UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ended September 30, 1997.
Commission File Number 2-89530
FLORIDA EAST COAST INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA 59-2349968
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Malaga Street, St. Augustine, FL 32085-1048
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code
(904) 829-3421
1650 Prudential Drive, Jacksonville, FL 32201-1380
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ____X____ No _________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at September 30, 1997
Common Stock, $6.25 par value 9,071,590 shares
FLORIDA EAST COAST INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
September 30 December 31
1997 1996
(Unaudited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 39,280 $ 23,602
Short-term investments 0 5,973
Accounts receivable, net 27,815 32,203
Materials and supplies 10,618 11,237
Other 8,256 7,803
-------- --------
Total current assets 85,969 80,818
Other investments 76,164 64,654
Properties, less accumulated depreciation
and amortization 656,957 636,019
Other assets and deferred charges 9,782 8,190
-------- --------
$828,872 $789,681
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 24,190 $ 22,705
Income taxes 6,192 4,652
Accrued property taxes 8,692 3,981
Accrued casualty and other reserves 5,381 5,038
Other accrued liabilities 2,708 3,239
-------- --------
Total current liabilities 47,163 39,615
Deferred income taxes 134,237 132,909
Reserves and other long-term liabilities 8,557 8,361
Shareholders' equity:
Common stock, $6.25 par value; 9,360,000 shares
authorized; 9,271,361 shares issued & 9,071,590
shares outstanding 57,946 57,946
Capital surplus 2,856 1,598
Retained earnings 584,144 557,621
Net unrealized gain on debt and
marketable equity securities 3,324 1,904
Less:
Treasury stock at cost (199,771 and
219,374 shares) (9,355) (10,273)
-------- --------
Total shareholders' equity 638,915 608,796
-------- --------
$828,872 $789,681
======== ========
(See accompanying notes)
FLORIDA EAST COAST INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS
OF INCOME AND RETAINED EARNINGS
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
THREE MONTHS NINE MONTHS
ENDED SEPT. 30 ENDED SEPT. 30
1997 1996 1997 1996
-------------------------------------
OPERATING REVENUES:
Transportation $ 46,333 $ 41,397 $136,526 $127,511
Realty - Sales 4,885 173 26,703 406
- Rents & Other 9,689 9,553 28,123 24,656
-------- -------- -------- --------
Total Revenues 60,907 51,123 191,352 152,573
OPERATING COSTS:
Transportation 31,326 32,364 93,749 97,184
Realty 5,823 5,433 16,740 15,409
Realty Sales 1,286 163 22,424 248
General and Administrative 6,050 5,436 19,749 16,328
-------- -------- --------- --------
Total Operating Costs 44,485 43,396 153,662 129,169
Operating profit 16,422 7,727 38,690 23,404
OTHER INCOME (EXPENSE):
Dividends 178 93 383 293
Interest income 1,538 1,332 3,961 3,575
Interest expense (89) (102) (331) (426)
Gains on sales and other disposition
of properties 202 2,486 1,534 5,186
Other (net) 968 732 2,559 2,492
-------- -------- --------- --------
Total Other Income (Expense) 2,797 4,541 8,106 11,120
Income before income taxes 19,219 12,268 46,796 34,524
INCOME TAXES:
Current 6,927 4,231 17,115 11,208
Deferred 281 369 434 1,738
-------- -------- --------- ---------
Total Income Taxes 7,208 4,600 17,549 12,946
Income before minority interest 12,011 7,668 29,247 21,578
Less: minority interest 0 (12) (8) (30)
-------- -------- --------- ---------
Net income $ 12,011 $ 7,656 $ 29,239 $ 21,548
Retained earnings:
Balance at beginning of period 573,038 542,916 557,621 530,834
Cash dividends (905) (906) (2,716) (2,716)
-------- -------- --------- --------
Balance at end of period $584,144 $549,666 $584,144 $549,666
======== ======== ======== ========
Per Share Data:
Cash dividends $ 0.10 $ 0.10 $ 0.30 $ 0.30
======== ======== ======== ========
Earnings per common share $ 1.33 $ 0.85 $ 3.23 $ 2.38
======== ======== ======== ========
(See accompanying notes)
FLORIDA EAST COAST INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
NINE MONTHS ENDED SEPT. 30
1997 1996
---- ----
Cash flows from operating activities:
Net income $29,247 $21,578
Adjustments to reconcile net income to cash
generated:
Depreciation and amortization 18,102 17,338
Loss (Gain) on disposition of assets (1,534) (5,186)
Deferred taxes 434 1,738
Changes in operating assets and liabilities:
Accounts receivable 4,388 (256)
Other current assets 166 (1,909)
Other assets and deferred charges 577 (1,114)
Accounts payable 1,485 1,177
Income taxes payable 1,540 3,501
Estimated property taxes 4,711 5,857
Other current liabilities (188) 147
Reserves and other long-term liabilities 196 (1,422)
------- -------
Net cash generated by operating activities 59,124 41,449
Cash flows from investing activities:
Purchases of properties (48,353) (39,208)
Purchases of investments:
Available-for-sale (14,917) (18,698)
Held-to-maturity (8,044) (9,437)
Maturities and redemption of investments:
