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 June 30, 1998.
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 June 30, 1998
Common Stock, no par value 36,286,360 shares
FLORIDA EAST COAST INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
June 30 December 31
1998 1997
(Unaudited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 46,212 $ 30,845
Short-term investments 503 258
Accounts receivable, net 28,529 31,045
Materials and supplies 10,864 11,789
Other 7,977 7,987
-------- --------
Total current assets 94,085 81,924
Other investments 58,462 72,041
Properties, less accumulated depreciation
and amortization 693,842 663,672
Other assets and deferred charges 6,367 7,853
-------- --------
$852,756 $825,490
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 21,428 $ 20,580
Income taxes 7,858 4,630
Accrued property taxes 6,652 1,008
Accrued casualty and other reserves 4,992 5,143
Other accrued liabilities 2,413 3,005
-------- --------
Total current liabilities 43,343 34,366
Deferred income taxes 134,594 133,884
Reserves and other long-term liabilities 7,700 8,365
Shareholders' equity:
Common stock, no par value; 50,000,000 shares
authorized; 37,085,444 shares issued and 36,286,360
shares outstanding 60,802 60,802
Retained earnings 612,259 594,132
Accumulated other comprehensive income 3,413 3,296
Less:
Treasury stock at cost (799,084 shares) (9,355) (9,355)
-------- --------
Total shareholders' equity 667,119 648,875
-------- --------
$852,756 $825,490
======== ========
(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 SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
1998 1997 1998 1997
-------------------------------------
OPERATING REVENUES:
Transportation $ 51,341 $ 45,790 $ 98,149 $ 90,193
Realty - Sales 0 15,926 269 21,818
- Rents & Other 10,731 9,291 20,411 18,434
-------- -------- -------- --------
Total Revenues 62,072 71,007 118,829 130,445
OPERATING COSTS:
Transportation 33,055 31,390 66,073 62,423
Realty 6,694 5,348 13,303 10,917
Realty Sales 0 14,725 71 21,138
General and Administrative 6,915 8,368 13,720 13,699
-------- -------- --------- ---------
Total Operating Costs 46,664 59,831 93,167 108,177
Operating profit 15,408 11,176 25,662 22,268
OTHER INCOME (EXPENSE):
Dividends 436 110 567 205
Interest income 1,182 1,118 2,518 2,423
Interest expense (57) (151) (143) (242)
Gains on sales and other disposition
of properties 285 1,237 476 1,332
Other (net) 1,140 694 2,585 1,583
-------- -------- --------- --------
Total Other Income (Expense) 2,986 3,008 6,003 5,301
Income before income taxes 18,394 14,184 31,665 27,569
INCOME TAXES:
Current 6,395 4,763 11,122 10,188
Deferred 347 558 604 153
-------- -------- --------- ---------
Total Income Taxes 6,742 5,321 11,726 10,341
Net income $ 11,652 $ 8,863 $ 19,939 $ 17,228
-------- ------- --------- --------
Retained earnings:
Balance at beginning of period 601,513 565,081 594,132 557,621
Cash dividends (906) (906) (1,812) (1,811)
-------- -------- --------- ---------
Balance at end of period $612,259 $573,038 $612,259 $573,038
======== ======== ========= =========
Per Share Data:
Cash dividends $ 0.025 $ 0.025 $ 0.05 $ 0.05
======== ======== ======== ========
Earnings per common share $ 0.32 $ 0.24 $ 0.55 $ 0.47
======== ======== ======== ========
(See accompanying notes)
FLORIDA EAST COAST INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30
1998 1997
---- ----
Cash flows from operating activities:
Net income $19,939 $17,228
Adjustments to reconcile net income to cash
generated:
Depreciation and amortization 13,345 11,899
Gain on disposition of assets (476) (1,332)
Realized gains on investments (2,266) (1,142)
Non-monetary fiber optic transaction (3,011) 0
Deferred taxes 604 153
Changes in operating assets and liabilities:
Accounts receivable 2,516 7,333
Other current assets 935 1,197
Other assets and deferred charges 1,486 1,277
Accounts payable 848 130
Income taxes payable 3,228 (196)
Estimated property taxes 5,644 3,745
Other current liabilities (743) (1,075)
Reserves and other long-term liabilities (665) (70)
------- -------
Net cash generated by operating activities 41,384 39,147
Cash flows from investing activities:
Purchases of properties (40,738) (31,148)
Purchases of investments:
Available-for-sale (20,527) (9,025)
Held-to-maturity 0 (5,983)
Maturities and redemption of investments:
Available-for-sale 36,347 7,261
Held-to-maturity 0 6,642
Proceeds from disposition of assets 713 5,612
------- -------
Net cash used in investing activities (24,205) (26,641)
Cash flows from financing activities:
Payment of dividends (1,812) (1,811)
------- -------
Net cash used in financing activities $(1,812) $(1,811)
Net increase in cash & cash equivalents 15,367 10,695
Cash and cash equivalents at beginning of period 30,845 23,602
------- -------
Cash and cash equivalents at end of period $46,212 $34,297
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 7,297 $10,536
======= =======
Cash paid during the period for interest $ 143 $ 242
======= =======
(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 June 30, 1998 and December 31, 1997, and the
results of operations and cash flows for the six-month periods ended
June 30, 1998 and June 30, 1997.
