income before income taxes		—		219
Income tax		—		(84	)
Income from discontinued operations		—		135
Gain on disposition of discontinued operations (net of taxes of $1,446 for the three months ended March 31, 2004.)		—		2,303

Corporate Expenses

Corporate expenses for the quarters ended March 31, 2005 and 2004 were $12.5 million and $5.0 million, respectively. The increase primarily relates to expenses associated with the appointment of Mr. Adolfo Henriques as Chairman, President, and Chief Executive Officer and termination benefits provided to Mr. Robert W. Anestis. These expenses totaled $9.1 million in the quarter and included $5.3 million of additional equity compensation ($1.9 million due to the accelerated vesting of equity compensation), $3.3 million of severance payments and $0.5 million of other benefits. The employment and separation agreements are attached as exhibits.

In ~~a first quarter~~ March 2004 ~~transaction (the “Transaction”) initiated at the request of the Board of Directors~~, ~~the~~Flagler ~~Company~~sold ~~cancelled~~a ~~vested~~60,000-sq. inft. build-~~the~~to-~~money~~suit ~~stock~~office ~~options~~building ~~(the~~for ~~“Options”)~~$12.6 million tofor ~~acquire~~a ~~144,000~~pre-tax ~~shares~~gain of ~~the Company’s common stock held by the Company’s former Chief Executive Officer (“CEO”)~~$3.7 million, ~~Robert~~or ~~W. Anestis. The embedded value of the Options (fair market value less strike price) was~~ $2.3 million~~. The embedded value~~, ~~less~~net of applicable ~~tax withholding, was paid in common stock~~taxes. The ~~CEO~~gain ~~was~~on ~~issued~~the ~~36,407~~sale ~~shares (valued at $35.06 per~~of ~~share,~~this ~~which was the closing price on February 27~~property, ~~2004).~~as ~~Because~~well as the ~~original~~operating ~~stock~~results ~~option~~of ~~award was~~this ~~cancelled~~ and ~~the~~an ~~Company~~office ~~replaced~~building ~~this~~sold ~~award with FECI common stock,~~ in ~~accordance~~the ~~with FASB~~third ~~Interpretation~~quarter ~~No. 44~~of 2004, ~~the~~are ~~Company~~included ~~was required to recognize compensation expense~~ in ~~the~~discontinued ~~amount~~operations ~~of $2 million~~for ~~with~~all ~~respect~~periods ~~to the Transaction~~presented.

Interest Expense


	Three Months						Six Months
	Ended June 30						Ended June 30
(dollars in thousands)	2005			2004			2005			2004
Summary of Operating Results of Discontinued Operations
Flagler realty rental revenues		—			179			—			731
Flagler realty rental expenses		25			133			25			465

(Loss) income before income taxes		(25	)		46			(25	)		266
Income tax		8			(16	)		8			(102	)

(Loss) income from discontinued operations		(17	)		30			(17	)		164

(Loss) gain on disposition of discontinued operations (net of taxes of $9 thousand for the three months ended June 30, 2004, and $1.4 million for the six months ended June 30, 2004.)		—			(16	)		—			2,287

~~Interest~~Corporate ~~expense for the quarter was $4.7 million compared to $3.9 million in the first quarter of~~Expenses ~~2004.~~Second ~~The~~Quarter ~~higher~~and ~~interest~~Six ~~expense resulted primarily from increased levels of mortgage notes at~~Months ~~Flagler. Cash paid for interest was $5.5 million for the quarter ended March 31, 2005.~~

~~Other~~Corporate ~~Income~~expenses for the quarter ended June 30, 2005 were $3.2 million compared to $3.8 million for the quarter ended June 30, 2004. Overall the decrease relates to lower professional services expenses.