Available-for-sale 11,737 12,218
Held-to-maturity 8,000 23,350
Proceeds from disposition of assets 10,847 7,778
------- -------
Net cash used in investing activities (40,730) (23,997)
Cash flows from financing activities:
Payment of dividends (2,716) (2,716)
------- -------
Net cash used in financing activities $(2,716) $(2,716)
Net increase in cash & cash equivalents 15,678 14,736
Cash and cash equivalents at beginning of year 23,602 11,050
------- -------
Cash and cash equivalents at end of quarter $39,280 $25,786
======= =======
Supplemental disclosure of cash flow information:
Cash paid for income taxes $15,727 $ 7,684
======= =======
Cash paid for interest $ 331 $ 426
======= =======
(See accompanying notes)
FLORIDA EAST COAST INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
1. In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of
normal recurring accruals) considered necessary to present fairly the
financial position as of September 30, 1997 and December 31, 1996, and
the results of operations and cash flows for the nine-month periods ended
September 30, 1997 and September 30, 1996.
2. The results of operations for the nine months ended September 30, 1997 are
not necessarily indicative of the results that may be expected
for the full year.
3. The Company has retained certain self-insurance risks with respect to
losses for third-party liability, property damage and group health
insurance coverage provided employees. The Company is the defendant and
plaintiff in various lawsuits resulting from its operations. In the
opinion of management, adequate provision has been made in the financial
statements for the estimated liability which may result from disposition
of such lawsuits.
The Company is subject to proceedings arising out of environmental laws
and regulations, which primarily relate to the disposal and use of fuel
and oil in the transportation business. It is the Company's policy
to accrue and charge against earnings environmental cleanup costs when it
is probable that a liability has been incurred and an amount can be
reasonably estimated.
The Company is currently a party to, or involved in legal proceedings
directed at the cleanup of four Superfund sites. The Company has accrued
its allocated share of the total estimated cleanup costs for these four
sites. Based upon management's evaluation of the other potentially
responsible parties, the Company does not expect to incur additional
amounts even though the Company has joint and several liability. Other
proceedings involving environmental matters, such as alleged discharge of
oil or waste material into water or soil, are pending against the Company.
It is difficult to quantify future environmental costs because of many
issues relating to actions by third parties or changes in environmental
regulation. 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 or liquidity of the
Company in any one period. Environmental liabilities of $2.0 million
for September 30, 1997 and December 31, 1996, respectively, will be paid
over an extended period, and the timing of such payments cannot be
predicted with any confidence.
Gran Central Corporation, a wholly-owned subsidiary of the Company,
entered into an agreement with the State of Florida Department of
Transportation to furnish all land necessary for the construction of the
N.W. 106th Street Interchange on the Homestead Extension of the Florida
Turnpike and to subsidize the Department for 15 years to cover any annual
operating deficit related to the interchange which is not covered by toll
revenues. The maximum assessment amount over the 15 years would be
approximately $9.3 million with no annual assessment to exceed $1.1
million. No assessments have been made to date.
4. The revenue recognition policies are:
Transportation Revenues: Revenues are substantially recognized upon
completion of transportation services at destination.
Realty Land Sales: Revenue is recognized upon closing of sales contracts
for sale of land or upon settlement of legal proceedings such as
condemnations.
Rental Income: Revenue is recognized upon completion of rental and lease
contracts. The Company uses the straight-line basis for recording the
revenues over the life of the lease contract.
5. Because a large percentage of the Company's properties is long-lived,
asset replacement will be at a higher cost and will take place over many
years. The acquisition of new assets will result in higher depreciation
charges and, in the case of Realty, higher taxes and operating costs.
Generally accepted accounting principles require the use of historical
costs in preparing financial statements. This approach disregards the
effect of inflation on the replacement cost of property and equipment.
The Company is a capital-intensive company and has approximately $876
million invested in such assets as of December 31, 1996. The
replacement costs of these assets, as well as the related depreciation
expense, would be substantially greater than the amounts reported on the
basis of historical costs.