2. The results of operations for the six months ended June 30, 1998 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 three Superfund sites. The Company has accrued
its allocated share of the total estimated cleanup costs for these three
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 June 30, 1998 and December 31, 1997, respectively, will be paid
over an extended period, and the timing of such payments cannot be
predicted with any confidence.
4. 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.
5. 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.
6. 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 $917
million (original cost) invested in such assets as of December 31, 1997.
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.
7. All share numbers and per share amounts have been restated to reflect the
four-for-one split of the Company's common stock which became effective
June 1, 1998.
8. The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," effective January 1,
1998. This Statement establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income for the six
months ended June 30, 1998 and 1997 was approximately $20.1 and $18.6
million, respectively. Comprehensive income for the three months ending
June 30, 1998 and 1997 was approximately $11.1 and $10.7 million,
respectively. This amount differs from net income due to changes in the
net unrealized holding gains generated from available-for-sale securities.
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 six months of 1998 reflected a decrease of approximately $11.6 million.
Operating costs for the same comparative period decreased approximately $15.0
million, resulting in an increase in operating profits of approximately $3.4
million.
Operating revenues for the second quarter 1998, when compared to the second
quarter 1997, decreased approximately $8.9 million. Operating costs for the
second quarter 1998, when compared to the same period 1997, decreased by $13.1
million, resulting in an increase of $4.2 million in operating profits.
When comparing second quarter 1998 with first quarter 1998, operating
revenues increased by approximately $5.3 million while operating expenses
increased by approximately $.1 million, resulting in an increase in
operating profits of $5.2 million.
ANALYSIS
Revenues: When comparing the first six months of 1998 with the same period
in 1997, transportation revenues increased by approximately $8.0 million or
8.8%. Included in transportation revenues was a non-monetary gain of
approximately $3.0 million related to an exchange involving fiber
optics. This non-monetary gain was the result of an exchange of unrestricted
rights to 36 dark fiber optic communication fibers for the forgiveness of 1998
rental income payable to the Company on certain right-of-way operating leases,
and a final installment for the sale of conduit owned by the Company.
Discounting the total increase in fiber optic income of approximately $3.7
million, transportation revenues increased approximately $4.3 million when
comparing the first six months of 1998 with 1997. The increase of approximately
$4.3 million represents an increase in total shipments of approximately 2%
when comparing the first six months of 1998 with 1997. This increase of 2%
was comprised of increases in relation to total shipments of approximately 2%
in the number of aggregate shipments, and approximately .8% in the number of
automotive shipments offset by a decline of approximately .8% in all other
types of carload shipments. The increase in aggregate products is related to
aggregate products being used in the residential, commercial and highway
construction within the state. The increase in the number of automotive
shipments is primarily attributable to a new automobile facility located in
Titusville on the Railway's right-of-way that is operated by Norfolk Southern.
The decline in other carload shipments was primarily attributed to a decline
in coal shipments because of shipper's use of alternative transportation.
