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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO______
COMMISSION FILE NO. 2-89530
FLORIDA EAST COAST INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA 59-2349968
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE MALAGA STREET, ST. AUGUSTINE, FL 32084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 829-3421
Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
Common Stock, No par value New York Stock Exchange
Collateral Trust 5% Bonds New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if the disclosure of delinquent filers, pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained or, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Based on the closing sales price of March 15, 1999, the aggregate market value
of the common stock held by non-affiliates of the Registrant was approximately
$420 million.
The number of shares of the Registrant's common stock, no par value, is
37,085,444 shares issued and 36,286,360 shares outstanding at March 15, 1999,
with 799,084 shares of treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 19, 1999 (the "Proxy Statement") are
incorporated in Part III of this Annual Report by reference.
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Forward-Looking Statements
This Form 10-K, including the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
contains certain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, that are not historical facts. Such
forward-looking information may include, without limitation, statements that
the Company does not expect that lawsuits, environmental costs, commitments,
contingent liabilities, labor negotiations, Year 2000 compliance or other
matters will have a material adverse effect on its consolidated financial
condition, result of operations or liquidity and other similar expressions
concerning matters that are not historical facts, and projections as to the
Company's financial results. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
anticipated in the forward-looking statements. Important factors that could
cause such differences include, but are not limited, to contractual
relationships, industry competition, regulatory developments, natural events
such as weather conditions, floods and earthquakes, forest fires, the effects
of adverse general economic conditions, changes in the real estate markets and
interest rates, fuel prices and the ultimate outcome of environmental
investigations or proceedings and other types of claims and litigation.
As a result of these and other factors, the Company may experience
material fluctuations in future operating results on a quarterly or annual
basis, which could materially and adversely affect its business, financial
condition, operating results, and stock price.
Readers should not place undue reliance on forward-looking statements,
which reflect management's view only as of the date hereof. The Company
undertakes no obligation to publicly release revisions to these forward-looking
statements that reflect events or circumstances after the date hereof or
reflect the occurrence of unanticipated events.
<PAGE> 3
PART I
As used throughout this Form 10-K Annual Report, the terms "FECI," the
"Company" and "Registrant" mean Florida East Coast Industries, Inc. and its
consolidated subsidiaries.
ITEM 1. BUSINESS
GENERAL
FECI is a holding company incorporated under the laws of the State of Florida in
1983, engaged, through three wholly-owned subsidiaries, in transportation
services (rail and trucking operations) and real estate ownership, development
and management. Its rail operations connect many of the major population centers
and port facilities of Florida and provide efficient service for its customers
through multiple competitive connections to the rest of North America. The
railroad handles construction aggregate (crushed stone and sand), automobiles,
intermodal freight and other rail carload commodities. The Company has extensive
and valuable real estate holdings in Florida, totaling approximately 19,000
acres, including 6.2 million square feet of commercial and industrial space in
62 buildings owned by the Company, 800,000 square feet under construction, and
500,000 square feet in predevelopment stages, and unimproved land, including
certain land with relevant development permits authorizing the construction of
14 million square feet of additional industrial and commercial space.
TRANSPORTATION
INDUSTRY OVERVIEW
Railroads are divided into three classes based on operating revenues: Class I,
$255 million or more; Class II, $20.4 million to $255 million; and Class III,
less than $20.4 million. As a result of mergers and consolidations, there are
currently nine Class I railroads in the country and that number is expected to
be seven by the end of 1999. These large systems handle approximately 91% of the
nation's rail freight business. The number of Class II and Class III railroads
has risen in the last two decades as the rail freight industry experienced a
revitalization after the 1980 passage of the Staggers Rail Act, which
substantially deregulated the pricing and types of services provided by
railroads. As a result, railroads were able to achieve significant productivity
gains and operating cost decreases while gaining pricing flexibility. Rail
freight service became more competitive with other transportation modes with
respect to both quality and price. The volume of freight moved by rail has risen
dramatically since 1980 and profitability has improved significantly.
Generally, freight railroads handle two types of traffic: conventional carloads
and intermodal containers used in the shipment of goods via more than one mode
of transportation, e.g., by ship, rail and truck. By using a hub-and-spoke
approach to shipping, multiple containers can be moved by rail to and from an
intermodal terminal and then either delivered to their final destinations by
trucks or transferred to ships for export. Over the past decade, commodity
shippers have increasingly turned to intermodal transportation principally as
an alternative to long-haul trucking. The development of new intermodal
technology, which allows containers to be moved by rail double stacked (i.e.,
stacked one on top of the other) in specially designed rail cars, together with
increasing highway traffic congestion and the shortage of long-haul truck
drivers have contributed to this trend.