~~Other~~Corporate ~~income~~expenses ~~was $6.3 million and $2.7 million~~ for the ~~first~~six ~~quarters~~months ofended June 30, 2005 and 2004, ~~respectively.~~ ~~Included~~were in$15.7 million ~~first~~and ~~quarter~~$8.7 million, ~~2005~~respectively. ~~results~~Increases isprimarily ~~one-time~~relate ~~income~~to costs associated with the ~~sale~~appointment of Mr. ~~air~~Adolfo ~~rights~~Henriques ~~related~~as ~~surface~~Chairman, President, and ~~sub-surface~~Chief ~~easements~~Executive Officer and ~~licenses~~termination onbenefits provided ~~approximately~~to ~~300~~Mr. Robert ~~feet~~W. ofAnestis. ~~the Railway’s~~These ~~right-of-way~~expenses totaled $9.1 million ~~The~~in the first quarter and included $5.3 million of ~~2005~~additional ~~also~~equity ~~included~~compensation a($1.9 million ~~one-time~~due ~~wire~~to ~~crossing~~the ~~agreement~~accelerated ~~with~~vesting aof ~~utility~~equity ~~company~~compensation), $3.3 million of severance payments and $0.5 million of other benefits.

In a first quarter 2004 transaction (the “Transaction”) initiated at the request of the Board of Directors, the Company cancelled vested, in-the-money stock options (the “Options”) to acquire 144,000 shares of the Company’s common stock held by the Company’s former Chief Executive Officer (“CEO”), Robert W. Anestis. The embedded value of the Options (fair market value less strike price) was $2.0 million. The embedded value, less applicable tax withholding, was paid in common stock. The CEO was issued 36,407 shares (valued at $35.06 per share, which was the closing price on February 27, 2004). Because the original stock option award was cancelled and the Company replaced this award with FECI common stock, in accordance with FASB Interpretation No. 44, the Company was required to recognize compensation expense in the amount of $2 million with respect to the Transaction.

Interest Expense
Second Quarter and Six Months

Interest expense for the second quarter and the first six months of 2005 was $5.1 million and $9.7 million, respectively, compared to $3.8 million and $7.7 million for the second quarter and first six months of 2004, respectively. The increased interest expense resulted primarily from increased levels of mortgage notes at Flagler. Cash paid for interest was $11.0 million and $8.9 million for the six months ended June 30, 2005 and 2004, respectively

Other Income
Second Quarter and Six Months

Other income was $3.0 million and $9.2 million for the second quarter and first six months of 2005, respectively, compared to $5.1 million and $7.8 million for the second quarter and first six months of 2004,

respectively. Second quarter 2004 pipe and wire crossing income included $1.8 million of income from a one-time utility wire crossing agreement. Included in the first six months 2005 results is one-time income ($3.0 million) associated with the sale of air rights and related surface and sub-surface easements and licenses on approximately 300 feet of the Railway’s right-of-way.

Income Tax

Income tax expenses represent an effective rate of 4037.33% for the ~~first~~six ~~quarter~~months of 2005 and 38.5% for ~~the~~ ~~first~~the ~~quarter~~six months of 2004, respectively. 2005’s ~~increase~~decrease in effective rate ~~reflects~~reflect ~~certain~~newly enacted tax credits related to track maintenance at FECR offset by certain non-deductible section 162(m) compensation over $1.0 million for Mr. Adolfo Henriques. This 162(m) compensation primarily relates to sign-on grants provided in Mr. Henriques’ employment agreement.

1924

Financial Condition, Liquidity and Capital Resources

The ~~statements~~Statements of Cash Flows have been included below to support the Company’s discussion of cash flows for the ~~three~~six months ended ~~March~~June 3130, 2005 and 2004.