6. Certain prior year amounts have been reclassified to conform with the
current year presentation.
7. In July 1997, the Company purchased the outstanding minority shares (20%)
of International Transit, Inc. through the issuance of Treasury Stock.
International Transit, Inc. is a regional truckload carrier. This
transaction has been excluded from the Statement of Cash Flows as it did
not result in the payment or receipt of cash.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Florida East Coast Industries, Inc.'s (FECI) operating revenues for the
first nine months of 1997 reflected an increase of approximately $38.8 million.
Operating costs for the same comparative period increased approximately $23.5
million, resulting in an increase in operating profits of approximately $15.3
million.
Operating revenues for the third quarter 1997, when compared to the third
quarter 1996, increased approximately $9.8 million. Operating costs for the
third quarter 1997, when compared to the same period 1996, increased by $1.1
million, resulting in an increase of $8.7 million in operating profits.
When comparing third quarter 1997 with second quarter 1997, operating
revenues decreased by approximately $10.1 million while operating expenses
decreased by approximately $15.3 million, resulting in an increase in
operating profits of $5.2 million.
ANALYSIS
Revenues: When comparing the first nine months of 1997 operating revenues with
the same period in 1996, transportation revenues increased by approximately
$9.0 million or 7.1%. This increase is attributable to a combination of the
8.2% increase in the number of shipments handled in the first nine months of
1997 versus 1996 and various rate increases instituted since the beginning of
the year. Sales of realty properties increased approximately $26.3 million
when comparing nine months of 1997 with 1996. This increase was
substantially comprised of four separate dispositions of properties in the
first nine months of 1997 of approximately $23.7 million. Realty income
increased approximately $3.5 million for the first nine months of 1997 versus
1996. This increase is primarily attributed to an increase in the inventory of
leasable space of approximately .6 million square feet.
Comparing third quarter 1997 with third quarter 1996, transportation revenues
increased approximately $4.9 million or 11.9%, represented by a combination of
increases of approximately 8.0% in the number of shipments handled and various
freight rate increases instituted during this period. During this same period,
realty sales increased approximately $4.7 million, and realty income increased
approximately $.2 million. The increase in the sales of realty properties of
$4.7 million in the third quarter 1997 was primarily attributed to one separate
disposition of property which approximated $3.6 million.
Comparing third quarter 1997 with second quarter 1997, transportation revenues
increased $.5 million or 1.2%, represented by an approximate increase of .5%
in the number of shipments handled. Sales of realty properties decreased
approximately $11.0 million from second quarter to third quarter 1997. This
decrease was primarily attributable to two separate dispositions of
properties of approximately $15.3 million in the second quarter. Realty
income increased $.4 million from second quarter to third quarter 1997.
Operating Costs - Operating costs in the first nine months of 1997 increased by
approximately $23.5 million when compared to the same period in 1996. This
increase of approximately $23.5 million was comprised of increases of $1.3
million in realty operating cost; $22.2 million in cost of realty sales; $3.4
million in general and administrative costs offset by a decrease in
transportation costs of approximately $3.4 million. The increase in cost of
realty sales was primarily attributable to the costs of four separate
dispositions of realty properties of approximately $21.6 million in the
first nine months of 1997. The increase in general and administrative costs
was primarily attributable to a special charge of $2.9 million for expenses
incurred prior to the May 5, 1997 announcement concerning the proposal from
St. Joe Corporation in connection with the possible disposition of the
Florida East Coast Railway Company and Gran Central Corporation (see "Recent
Events"). The decrease of $3.4 million in transportation costs was primarily
attributable to a reduction in casualty and insurance costs of approximately
$2.5 million and various other transportation costs of approximately $.9
million. The 1996 comparative figures for casualty and insurance costs
included an accrual for an adverse legal judgment against the Company
regarding an asbestos case of approximately $2.2 million.
Operating costs for the third quarter 1997 increased by $1.1 million when
compared to the third quarter 1996. This increase of $1.1 million was
comprised of increases of $.4 million in realty operating costs; $1.1 million
in cost of realty sales, and $.6 million in general and administrative
costs, with a decrease of $1.0 million in transportation costs. The decrease
of $1.0 million in transportation costs represents decreases in casualty and
insurance of approximately $.8 million and in purchased services of
approximately $.2 million.