RAIL
FECI's subsidiary, Florida East Coast Railway Company ("FECR"), operates a Class
II railroad along 351 miles of main line track between Jacksonville and Miami,
Florida serving the most densely populated areas of the state. FECR also owns
and operates approximately 184 miles of switching track and 159 miles of yard
track, all wholly within Florida. FECR has the only coastal right-of-way between
Jacksonville and Miami and is the exclusive rail-service provider to the Port of
Palm Beach, Port Everglades and the Port of Miami.
In 1998, FECR principally transported trailers and containers on flatcars, rail
carloads of crushed stone and other construction materials, motor vehicles,
foodstuffs and other consumer products, chemicals and metals.
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The following table summarizes the Company's freight shipments by commodity
group and as a percentage of rail operating revenues:
TRAFFIC
YEAR ENDED DECEMBER 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Commodity Units (000's) Percentage Amt. of Rev. Percentage
- --------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Intermodal
- ----------
TOFC/COFC 326.6 67.0% $69,710 44.7%
Rail Carloads
- -------------
Crushed stone 103.2 21.2% 41,686 26.7%
Construction Materials 5.7 1.2% 3,406 2.2%
Vehicles 22.5 4.6% 17,964 11.5%
Foodstuffs 8.9 1.8% 6,566 4.2%
Chemicals 2.7 0.5% 3,003 1.9%
Paper 7.7 1.6% 7,105 4.5%
Other 10.2 2.1% 6,921 4.4%
----- ----- -------- -----
Total 487.5 100.0% $156,361 100.0%
===== ===== ======== =====
</TABLE>
At Jacksonville, FECR connects with Norfolk Southern Corporation ("NS") and
with CSX Transportation, Inc. ("CSXT") and is able to offer its customers
competitive rail connections to the rest of North America. In 1998,
approximately 47% of FECR's freight revenues was attributable to traffic that
originated on other railroads, approximately 5% was attributable to traffic
that originated on FECR but was bound for other destinations and 48% was
attributable to traffic that both originated and terminated on FECR's system
("local traffic"). FECR does not receive traffic from one railroad to be passed
over its track to another railroad. Because all of FECR's traffic either
originates in or is bound for Florida, FECR's revenues can fluctuate seasonally
and with economic conditions in Florida, rising as the economy of Florida
expands and declining as it contracts.
Rail freight rates can be in various forms. Generally, customers are given a
"through" rate, a single figure encompassing the rail transportation of a
commodity from point of origin to point of destination, regardless of the
number of carriers which handle the car. Rates are developed by the carriers
based on the commodity, volume, distance and competitive market considerations.
The entire freight bill is paid either to the originating carrier ("prepaid")
or to the destination carrier ("collect") and divided between all carriers
which handle the move. The basis for the division varies and can be based on
factors (or revenue requirements) independently established by each carrier
which comprise the through rate, or on a percentage basis established by
division agreements among the carriers. A carrier such as FECR, which actually
places the car at the customer's location and attends to the customer's daily
switching requirements, receives revenue greater than an amount based simply on
mileage hauled.
FECR serves over 787 direct rail-served customers, as well as hundreds of other
customers through the Company's intermodal operations. The Company's five
largest customers accounted for approximately 40% of operating revenues in
1998. In 1998, one customer accounted for approximately 15% of the Company's
rail operating revenues.
FECR handles rail cars for South Central Florida Express, Inc. ("South Central")
between Fort Pierce and Jacksonville for interchange with CSXT or NS. South
Central is a short-line railroad with a twenty-year Trackage Rights Agreement
over a branch line extending from Fort Pierce to Lake Harbor owned by FECR. A
concurrent Car Haulage Agreement is in effect between Fort Pierce and
Jacksonville.
As fee simple owner of its railroad right-of-way extending along the east coast
from Jacksonville to Miami, FECR actively manages this and ancillary real
estate assets owned by it to generate miscellaneous rents and
telecommunications profits. FECR leases the use of its right-of-way to various
tenants, including agreements for the occupancy of the right-of-way by various
utility company installations and several telecommunications
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companies' fiber optics systems, pursuant to long-term leases. The Company
intends to aggressively pursue further opportunities in the telecommunications
industry. In addition, FECR generates revenues from the grant of licenses and
leases to use railroad property for outdoor advertising, and perpendicular
crossings of wires and pipes by utility companies. These miscellaneous rents and
telecommunications profits are included in rail operating revenues.