However, a new contract has been negotiated which secures future shipments via
rail. Sales of realty properties decreased approximately $21.5 million when
comparing six months of 1998 with 1997. This decrease was primarily related
to three separate dispositions of properties in the first and second quarters
of 1997 of approximately $4.8 and $15.3 million, respectively. Realty rents
and other increased approximately $2.0 million for the first six months of
1998 versus 1997. This increase is primarily attributed to the addition of
leasable space of approximately .5 million square feet.
Comparing second quarter 1998 with second quarter 1997, transportation revenues
increased approximately $5.6 million or 12.1%. Included in second quarter 1998
is the non-monetary gain of approximately $3.0 million related to fiber optic
income previously discussed. Discounting total fiber optic income of $3.4
million, transportation revenues increased approximately $2.2 million when
comparing second quarter 1998 with second quarter 1997. This increase of
approximately $2.2 million represents an increase in total shipments of
approximately 1%. This increase was comprised of increases in relation to total
shipments of approximately 2.8% in the number of aggregate shipments, and
approximately .8% in the number of automotive shipments offset by declines in
all other types of carload and intermodal shipments of .7% and 1.9%,
respectively. As previously discussed, the increase in aggregate shipments was
related to the various types of construction being performed within the state.
The increase in the number of automotive shipments was primarily attributed to
the new automobile facility at Titusville. During this same period, realty
sales decreased approximately $15.9 million, while realty rents and other
increased approximately $1.4 million. This increase was primarily related to
the .5 million square feet of leasable space added to inventory. The decrease
in the sales of realty properties of $15.9 million in the second quarter 1998
was primarily attributed to two separate dispositions of properties in 1997
which approximated $15.3 million.
Comparing second quarter 1998 with first quarter 1998, transportation revenues
increased $4.5 million or 9.7%. As previously discussed, transportation revenues
include the non-monetary gain related to fiber optic income. Discounting the
total increase in fiber optic income of approximately $3.0 million, which
represents the non-monetary gain, transportation revenues increased
approximately $1.5 million. This increase of approximately $1.5 million
represents an increase in total shipments of 6.6% when comparing second quarter
with first quarter 1998. The increase of approximately 6.6% was comprised of
increases of approximately 3.6% in aggregate shipments; of approximately .3%
in automotive shipments; of approximately .4% in all other shipments, and
of approximately 2.3% in intermodal shipments. Basically, the same rationale,
as previously discussed, applies when comparing second quarter with first
quarter 1998. Sales of realty properties decreased approximately $.3 million
from first quarter to second quarter 1998. Realty rents and other increased
$1.1 million from first quarter to second quarter 1998 primarily attributable
to the addition of leasable space from new construction.
Operating Costs - Operating costs in the first six months of 1998 decreased by
approximately $15.0 million when compared to the same period in 1997. This
decrease of approximately $15.0 million was comprised of increases of $2.4
million in realty operating costs and $3.7 million in transportation costs
offset by a decrease in cost of realty sales of approximately $21.1 million.
The decrease in cost of realty sales was primarily attributable to the costs
of three separate dispositions of realty properties of approximately $20.7
million in the first six months of 1997. The increase of $2.4 million in realty
operating cost was primarily related to the outsourcing of the "asset and
property management" function of Gran Central Corporation to St. Joe Company
and related entities of approximately $2.3 million. The increase of $3.7
million in transportation costs was attributable to increases in casualty and
insurance costs of approximately $1.4 million; approximately $.6 million in
equipment repairs, and approximately $1.7 million in costs related to purchased
services.
Operating costs for the second quarter 1998 decreased by $13.1 million when
compared to the second quarter 1997. This decrease of $13.1 million was
comprised of increases of $1.3 million in realty operating costs and $1.7
million in transportation costs offset by decreases of $14.7 million in cost
of realty sales and $1.4 million in general and administrative costs. The
decrease of $14.7 million in costs of realty sales was primarily attributable
to two separate dispositions of properties in the second quarter of 1997.
The decrease in general and administrative costs was primarily attributable to
the special charge in 1997 in connection with possible disposition of the
Company.