When comparing third quarter 1997 with the second quarter 1997, operating costs
decreased approximately $15.3 million. This decrease of $15.3 million was
comprised of decreases of $2.3 million in general and administrative costs;
$13.4 million in costs of realty properties sold, with an increase of $.4
million in realty operating costs. The decrease of approximately $13.4
million in cost of realty properties sold was primarily attributable to the
two separate dispositions of properties in the second quarter 1997 of
approximately $14.7 million versus a single disposition of property for
approximately $.9 million. The decrease of $2.3 million in general and
administrative expenses is primarily attributed to the special charge in the
second quarter 1997 of $2.9 million discussed in the nine-month analysis above.
Other Income - Other income for the first nine months of 1997, when compared to
the same period in 1996, reflected a decrease of approximately $3.0 million.
This decrease was primarily attributable to a decrease in gains on sales and
and other dispositions of approximately $3.7 million offset by dividends,
interest and other income of approximately $.7 million. The $3.7 million
decrease was primarily the result of a sale of fiber optic conduit in 1996.
When comparing third quarter 1997 with third quarter 1996, other income
decreased approximately $1.7 million. This decrease was principally
attributed to a reduction in gains on sales of realty properties of
approximately $2.3 million.
When comparing third quarter 1997 with second quarter 1997, other income
decreased by approximately $.2 million.
Net Income - Net income increased approximately $7.7 million when comparing
first nine months of 1997 with 1996. Comparing third quarter 1997 with third
quarter 1996, net income increased by approximately $4.3 million. Comparing
third quarter with second quarter 1997, net income increased by approximately
$3.1 million.
RECENT EVENTS:
The Company announced on May 5, 1997 that it had received a proposal from
St. Joe Corporation in which St. Joe has offered to merge FECI with a wholly-
owned subsidiary of St. Joe. In the proposed merger, the approximately 4.2
million shares of FECI common stock not owned by St. Joe would be exchanged for
cash at a price of $102 per share. St. Joe's proposal is subject by its terms
to any regulatory approvals and required vote of the outstanding shares of FECI,
as well as customary terms and conditions. The proposal is also subject by its
terms to the negotiation of a merger agreement containing terms mutually
satisfactory to FECI and St. Joe.
The Board of Directors of FECI has authorized a committee of three of its
outside Directors to review the St. Joe proposal; to negotiate its terms and
conditions (including price) if the Special Committee determines that St. Joe's
proposal should be pursued; and to recommend to the full Board of Directors
whether the final terms and conditions (including price) resulting from such
negotiations are fair to and in the best interests of the Company and its
shareholders (other than St. Joe) and should be approved by the Board of
Directors.
The Special Committee has retained counsel and Goldman, Sachs & Co. as
its investment advisor concerning the St. Joe proposal, and the Special
Committee and St. Joe have engaged in negotiations concerning the St. Joe
proposal. There can be no assurances when, if or on what terms FECI and St.
Joe can reach agreement with respect to St. Joe's proposal.
On May 9, 1997, the Company received notification from Franklin Mutual Advisors,
Inc. that, as of that date, it had a present good faith intention to acquire
through open market or privately-negotiated purchases or otherwise, voting
securities of the Company such that it will hold as a result of such
acquisitions at least 15% of the voting securities of the Company. The
Company has received notification from Franklin Resources, Inc. that as of
June 30, 1997, it beneficially owned 15% of the outstanding shares of the
Company.
LIQUIDITY AND CAPITAL RESOURCES
FEC's principal sources of liquidity include cash generated by operations;
earnings on invested cash, and earnings on its investment portfolio, consisting
largely of U.S. Treasury securities for its short-term investments, and
approximately $50.3 million being actively managed in other diversified
investment funds.
Current cash generations are used for capital expenditures in the
transportation and realty sectors and in payment of dividends. The investment
portfolios are informally dedicated to major real estate development.
Cash and short-term investments increased $9.7 million to $39.3 million
at September 30, 1997 from $29.6 million at year-end 1996. The investment
portfolios increased $11.5 million to $76.2 million at September 30, 1997
from $64.6 million at year-end 1996. The Company's working capital position
changed from a ratio of 2.04 to 1.00 at year-end 1996 to ratios of 1.69 to
1.00 at March 31, 1997, 1.85 to 1.00 at June 30, 1997, and 1.82 to 1.00
at September 30, 1997.