TRUCKING
FECI also owns 100% of the stock of International Transit, Inc. ("ITI"). FECI
acquired an 80% interest in ITI on April 1, 1995, and the remaining 20% on June
25, 1997. ITI is a common and contract motor truck carrier operating throughout
the U.S., with a concentration in the Southeast and Midwest. ITI offers
truckload over-the-road service, as well as intermodal drayage. ITI also offers
transportation logistic services and maintains a brokerage operation. ITI
generates revenues from trucking, brokerage and contract logistic services.
Ownership of ITI enables the Company to provide coordinated motor/rail
intermodal services with FECR to and from southeastern points.
In 1998, ITI interlined 13,456 intermodal units (trailers and containers) with
FECR's intermodal facility at Jacksonville.
REALTY
FECI owns 100% of the stock of Gran Central Corporation ("GCC"). GCC is engaged
in the development, leasing, management and sales of real estate.
GCC owns, operates and leases commercial and industrial properties throughout
Florida. At December 31, 1998, GCC owned and operated 62 buildings, with
approximately 6.2 million square feet of rentable commercial/industrial space
on 464 acres of land. A schedule of these buildings is included in Part 1, Item
2 of this Annual Report. This represents a 10% increase in square footage since
December 31, 1997. At December 31, 1998, GCC's buildings in service for more
than one year were 91% leased, while 87% of its portfolio as a whole, including
newly constructed buildings was leased. GCC's buildings are primarily "Class A"
office space and high-quality commercial/industrial facilities constructed
after 1987. At December 31, 1998, GCC had almost 800,000 square feet under
construction, a 300% increase from December 31, 1997, and 500,000 square feet
in predevelopment, for a total of 1,283,000 square feet, located primarily in
the Jacksonville, Orlando and Miami areas at its facilities known as Gran
Parks. At the predevelopment phase, GCC has obtained necessary permits and
invested in engineering and architectural planning and design. The Gran Parks'
facilities occupy approximately 2,500 acres. GCC also owns approximately 15,000
acres of undeveloped land in inventory for potential future commercial and
industrial development, primarily situated adjacent to FECR's rights-of-way in
markets that the Company believes will provide significant growth
opportunities. These properties do not yet have necessary development permits
and authorizations. The primary focus of GCC's development activities has been
the Miami, Jacksonville and Orlando areas, all of which are highly active with
local, regional and national development companies competing for land and
tenants. The projects under development include:
- Gran Park at Southpark - Orlando, Florida: Development plans
for this Gran Central multi-use corporate campus include
eight buildings totaling approximately 850,000 square feet.
Phase one, which includes a four-story, Class-A office
building and one office, showroom and warehouse building, is
currently open. Both buildings are experiencing strong
leasing activity, including a lease signed in the fourth
quarter of 1998 with Lockheed Martin for over 38,000 square
feet of space. Phase two, also under construction, includes
an additional 150,000-square foot office building. Completion
is scheduled for April 1999.
- Gran Park at Deerwood Park North - Jacksonville, FL: Gran
Central's Deerwood Park North project includes plans to
develop four Class-A office buildings for a total of 513,000
square feet. Building one, currently under construction, is a
five-story, 139,000-square foot office building, with
completion scheduled for July 1999.
- Bombardier Capital, Inc. Gran Park at Jacksonville -
Jacksonville, Florida: Gran Central is developing a new one
million-square foot business park for Bombardier Capital.
This project, which was launched in the third quarter of
1998, is a component of Gran Central's Gran Park at
Jacksonville. Bombardier is taking all of the first
125,000-square foot building along with options for up to
500,000 additional square
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feet. Construction is approximately 50 percent complete on
the first building, with completion expected in June 1999.
- Gran Park at Jacksonville - Jacksonville, Florida: Atlantic
Mortgage (AMIC) occupied a new 134,085-square foot Gran
Central office, showroom and warehouse building in the fourth
quarter of 1998.
- Beacon Pointe at Weston - Weston, Florida: Gran Central is in
a venture with Weeks Corporation ("Weeks") (NYSE: WKS) on
Gran Central property at Weston, FL. Development plans over
five years include four office buildings totaling 375,000
square feet and a hotel site. Beacon Pointe is located in the
Weston Park of Commerce in west Broward County. Currently
under construction is the first 100,000-square foot Class-A
office building. Completion is scheduled for summer 1999.