FLORIDA EAST COAST INDUSTRIES, INC. ~~CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited)~~

	Three Months
	Ended March 31
	2005			2004
Cash Flows from Operating Activities
Net income		8,071			8,322
Adjustments to reconcile net income to cash generated by operating activities:
Depreciation and amortization		12,871			13,156
Gain on disposition of properties		(4,421	)		(6,598	)
Deferred taxes		2,453			4,096
Stock compensation expense		6,316			2,747
Changes in operating assets and liabilities:
Accounts receivable		1,054			(1,100	)
Prepaid expenses		(726	)		540
Other current assets		(3,100	)		(3,121	)
Other assets and deferred charges		(929	)		(2,123	)
Accounts payable		(9,923	)		(5,859	)
Taxes payable		7,763			4,056
Income tax refund		2,800			—
Other current liabilities		2,864			(2,250	)
Accrued casualty and other long-term liabilities		(603	)		(1,466	)
Net cash generated by operating activities		24,490			10,400
Cash Flows from Investing Activities
Purchases of properties		(97,010	)		(19,254	)
Proceeds from disposition of assets		4,885			17,648
Net cash used in investing activities		(92,125	)		(1,606	)
Cash Flows from Financing Activities
Payment of mortgage debt		(1,197	)		(690	)
Payment of dividends		(1,615	)		(1,476	)
Purchase of common stock		(1,461	)		(732	)
Proceeds from exercise of options		2,269			2,249
Payment for stock repurchase		(84	)		—
Other		(270	)		(80	)
Net cash used in financing activities		(2,358	)		(729	)
Net (Decrease) Increase in Cash and Cash Equivalents		(69,993	)		8,065
Cash and Cash Equivalents at Beginning of Period		126,166			125,057
Cash and Cash Equivalents at End of Period		56,173			133,122
Supplemental Disclosure of Cash Flow Information
Cash (received) paid for income taxes		(2,800	)		1,200
Cash paid for interest		5,472			4,357

CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

(Prior year’s results have been reclassified to conform to current year’s presentation.) See accompanying notes to consolidated financial statements (unaudited).


	Six Months
	Ended June 30
	2005			2004
Cash Flows from Operating Activities
Net income		18,475			16,690
Adjustments to reconcile net income to cash generated by operating activities:
Depreciation and amortization		26,324			24,806
Gain on disposition of properties		(5,958	)		(7,268	)
Deferred taxes		(1,330	)		5,181
Stock compensation expense		7,192			4,010
Changes in operating assets and liabilities:
Accounts receivable		(1,081	)		(4,104	)
Prepaid expenses		13			1,800
Other current assets		(4,297	)		(3,647	)
Other assets and deferred charges		(3,531	)		(4,084	)
Accounts payable		(8,119	)		(3,157	)
Taxes payable		14,453			12,557
Income tax refund		2,800			—
Other current liabilities		(2,498	)		(3,664	)
Accrued casualty and other long-term liabilities		(969	)		(1,000	)

Net cash generated by operating activities		41,474			38,120

Cash Flows from Investing Activities
Purchases of properties		(124,325	)		(47,676	)
Proceeds from disposition of assets		6,779			20,261

Net cash used in investing activities		(117,546	)		(27,415	)

Cash Flows from Financing Activities
Payment of mortgage debt		(2,412	)		(1,394	)
Payment of dividends		(3,567	)		(1,476	)
Proceeds from exercise of options		9,654			3,135
Stock repurchase program payments		(2,289	)		—
Purchase of common stock		(1,750	)		(1,352	)

Net cash used in financing activities		(364	)		(1,087	)

Net (Decrease) Increase in Cash and Cash Equivalents		(76,436	)		9,618
Cash and Cash Equivalents at Beginning of Period		126,166			125,057

Cash and Cash Equivalents at End of Period		49,730			134,675


Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes (2005 net of refund)		5,200			4,700

Cash paid for interest		10,983			8,905

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

See accompanying notes to consolidated financial statements (unaudited).

Net cash generated by operating activities was $2441.5 million and $1038.41 million in the ~~three~~six months ended ~~March~~June 3130, 2005 and 2004, respectively. The year-to-year fluctuation in net ~~cash~~ cash generated by operating activities primarily reflects the 2005 receipt of an income tax refund related to tax year 2004 of $2.8 million, increased 2005 tax payments of $8.0 million related to taxable 2005 earnings (tax payments for 2004 were $4.7 million) and ~~working~~increased ~~capital~~net ~~changes~~income adjusted for certain non-cash items (i.e. depreciation & amortization and stock compensation expense).