When comparing second quarter 1998 with the first quarter 1998, operating costs
increased approximately $.2 million. This increase of $.2 million was primarily
comprised of general and administrative costs of approximately $.1 million, and
$.1 million in realty operating costs.
Other Income - Other income for the first six months of 1998, when compared to
the same period in 1997, increased approximately $.7 million, which was
primarily attributable to the increase in investment income.
When comparing second quarter 1998 with second quarter 1997, other income
remained approximately the same.
When comparing second quarter 1998 with first quarter 1998, other income
remained approximately the same.
Net Income - Net income increased approximately $2.7 million when comparing
the first six months of 1998 with 1997. Comparing second quarter 1998 with
second quarter 1997, net income increased by approximately $2.8 million.
Comparing second quarter with first quarter 1998, net income increased by
approximately $3.4 million.
Stock Split - At the Annual Meeting of Shareholders on May 20, 1998, the
shareholders approved an increase in the authorized number of shares of the
Company's common stock from 9,360,000 shares to 50,000,000 shares, and approved
a four-for-one stock split to holders of record on June 1, 1998, payable on
June 15, 1998.
LIQUIDITY AND CAPITAL RESOURCES
FECI'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 $49.7 million being actively managed in other diversified
investment funds.
Current cash generations are used for capital expenditures in the
transportation and realty sectors and for payment of dividends. The investment
portfolio is informally dedicated to major real estate development.
Cash and cash equivalents increased approximately $15.6 million to $46.7
million at June 30, 1998 from $31.1 million at year-end 1997. The investment
portfolios decreased $13.6 million at June 30, 1998 from $72.0 million at
year-end 1997. The Company's working capital position changed from a ratio of
2.4 to 1 at year-end 1997 to a ratio of 2.2 to 1 at March 31, 1998, and
to a ratio of 2.2 to 1 at June 30, 1998.
There was no significant change in debt, reserves or other liabilities
during the six-month period and capital projects at June 30, 1998 amounted
to approximately $61.6 million authorized and outstanding from $34.0 million
authorized and outstanding at December 31, 1997. Of the $61.6 million of
capital projects, development projects represent approximately 90%.
Year 2000 Compliance - The Company has created a program management office to
direct the project's effort in achieving year 2000 compliance. A Year 2000
Compliance Steering Committee has been established that is sponsored by the
CEO and comprised of senior management as active participants in the project.
The project contains four phases to address the year 2000 issues: an
inventory phase to identify all computer-based systems and applications which
might not be year 2000 compliant; an assessment phase to determine what
revisions or replacements would be needed to achieve compliance, and the
priority of each correction in assuring that business strategies and goals are
met; a conversion phase to implement the actions necessary to achieve
compliance, and to conduct tests necessary to verify that the systems are
operational; and an implementation phase to transition the compliant systems
into the everyday operations of the Company. Management believes that the
four phases are approximately 70%, 50%, 20% and 10%, respectively, complete,
and that all critical systems will be compliant with the century change by
third quarter 1999.
The Company has budgeted approximately $250,000 to address the year 2000
issues, which includes the estimated costs of modifications and consultant
fees addressing the issues. Approximately $53,000 of this amount has been
expended through July 1998.
As part of the year 2000 review, the Company is examining vendor and
customer relationships to determine, to the extent practical, the degree of
such parties' year 2000 compliance, and to develop strategies for working with
such parties through the system changes.
Should the Company have problems with outside parties, the area most
likely to be affected centers around shipments received from and/or forwarded
to connecting rail carriers. Contingency plans are being developed to address
this possibility.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no 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: August 13, 1998 /s/ T. Neal Smith
___________________________________
Vice President & Secretary
(Principal Financial Officer)
Date: August 13, 1998 /s/ J.R. Yastrzemski
___________________________________
Comptroller
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<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> JUN-30-1998 DEC-31-1997
<CASH> 46,212 30,845
<SECURITIES> 503 258
<RECEIVABLES> 28,529 31,045
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<INVENTORY> 10,864 11,789
<CURRENT-ASSETS> 94,085 81,924
<PP&E> 958,240 916,593
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0 0
0 0
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