- Gran Park at Beacon Station - Miami, Florida: Development is
underway at Beacon Station for three Gran Central industrial
buildings totaling 540,000 square feet. The first of the
three buildings should be completed in the spring of 1999,
and site preparation is currently underway for the second and
third buildings. Beacon Station is located near Miami
International Airport and entitled for 6.5 million square
feet of office and industrial space.
A summary of the Company's development activity as of December 31, 1998, as
explained above follows:
<TABLE>
<CAPTION>
Net Rentable
Status Owner Property Description Square Feet Start Date
------ ----- -------------------- ------------ ----------
<S> <C> <C> <C> <C>
Under construction GCC Gran Park at Jacksonville 222,000 July 1998
Under construction GCC Gran Park at Deerwood 139,000 Oct. 1998
Under construction GCC Gran Park at Southpark 150,000 Aug. 1998
Predevelopment GCC Gran Park at Southpark 132,000 TBD
Under construction GCC Beacon Station 180,000 Sept. 1998
Predevelopment GCC Beacon Station 360,000 TBD
Under construction GCC/Weeks Beacon Pointe at Weston 100,000 June 1998
---------
Total 1,283,000
</TABLE>
Because GCC was formed to conduct the real estate activities of FECI, its
undeveloped properties are generally located near transportation corridors
along the eastern coast of Florida. GCC's developable holdings include sizable
parcels adjacent to FECR's tracks, which may be developed into office and
industrial parks, offering both rail and non-rail served parcels. Certain of
GCC's other holdings are in urban or suburban locations offering opportunities
for development of office, building structures or business parks containing
both office building sites and sites for flexible space structures such as
office/showroom/warehouse buildings.
Effective as of January 1, 1998, GCC entered into an Asset Management Agreement
with The St. Joe Company ("St. Joe") (NYSE: JOE), pursuant to which St. Joe
assumed the management, including permitting, development planning, construction
oversight, operation and leasing, of GCC's real estate. St. Joe's compensation
for these services is in accordance with the agreement. See Part II, Item 8,
"Financial Statements and Supplemental Data" and notes thereto. St. Joe owns
directly 54% of the common stock of FECI and is a diversified company engaged,
among other things, in the real estate business. St. Joe is the single largest
private landowner in Florida, owning more than 1.1 million acres or
approximately 3% of the land area of the state (an area slightly smaller than
the land area of the State of Delaware). Although the vast majority of St. Joe's
properties consist of timberlands, it owns a large portfolio of income producing
properties and sizable tracts suitable for commercial, industrial and
residential, as well as resort and entertainment, development. On February 25,
1998, St. Joe completed a transaction with the Codina Group, Inc. ("Codina") and
Weeks by which St. Joe and Weeks, among other things, each purchased a one-third
interest in Codina, a commercial/industrial developer, active principally in
southern Florida.
GCC entered into the Asset Management Agreement to capitalize on the strength
and real estate development expertise of St. Joe and its development partners.
In addition to the relationship with Weeks described in the table above, GCC has
also entered into an agreement with Codina pursuant to which Codina provides
certain property management services.
FECR generates realty revenues from leases and sales on FECR-owned but
non-operating property, such as leases of land for parking lots and non-rail
served warehouses.
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FINANCIAL INFORMATION ABOUT INDUSTRY'S SEGMENTS
The Company had total operating revenues in 1998 of $248 million and operating
profit of $57.8 million. The Company's total railroad operating revenues were
approximately $165 million, trucking revenues were approximately $30 million,
and real estate revenues were approximately $53 million. Operating profit for
the railroad was $44.5 million, $48,000 for trucking and $16 million for the
real estate business. See footnote 9, "Segment Information" of the Consolidated
Financial Statements and supplementary data set forth in Item 8 in this Annual
Report on Form 10-K.
SOURCES AND AVAILABILITY OF RAW MATERIALS
All of the raw materials the Company uses are available in adequate supply from
multiple sources.
SEASONALITY
FECI's rail traffic is relatively stable throughout the year with heaviest
traffic ordinarily occurring during the first and last quarters of the year.
Its real estate business and trucking operations are not generally seasonal.
WORKING CAPITAL
The Company has a strong working capital position. At December 31, 1998,
current assets exceeded current liabilities by $65 million.
CUSTOMERS
TRANSPORTATION
RAIL
One customer generated about 15% of the Company's rail revenues in 1998. The
Company's business could be adversely affected if its large customers suffer
significant reductions in their businesses or reduce shipments of commodities
transported by the Company.
TRUCKING
The trucking operation is not dependent on any significant customer. No
customer generates revenue which exceeds 10% of the trucking operations'
revenues. About 20% of the trucking operation's customer base accounts for about
80% of its revenues.