During the ~~three~~six months ended ~~March~~June 3130, 2005 and 2004, respectively, the Company invested approximately $90108 million and $1335 million at Flagler. The increase ~~quarter over quarter~~ primarily relates to three large purchases by Flagler using §1031 proceeds, totaling $69.6 million. For the ~~three~~ six months ended ~~March~~ June 3130, 2005 and 2004, the Company’s capital investments at FECR were approximately $715 million and $612 million.

Proceeds from disposition of assets were $46.98 million and $1720.63 million for the ~~quarters~~six months ended ~~March~~June 3130, 2005 and 2004, respectively. The majority of these proceeds were from the sale of a building (Flagler-2004) and parcels of land by Flagler and FECR in the quarters.

Net cash used in financing activities was $20.4 million and $01.71 million for the ~~quarters~~six months ended ~~March~~June 3130, 2005 and 2004, respectively. Financing activities for the ~~quarter~~six months ended ~~March~~June 3130, 2005 included increased payments for the purchase of common stock, ~~for~~increased mortgage debt ~~due~~payments ~~to the~~at Flagler, and increased ~~level~~dividend ofpayments, ~~mortgage~~offset ~~debt~~by atproceeds ~~Flagler,~~from ~~and~~the ~~increased~~exercise ~~dividend~~of ~~payments~~stock options.

On February 22, 2005, the Company entered into a new unsecured $150 million, 5-year revolving credit agreement with a syndication of banks. The new credit facility provides a more favorable interest rate and terms and replaces the Company’s existing $200 million credit agreement. The Company will pay (quarterly) commitment fees, as applicable under the agreement, at a range of 12.5 -to 25.0 basis points. The Company’s ~~new~~ revolving credit agreement requires the maintenance of ~~certain~~ certain financial ratios (interest coverage and leverage) and maintenance of minimum established levels of net worth. In addition there are various established limitations (dollars and otherwise) on certain types of liens, investments (including loans and advances) and acquisitions, limitation on on transactions with affiliates, merger and sales of all or substantially all of the assets; and ~~use~~ use of proceeds. Some of the above covenants provide specific 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.

The Company believes its access to liquidity via cash generated from operations and the existing Credit Agreement and/or external financing will be sufficient to support needs in future years. The Company plans on maintaining its revolving credit facility in support of its general corporate needs.

At ~~March~~June 3130, 2005, FECI had $255.2 million of deposits and escrowed funds included in cash and cash equivalents related to pending land sales and potential real estate §1031 like-kind exchanges, respectively.

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, income tax provisions, realty rental revenue recognition, real estate infrastructure costs and contingencies may be considered Critical Accounting Policies.

Real Estate Allocation of Acquisition Costs –— Flagler utilizes Statement of Financial Accounting Standard No. 141, “Business Combinations” (SFAS 141) to account for the costs of acquiring Buildings. This statement provides a framework for allocating the costs of acquisition to tangible assets, financial assets,

2126

~~assets, financial assets,~~ and separately identifiable intangible assets, less acquired liabilities, using the purchase method of accounting.

During the first quarter of 2005, Flagler purchased two buildings: one for $41.5 million with approximately 240,000 rentable square feet ~~and~~on 5.1 acres of land and one for $19.5 million with approximately 107,000 rentable square feet ~~and~~on 8.0 acres of land. The majority ($50.1 million) of acquisition costs of these buildings were allocated to various tangible assets (including land, land improvements, building and parking decks) with the remaining costs allocated to financial assets (i.e.g., above or below market value of in-place leases) and intangible assets (e.g. customer relationship intangible). Financial assets and intangible assets are generally amortized over the remaining life (approximately 3.5 to 8 years) of the underlying tenant leases.