There was no significant change in debt, reserves or other liabilities
during the nine-month period and capital projects at September 30, 1997 amounted
to approximately $63.4 million authorized and outstanding versus $31.2 million
authorized and outstanding at December 31, 1996. Of the $63.4 million of
capital projects, approximately 80.1% represents realty development projects.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
During April 1996, an individual, alleging that he is a shareholder of FECI,
instituted a purported class action suit in Florida state court against FECI,
St. Joe Industries, Inc., St. Joe Corporation and members of the FECI Board of
Directors (Messrs. Thornton, Belin, Nedley, Zellers, Fairbanks, Foster, Harper,
Mercer and Parrish). Certain of the aforementioned individuals named in the
action are also directors of St. Joe Corporation. The action, which has
purportedly been brought on behalf of all shareholders of FECI, other than
the defendants and their affiliates, is styled Kahn, et al. v. St. Joe
Industries, Inc., et al., Case No. 96-01874 CA (Circuit Court, Fourth
Judicial Circuit, Duval County, Florida, Division CV-G).
The initial complaint alleged that the defendants breached their fiduciary
duties to the minority shareholders of FECI in connection with the February
26, 1996 announcement by FECI that it was considering the sale of its real
estate subsidiary, GCC, to St. Joe Corporation and the sale of its railroad
subsidiary, FEC Railway, to a third party. On June 12, 1997, the court
entered an order permitting the filing of an amended and supplemental complaint
adding two additional alleged shareholder plaintiffs and claiming that the
defendants also breached their fiduciary duties in connection with the May 5,
1997 proposal by St. Joe Corporation to acquire in a merger the 46% of FECI
that it did not own for $102 per share in cash. According to the amended and
supplemental complaint, the proposed merger price is inadequate and the merger
allegedly would constitute unfair dealing and benefit St. Joe Corporation, as
FECI's majority and controlling shareholder, at the expense of FECI's minority
shareholders. The action seeks, among other things, to certify the litigation
as a class action, enjoin the proposed merger and award damages against
defendants. On June 12, 1997, St. Joe Corporation moved to dismiss the
amended and supplemental complaint.
On July 18, 1997, the parties to the action entered into a stipulation whereby
(1) defendants agreed to appear in the litigation and waive any challenge to
sufficiency and service of process, (ii) plaintiff agreed that defendants' time
to respond to the complaint would be extended such that defendants are not
required to answer or respond to the complaint until plaintiffs' counsel
provides written notice to defendants' counsel that a response is required (a
response is then required to be filed within 14 days), and defendant, St. Joe
Corporation, agreed to postpone proceedings on its motion to dismiss.
During May 1997, another individual, also alleging that he is a shareholder of
FECI, instituted a purported class action suit in the United States District
Court, Middle District of Florida, Jacksonville Division, against the same
defendants named in the Kahn action, other than Mr. Nedley and St. Joe
Industries, Inc., allegedly on behalf of a class consisting of all other
shareholders of FECI as of May 5, 1997 and their successors in interest,
excluding defendants and their affiliates. The action is styled Harold Kokol,
IRA v. W. L. Thornton, et al., Civil Action No. 97-650-Civ.
The complaint alleges that the defendants breached their fiducary duties to the
minority shareholders of FECI in connection with the May 5, 1997 proposal by
St. Joe Corporation to acquire in a merger the 46% of the stock of FECI it
does not already own for $102 per share in cash. According to the complaint,
the proposed transaction is the product of unfair dealing and the price of $102
is unfair and inadequate. The action seeks, among other things, to certify the
litigation as a class action, to enjoin the proposed merger, and to require
defendants to account to the alleged class for damages. Counsel for the
parties have stipulated to an extension of defendants' time to respond
to the complaint such that defendants will not be required to answer or respond
to the complaint until plaintiff's counsel provides written notice to
defendants' counsel that a response is required (a response would then be
required to be filed in 14 days).
There are no other legal or regulatory proceedings pending or known to be
contemplated which, in the opinion of the General Attorney of the Registrant,
are other than normal and incidental to the kinds of businesses conducted by
the Registrant.
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.
FLORIDA EAST COAST INDUSTRIES, INC.
(Registrant)
Date: November 14, 1997 /s/ T. Neal Smith
___________________________________
Vice President & Secretary
(Principal Financial Officer)
Date: November 14, 1997 /s/ J.R. Yastrzemski
___________________________________
Comptroller
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<CASH> 39,280 23,602
<SECURITIES> 0 5,973
<RECEIVABLES> 27,815 32,203
<ALLOWANCES> 0 0
<INVENTORY> 10,618 11,237
<CURRENT-ASSETS> 85,969 80,818
<PP&E> 904,428 875,506
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<COMMON> 57,946 57,946
0 0
0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 828,872 789,681
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<TOTAL-REVENUES> 199,458 218,583
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<INCOME-PRETAX> 46,788 48,117
<INCOME-TAX> 17,549 17,703
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