REAL ESTATE
In the real estate segment, the Company is not dependent on any significant
customer. GCC's largest commercial tenant occupied approximately 3% of leased
space in 1998.
COMPETITION
TRANSPORTATION
RAIL
Although the Company's railroad is typically the only rail carrier directly
serving its customers, the Company's railroad competes directly with other
railroads that could potentially deliver freight to their markets and customers
via different routes and use of multiple modes of transportation. The
railroad's primary rail competition is CSXT. FECR also competes directly with
other modes of transportation, including motor carriers and, to a lesser
extent, ships and barges. Competition is based primarily upon the rate charged
and the transit time required, as well as the quality and reliability of the
service provided. Any improvement in the cost or quality of these alternate
modes of transportation could increase competition from these other modes of
transportation and adversely affect the Company's business.
There is continuing strong competition among rail, water and highway carriers.
Price is usually only one factor of
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importance as shippers and receivers choose a transport mode and specific
transportation company to do business with. Inventory carrying costs, service
reliability, ease of handling and the desire to avoid loss and damage during
transit are increasingly important considerations, especially for higher valued
finished goods, machinery and consumer products. Even for raw materials,
semi-finished goods and work-in-process, users are increasingly sensitive to
transport arrangements which minimize problems at successive production stages.
TRUCKING
Substantially the same competitive factors affect the Company's trucking
operations as well.
REAL ESTATE
The real estate industry is generally characterized by significant competition.
The Company plans to continue to expand through a combination of office and
industrial developments in Florida where the acquisition and/or development of
property would, in the opinion of management, result in a favorable
risk-adjusted return on investment. There are a number of office and industrial
developers and real estate companies that compete with the Company in seeking
properties for acquisition, resources for development, and prospective tenants.
Competition from other real estate developments may adversely affect the
Company's ability to attract and retain tenants, rental rates and expenses of
operation (particularly in light of the higher vacancy rates of many competing
properties, which may result in lower-priced space being available in such
properties). The Company may compete with other entities that have greater
financial and other resources than the Company. There can be no assurance that
the existence of such competition could not have a material adverse effect on
the Company's business, operations and cash flow.
REGULATION
TRANSPORTATION
RAIL
FECR is subject to regulation by the Surface Transportation Board ("STB") of
the U.S. Department of Transportation which succeeded the ICC on January 1,
1996 and, in some areas, the State of Florida. The STB has jurisdiction over
some rates, routes, conditions of service, and the extension or abandonment of
rail lines. The STB also has jurisdiction over the consolidation, merger or
acquisition of control of and by rail common carriers. The U.S. Department of
Transportation through the Federal Railroad Administration regulates railroad
operations, including certain track and mechanical equipment standards and
certain human factor issues.
The relaxation of economic regulation of railroads, begun over a decade ago by
the ICC under the Staggers Rail Act of 1980 ("Staggers Act"), has continued
under the STB and additional rail business could be exempted from regulation in
the future. Significant exemptions are TOFC/COFC (i.e., "piggyback") business,
rail boxcar traffic, lumber, manufactured steel, automobiles and certain bulk
commodities such as sand, gravel, pulpwood and wood chips for paper
manufacturing. Transportation contracts on regulated shipments, which no longer
require regulatory approval, effectively remove those shipments from regulation
as well. Over 90% of FECR's freight revenues come from either exempt traffic or
traffic moving under transportation contracts.
Efforts are being made in 1999 to re-subject the rail industry to federal
economic regulation. The Staggers Act encouraged and enabled rail carriers to
innovate and to compete for business, thereby contributing to the economic
health of the nation and to the revitalization of the industry. Accordingly,
the nation's rail carriers can be expected to vigorously oppose these efforts
to re-impose or to authorize re-imposing such economic regulation.
TRUCKING
The Company's trucking operation is regulated by the United States Department
of Transportation, including the Federal Highway Administration. This
regulatory authority exercises broad powers, generally governing activities
such as authorizations to engage in motor carrier operations, safety, and
certain mergers, consolidations and acquisitions.
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RAIL AND TRUCKING
The Company's transportation operations, both rail and trucking, are also
subject to extensive environmental laws and regulations, including the federal
Clean Air Act, CERCLA, and various other environmental laws and regulations.