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. Detecting these events or changes in circumstances can be difficult. At ~~March~~June 3130, 2005, management had not identified indicators of an impairment of value for any significant asset group of the Company. However, events or changes in circumstances could develop or occur that would cause the Company to evaluate the recovery of its long-lived assets and potentially record an impairment, the amount of which could be material. Assets that are deemed impaired are recorded at the lower of carrying amount or fair value.

Income Tax Provisions – — FECI’s net deferred tax liability was $~~180~~176.02 million at ~~March~~June 3130, 2005 and $177.6 million at December 31, 2004, respectively. At December 31, 2004, the Company had a state deferred tax asset of approximately $7.0 million relating to net operating loss carry forwards. The net deferred tax liability is estimated based on the expected future tax consequences of items recognized in the financial statements. Management must use judgment when estimating the future timing and deductibility of expenses and loss and credit carry forwards in the Company’s tax returns. A valuation allowance is required to be recorded if management expects that it be more likely than not that its deferred tax assets will not be realized. As of ~~March~~June 3130, 2005, FECI has no no valuation allowance since it expects to realize its deferred tax assets. This expectation is primarily based upon FECI’s expectation that future operations will be sufficiently profitable to utilize the operating loss carry forwards, as well as the existence of various tax, business and other planning strategies available to the Company. However, the Company cannot guarantee that it will realize this tax asset or that future valuation allowances will not be required. Failure to utilize the tax asset could materially affect the Company’s financial results and financial position. Federal tax years through 1999 have been closed with the Internal Revenue Service (IRS). Federal tax years 2000-2002 are currently under review by the IRS. Management believes its income tax provision reserves at ~~March~~June 3130, 2005 to be adequate for the settlement, if any, of disputed tax positions taken by the Company for these years. Historically, settlements for disputed ~~tax~~ tax positions that have effected the total tax provision provided for in the income statement has ~~been~~ been primarily interest charges on timing differences between years.

Revenue Recognition – — Realty Rental Revenues –— Revenues from realty rentals are primarily contractual base rents from leases of commercial property. The Company recognizes revenues from these base rents evenly over the lease term in accordance with SFAS 13, “Accounting for Leases” (SFAS 13). SFAS 13 requires rental income from an operating lease be recognized on a straight-line basis over the non-cancelable lease term. Accordingly, total contractual minimum lease payments, including scheduled rent increases, are recognized as rental revenue evenly over the lease term. Accrued revenues from contractually scheduled rent increases in excess of amounts currently due amounted to $1719.78 million at ~~March~~June 3130, 2005 and $15.7 million at December 31, 2004, which is reported in other current assets and ~~deferred~~long ~~charges~~term assets. The Company monitors this asset for collection risk and establishes reserves for any amounts deemed not collectible. However, amounts collected in future periods may vary from the Company’s expectations.

Real Estate Infrastructure Costs – — The Company periodically constructs road, road structures, and general infrastructure related to the development of commercial real estate. Certain of these infrastructure assets may be deeded, upon completion, to applicable governmental authorities. The Company believes these deeded items (e.g., roads) benefit and increase the value of the parcels within and adjacent to the related commercial real estate developments. The Company capitalizes all infrastructure costs (including

2227

~~infrastructure~~ costs ~~(including costs~~ of infrastructure assets deeded to governmental authorities) into the basis of its commercial real estate developments, and allocates these costs to the individual parcels within the park on a relative fair value basis in accordance with SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects” (SFAS 67).

In connection with infrastructure assets constructed by the Company and deeded to governmental authorities, certain governmental authorities may agree to reimburse the Company certain of its construction costs for the deeded assets based on and to the extent of annual incremental taxes (such as property taxes) as may be collected by the governmental authority from the applicable properties over a stipulated period of time. Prior to and at the date of deeding the infrastructure asset to the governmental authority, any current reimbursements ~~are~~were accounted for as a reduction in in the allocated costs described above to the extent the Company’s receipt of such reimbursements ~~has~~ had become fixed and determinable, based upon the related incremental taxes having been assessed ~~and~~ and being, therefore, payable. The Company does not recognize expected future tax reimbursements ~~even~~ even though they may be probable and estimable, until they become fixed and determinable.

~~Contingencies~~Under –a Itcurrent isagreement with the ~~Company’s~~City ~~policy~~of toJacksonville ~~reserve~~and ~~for~~the ~~certain~~Florida ~~contingencies~~Department ~~consisting~~of ~~primarily~~Transportation of(FDOT), ~~various~~Flagler ~~claims~~constructed and ~~lawsuits~~deeded ~~resulting~~to ~~from~~the ~~its~~FDOT ~~operations.~~an Ininterchange asset in the ~~opinion~~third quarter of ~~management,~~ ~~appropriate~~2004. ~~reserves~~During ~~have~~2004, ~~been~~prior ~~made~~to ~~for~~completion of the ~~estimated~~interchange ~~liability~~asset, ~~that~~Flagler ~~may~~received ~~result from~~$2.1 ~~disposition~~million ofthat ~~such~~was ~~matters.~~applied ~~Management’s~~as ~~opinion~~a ~~and~~reduction ~~ultimately~~in the ~~reserve~~basis ~~recorded~~of in the ~~financial~~ ~~statements~~asset. ~~are~~In ~~based~~June 2005, onFlagler ~~known~~received a ~~facts~~reimbursement ~~and~~from ~~circumstances.~~the InCity ~~certain~~of ~~circumstances~~Jacksonville for $0.7 million, ~~management~~ ~~uses~~of ~~the~~which ~~services~~$0.5 million ofwas ~~outside~~applied against ~~counsel~~depreciation toexpense ~~help~~on ~~evaluate~~infrastructure ~~the~~assets. ~~facts~~The ~~and~~remaining ~~circumstances~~$0.2 million ~~and~~of the ~~considers~~reimbursement ~~their~~was ~~professional~~recorded ~~judgment~~as inother ~~establishing~~non-operating ~~the~~income. ~~appropriate~~This ~~reserve.~~reimbursement ~~The~~received ~~ultimate~~after the ~~resolution~~completion of ~~these~~the ~~contingencies~~infrastructure ~~may~~asset bewas ~~for~~allocated anbetween ~~amount~~operating ~~greater~~and ornon-operating ~~less~~activities based ~~than~~on the ~~amount~~relative ~~estimated~~assessed value of property within Flagler Center, owned by Flagler versus ~~management~~that sold to outside parties. Future reimbursements will be treated similarly.

Contingencies — It is the Company’s policy to reserve for certain contingencies consisting primarily of various claims and lawsuits resulting from its operations. In the opinion of ~~Item 3~~management, appropriate reserves have been made for the estimated liability that may result from disposition of such matters. Management’s opinion and ultimately the reserve recorded in the ~~QUANTITATIVE~~financial ~~AND~~statements ~~QUALITATIVE~~are ~~DISCLOSURES~~based ~~ABOUT~~on ~~MARKET~~known ~~RISK~~facts and circumstances. In certain circumstances, management uses the services of outside counsel to help evaluate the facts and circumstances and considers their professional judgment in establishing the appropriate reserve. The ultimate resolution of these contingencies may be for an amount greater or less than the amount estimated by management.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change to the disclosures made under the heading “Quantitative and Qualitative Disclosures about Market Risk” on pages 35 and 36 of the Company’s 2004 Annual Report on Form 10-K.

Item 4. ~~CONTROLS AND PROCEDURES~~

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and ~~15d-15(e)). Based on that evaluation, the CEO and CFO concluded that the Company’s~~ ~~disclosure controls and procedures were effective as of March 31, 2005.~~

15d-15(e)). Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2005.

Changes in Internal Control over Financial Reporting

There were no changes in the Registrant’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the Registrant’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

23During the third quarter of 2005 the Company will upgrade the existing version of its financial software to enable new functionality that will be implemented within our finance and accounting departments. The system upgrade process will include deploying resources to mitigate internal control risks and perform additional verifications and testing to ensure continuing data integrity during the implementation phase. We believe we will take the necessary steps to establish and maintain effective internal controls over financial reporting during the period of change. It should be noted that the design of any system of controls is based in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. In addition, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met. Therefore, we do not expect our disclosure controls to prevent all errors and all fraud.