Violations of various statutory and regulatory programs can result in civil
penalties, remediation expenses, natural resource damage claims, potential
injunctions, cease and desist orders and criminal penalties. Some environmental
statutes impose strict liability, rendering a person liable for environmental
damage without regard to negligence or fault on the part of such person. In
addition, the Company's present and historic ownership and operation of real
property, including railyards, in connection with its transportation operations
involve the storage, use or disposal of hazardous substances that may have
contaminated and may in the future contaminate the environment. The Company may
also be liable for the costs of cleaning up a site at which it has disposed
(intentionally or unintentionally of hazardous substances by virtue of, for
example, an accident, derailment or leak) or to which it has transported
hazardous substances it generated, such as waste oil. The Company is currently
involved in various remediations of properties relating to its transportation
operations. In addition, FECR, along with many other companies, has been named
a potentially responsible party in proceedings under Federal statutes for the
clean up of designated Superfund sites at Hialeah, Florida; Jacksonville,
Florida, and Portsmouth, Virginia. See Item 3, "Legal Proceedings." Based on
presently available information, the Company does not believe that the costs of
addressing any known environmental issues relating to its transportation
operations will be material. However, the future cost of complying with
environmental laws and containing or remediating contamination cannot be
predicted with any certainty, and there can be no assurances that such
liabilities or costs would not have a material adverse effect on the Company in
the future.
REAL ESTATE
Development of real property in Florida entails an extensive approval process
involving overlapping regulatory jurisdictions. Real estate projects must
generally comply with the provisions of the Local Government Comprehensive
Planning and Land Development Regulation Act (the "Growth Management Act"). In
addition, development projects that exceed certain specified regulatory
thresholds require approval of a comprehensive Development of Regional Impact
("DRI") application. Compliance with the Growth Management Act and the DRI
process is usually lengthy and costly and can be expected to materially affect
the Company's real estate development activities.
The Growth Management Act requires counties and cities to adopt comprehensive
plans guiding and controlling future real property development in their
respective jurisdictions. After a local government adopts its comprehensive
plan, all development orders and development permits that it issues must be
consistent with the plan. Each such plan must address such topics as future
land use, capital improvements, traffic circulation, sanitation, sewerage,
potable water, drainage and solid wastes. The local governments' comprehensive
plans must also establish "levels of service" with respect to certain specified
public facilities and services to residents. Local governments are prohibited
from issuing development orders or permits if facilities and services are not
operating at established levels of service, or if the projects for which
permits are requested will reduce the level of service for public facilities
below the level of service established in the local government's comprehensive
plan. If the proposed development would reduce the established level of
services below the level set by the plan, the development order will require
that, at the outset of the project, the developer either sufficiently improve
the services to meet the required level or provide financial assurances that
the additional services will be provided as the project progresses.
The Growth Management Act is in some instances significantly affecting the
ability of developers to obtain local government approval in Florida. In many
areas, infrastructure funding has not kept pace with growth. As a result,
substandard facilities and services are delaying or preventing the issuance of
permits. The Growth Management Act could adversely affect the ability of
Florida developers, including GCC, to develop real estate projects.
The DRI review process includes an evaluation of the project's impact on the
environment, infrastructure and government services, and requires the
involvement of numerous federal, state and local governmental, zoning and
community development agencies and authorities. Local government approval of
any DRI is subject to appeal to the Governor and Cabinet by the Florida
Department of Community Affairs, and adverse decisions by the Governor or
Cabinet are subject to judicial appeal. The DRI approval process is usually
lengthy and costly, and there are no assurances as to what specific factors
will be considered in the approval process, or what conditions, standards or
requirements may be imposed on a developer with respect to a particular
project. The
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DRI approval process is expected to have a material impact on the Company's
real estate development activities in the future.
In addition, a substantial portion of the developable property in Florida,
including certain of the Company's property, is raw land located in areas where
its development may affect the natural habitats of various endangered or
protected wildlife species or in sensitive environmental areas such as wetlands
and coastal areas, which are subject to extensive and evolving federal, state
and local regulation. Accordingly, federal, state and local wildlife
protection, zoning and land use restrictions, as well as community development
requirements, may become increasingly restrictive and, as a result, significant
limitations may be imposed on the Company's ability to develop its real estate
holdings in accordance with their most profitable uses.
The Company's ownership and development of real estate are subject to extensive
and changing federal, state and local environmental laws, the provisions and
enforcement of which may become more stringent in the future. Pursuant to those
laws, the owner or operator of real estate may be required to perform
remediation regardless of whether it caused the contamination. The sale or
development of properties may also be restricted due to environmental concerns,
the protection of endangered species, or the protection of wetlands. In
addition, violations of various statutory and regulatory programs can result in
civil penalties, remediation expenses, natural resource damages, potential
injunctions, cease and desist orders and criminal penalties. The Company is not
presently aware of any material contaminations at or any material adverse
environmental development issues relating to its real estate operations.