PART II

Item 1. ~~LEGAL PROCEEDINGS~~

LEGAL PROCEEDINGS

There are no new legal or regulatory proceedings pending or known to be contemplated which, in management’s opinion, are other than normal and incidental to the kinds of businesses conducted by the Company.

Item 2. ~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

~~The~~UNREGISTERED ~~Company~~SALES ~~has~~OF aEQUITY ~~repurchase program for up to $40 million of common stock through a program of~~SECURITIES ~~open~~AND ~~market~~USE ~~purchases~~OF ~~and privately negotiated transactions, from time to time. During the first~~PROCEEDS ~~quarter of 2005, two thousand shares were purchased.~~

The ~~following~~Company ~~table~~has ~~sets~~a ~~forth~~repurchase ~~the~~program ~~total~~for ~~repurchases,~~up ~~including~~to ~~those~~$40.0 million ~~made~~of ~~and~~common ~~not~~stock ~~made~~through ~~pursuant~~a toprogram of ~~the~~open ~~$40 million~~market ~~repurchase~~purchases ~~program~~and privately negotiated transactions, ~~for~~from time to time. During the ~~three~~second quarter ~~months~~of ~~ended~~2005, ~~March 31~~52,500 ~~2005:~~shares were purchased.

				Total Number of		Maximum Amount
				Shares Purchased		of Value that may
				as Part of		yet be Purchased
	Total Number of	Average Price		Publicly Announced		under the
	Shares Purchased	Paid Per Share		Plans or Programs		Plans or Programs
January	550*	$	45.07		—	$	40,000,000
February	13,516*	$	42.01		—	$	40,000,000
March	25,136*	$	43.40		2,000	$	39,916,506

The following table sets forth the total repurchases, including those made and not made pursuant to the $40.0 million repurchase program, for the three months ended June 30, 2005:

* Shares purchased represent shares surrendered to the Company for federal withholding obligations related to employees’ vesting on previously restricted stock


								Maximum Amount
				Average Price		Total Number of Shares		of Value that may
	Total Number of			Paid Per Share		Purchased as Part of		yet be Purchased
	Shares			(including		Publicly Announced		under the Plans or
	Purchased			commissions)		Plans or Programs		Programs

April		6,000		$	42.06		6,000	$	39,664,134

May		28,400		$	42.05		28,400	$	38,469,984

June		18,350	*	$	41.93		18,100	$	37,711,048

24 * Shares purchased include shares surrendered to the Company for federal withholding obligations related to employees vesting on previously restricted stock.

Item 64. ~~EXHIBITS~~

SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS

The Annual Meeting of Shareholders was held on June 2, 2005. There were 32,396,906 shares of common stock outstanding as of the record date, April 15, 2005.

Proposal 1: The election of ten directors to hold office until the Annual Meeting of Shareholders in 2006, or until their successors are elected and qualified.


	Number of Votes Cast
Common Class	Votes For		Votes Withheld

Robert D. Fagan		30,457,027		628,801
David M. Foster		30,445,815		640,013
Allen C. Harper		29,645,576		1,440,252
Adolfo Henriques		30,454,173		631,655
James E. Jordan		30,410,696		675,132
Gilbert H. Lamphere		30,459,030		626,798
Joseph Nemec		29,910,202		1,175,626
Jorge Perez		30,536,857		548,971
James J. Pieczynski		29,644,818		1,441,010
Wellford L. Sanders, Jr.		30,539,976		545,852

Proposal 2: The approval of the Florida East Coast Industries, Inc. 2002 Stock Incentive Plan (as amended and restated effective June 2, 2005).

Item 6.

EXHIBITS

(a) Exhibits

The Exhibits listed on the accompanying Index to Exhibits are filed as part of this Report or furnished with this Report.