However, there can be no assurance that environmental issues will not arise in
the future relating to the real estate operations.
RISK RELATING TO REAL ESTATE OPERATIONS
Market Risks. There can be no assurance that the U.S. Economy, in general, or
the economy of the Southeast in particular will continue to experience positive
growth rates or that the United States, in general, or the Southeast in
particular, will not be affected by a recession in the future. Certain
significant expenditures associated with the development, management and
servicing of real estate (such as real estate taxes, maintenance costs, and
debt payments, if any) would generally not be reduced if an economic downturn
caused a reduction in revenues from the Company's properties.
Development Risks. The Company's real estate development activities require
significant capital expenditures. The Company will be required to obtain funds
for its capital expenditures and operating activities through cash flow from
operations, property sales or financings. There can be no assurances that funds
available from cash flow, property sales and financings will be sufficient to
fund the Company's required or desired capital expenditures for development. If
the Company were unable to obtain sufficient funds, it might have to defer or
otherwise limit certain development activities. Further, any new development or
any rehabilitation of older projects can require compliance with new building
codes and other regulations. The company cannot estimate the cost of complying
with such codes and regulations, and such costs can make a new project or some
otherwise desirable uses of an existing project uneconomic.
Joint Venture Risks. The Company has entered into certain joint venture
relationships and may initiate future joint venture projects as part of its
overall development strategy. A joint venture may involve special risks
associated with the possibility that (i) the venture partner at any time may
have economic or business interests or goals that are inconsistent with those
of the Company, (ii) the venture partner may take actions contrary to the
instructions or requests of the Company or contrary to the Company's policies
or objectives with respect to its real estate investments or (iii) the venture
partner could experience financial difficulties. Actions by the Company's
venture partners may have the result of subjecting property owned by the joint
venture to liabilities in excess of those contemplated by the terms of the
joint venture agreement or have other adverse consequences. In addition, the
Company's joint venture partners may dedicate times and resources to existing
commitments and responsibilities.
EMPLOYEES
As of December 31, 1998, FECI employed 9 people, while FECR employed 877 and
ITI employed 159 employees. Approximately 661 of FECR's employees are
represented by the following labor unions: United Transportation Union (train
and engine service employees), Brotherhood of Maintenance of Way Employees
(track maintenance and structures) and International Brotherhood of Electrical
Workers (seven crafts, including agents and clerical, carmen, maintenance of
equipment foremen, roadway shop, signals and communications, train dispatchers,
boilermakers, electricians, machinists, sheetmetal workers and shop laborers).
The Company
8
<PAGE> 11
is currently engaged in negotiations regarding proposed changes to labor
agreements with each of its unions. The Company considers its working
relationship with its unions to be satisfactory. The Company's real estate
subsidiary does not have employees other than its officers and directors due to
the Asset Management Agreement between St. Joe and GCC, discussed above.
ITEM 2. PROPERTIES
The material physical properties of the Company at December 31, 1998, are
listed below and are grouped by industry segment. All properties shown are
owned in fee simple except where otherwise indicated.
TRANSPORTATION
RAIL
FECR owns three connected four-story buildings in St. Augustine, Florida which
are used by FECI and FECR as corporate headquarters. FECR also owns, in fee
simple, a railroad right-of-way, generally 100 feet wide, along the east coast
of Florida extending for 351 miles used for its railroad operations and
telecommunications facilities. FECR also owns a 91 mile branch line. In
addition, it owns various switching and classification yards, trailer/container
loading and unloading facilities, an automobile marshaling yard and a number of
maintenance facilities.
The track structure and bridges, the shop, office and other buildings and the
improved surfaces for trailer/container and automobile handling operations are
in excellent condition. The route consists of 442 miles of road, divided as 351
miles of mainline and 91 miles of branch line. On March 2, 1998, FECR entered
into a Trackage Agreement providing for, among other things, the exclusive
operation and maintenance of 56 miles of the 91 miles of the branch line by the
South Central Florida Express, Inc.
The mainline and its passing and crossover tracks are, in general, 132-pound per
yard continuous welded rail supported by concrete crossties. This infrastructure
meets the needs of today's heavy traffic loads, including double stack container
trains, tri-level auto carriers and heavy axle rail cars.
The railroad's branch mainline, and its mainline way switching and yard tracks
are, for the most part, of 115-pound per yard rail on wood crossties. This
construction is in good condition.