2531

SIGNATURES

Pursuant to the requirements 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.

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 ~~April~~July 2228, 2005.

		FLORIDA EAST COAST INDUSTRIES, INC.
		(Registrant)
Dated: April 22, 2005		/s/ Mark A. Leininger
Dated: July 28, 2005		/s/ Mark A. Leininger
		Mark A. Leininger Vice President and Controller
		Mark A. Leininger
Dated: April 22, 2005		/s/ Daniel H. Popky
		Vice President and Controller
		Daniel H. Popky, Executive Vice President and Chief Financial Officer
Dated: July 28, 2005		/s/ Daniel H. Popky
		Daniel H. Popky, Executive Vice President and Chief Financial Officer

2632

INDEX TO EXHIBITS

		PAGE
S-K ITEM 601	DOCUMENTS	NUMBERS
3.(i)	Second Amended and Restated Articles of Incorporation	*
3 (i)	Second Amended and Restated Articles of Incorporation	*
3.(ii)	Amended and Restated By-Laws of FECI through February 26, 2004	#
3 (ii)	Amended and Restated By-Laws of FECI through February 26, 2004	#
3.(iii)	Amended and Restated Articles of Amendment Relating to Designation of Series A Participating Cumulative Preferred Stock	**
3 (iii)	Amended and Restated Articles of Amendment Relating to Designation of Series A Participating Cumulative Preferred Stock	**
4	Amended and Restated Rights Agreement dated as of September 22, 2003	**
10 (a)	Representative Amendment, made as of February 26, 2004, to the Employment Agreements dated February 2, 1999 between FECI and certain Executive Officers (Vice Chairman, Executive Vice President-Rail Operations and Executive Vice President, General Counsel and Secretary)	##
10 (b)	Termination Agreement, made as of February 10, 2005 between FECI and Robert W. Anestis.	###
10 (c).1 – 10 (c).4	Employment and Change in Control Agreements dated February 10, 2005, effective March 28, 2005, and Restricted Stock and Supplemental Employee Retirement Plan (SERP) Participant Agreements, dated March 28, 2005 between FECI and Adolfo Henriques
10 (c).1 — 10 (c).4	Employment and Change in Control Agreements dated February 10, 2005, effective March 28, 2005, and Restricted Stock and Supplemental Employee Retirement Plan (SERP) Participant Agreements, dated March 28, 2005 between FECI and Adolfo Henriques	###
10 (d)	$150 million Unsecured Revolving Credit Agreement with a 5-year term between FECI and a syndication of financial institutions with Bank of America, N.A. as Lead Arranger	***
10 (e)	Supplemental Employee Retirement Plan (SERP) dated as of March 28, 2005.	###
31.1 – 31.2	Section 302 Certifications
10 (f)	Amended 2002 Stock Incentive Plan.	****
31.1 — 31.2	Section 302 Certifications
32.1	Section 906 Certification

*		Amended and Restated Articles of Incorporation and Amendment 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).
#		This document, as amended through February 26, 2004, is filed as an exhibit to Form 10-Q with the Securities and Exchange Commission on April 29, 2004.
**		These documents, dated effective as of September 22, 2003, were filed as exhibits to Form 8-A/A with the Securities and Exchange Commission on September 22, 2003.
##		This document, dated February 26, 2004, is filed as an exhibit to Form 10-Q with the Securities and Exchange Commission on April 29, 2004.
***		This document, dated February 22, 2005, is filed as an exhibit to form 8-K with the Securities and Exchange Commission on February 24, 2005.
###		These documents, dated February 10, 2005 and March 28, 2005, are filed as an exhibit to Form 10-Q with the Securities and Exchange Commission on April 22, 2005.
****		This document, dated June 2, 2005, is filed as an exhibit to Form 8K with the Securities and Exchange Commission on June 3, 2005.

2733

Votes For

Votes Against

Abstention

Broker Non-Votes

Filing Compare · FLORIDA EAST COAST INDUSTRIES INC