The branch line switching and yard tracks are of lesser weight rail on wood
crossties. These tracks and certain of the mainline yard tracks, though in good
condition, are of a weight deemed less than necessary for their current usage,
and programs for their improvement with heavier materials are in progress. These
programs may be expected to extend several years in the future.
FECR owns 82 diesel electric locomotives, approximately 2,628 freight cars,
1,438 trailers for highway revenue service, numerous pieces of rail-mounted and
non-rail-mounted work equipment, and numerous automobiles used in maintenance
and transportation operations. All equipment owned is in good physical
condition.
TRUCKING
ITI leases in Cincinnati, OH about 3,500 square feet of office space where its
corporate headquarters and terminal dispatching operations are located and a
three acre terminal parking facility.
ITI leases a 6 bay shop and 717 sq. ft. of office space in Jacksonville,
Florida from FECR and leases approximately 9,000 square feet of office space in
Jacksonville from the prior owner of ITI. ITI leases 600 sq. ft. of office
space, a 2,600-sq. ft. repair shop and 11 acres of parking space in Warner
Robbins, GA and leases about 1,000 square feet of office space in Albany, GA
and 2,500 square feet in Atlanta, GA for terminal dispatching operations.
ITI has available approximately 232 tractors, consisting of 84 owned tractors,
4 terminal hostlers, 1 rental tractor and 148 owner-operated tractors. ITI has
a total of 302 trailers in its fleet, consisting of 9-45', 23-48' and 256-53'
dry vans, 4 flatbed trailers and 10 rental trailers.
9
<PAGE> 12
REAL ESTATE
At December 31, 1998, GCC's commercial and industrial portfolio included twelve
projects with 62 buildings aggregating 6.2 million rentable square feet. GCC's
income-producing properties are detailed below:
<TABLE>
<CAPTION>
GCC INCOME-PRODUCING PROJECTS
(AT DECEMBER 31, 1998)
Leased
No. of Rentable Square % Year
Location Bldgs. Type Square Feet Feet Occupied Built
- -------- ------ ---- ----------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
DuPont Center
Jacksonville, FL 2 Office Buildings 160,000 142,000 89% 1987-88
Gran Park at
Interstate South 1 Service Center 35,000 29,000 83% 1988
Jacksonville, FL 5 Office/Showroom/Warehouse 225,000 184,000 82% 1987-89
Gran Park at the 3 Office/Showroom/Warehouses 172,000 96,000 56% 1992-97
Avenues 3 Office/Buildings 242,000 207,000 86% 1992-95
Jacksonville, FL 2 Office/Warehouses 302,000 283,000 94% 1994-96
Gran Park at 3 Office/Showroom 344,000 325,000 94% 1997-98
Jacksonville 1 Front Load Warehouse 99,000 46,000 46% 1997
Jacksonville, FL 1 Rail Building 108,000 57,000 53% 1997
Gran Park at Deerwood
Jacksonville, FL 4 Office/Buildings 519,000 463,000 89% 1996-98
Gran Park at
Southpark 1 Office/Building 147,000 110,000 75% 1998
Orlando, FL 1 Office/Showroom/Warehouse 132,000 28,000 21% 1998
Gran Park at 1 Office/Showroom/Warehouse 62,000 36,000 58% 1987
Lewis Terminals 2 Rail Warehouses 176,000 148,000 84% 1992-94
Riviera Beach, FL 2 Cross Dock Warehouses 74,000 74,000 100% 1987-91
Gran Park-McCahill 2 Rail Warehouses 468,000 353,000 75% 1992-94
Miami, FL 1 Front Load Warehouse 91,000 91,000 100% 1996
2 Office/Warehouses 319,000 319,000 100% 1997
Gran Park at-Miami 5 Office/Showroom/Warehouses 369,000 338,000 92% 1988-94
Miami, FL 5 Office/Warehouses 485,000 427,000 88% 1990-97
4 Rail Warehouses 398,000 398,000 100% 1989-94
7 Front Load Warehouses 790,000 790,000 100% 1991-95
1 Double Front Load Warehouse 239,000 239,000 100% 1993
1 Office Service Center 39,000 39,000 100% 1994
Gran Park at Beacon Station
Miami, FL 1 Office Warehouse 103,000 103,000 100% 1997
Pompano Beach, FL 1 Rail Warehouse 54,000 54,000 100% 1987
-
--------------------------------------
Totals 62 6,152,000 5,379,000 87%
</TABLE>
The Company periodically reviews its inventory of income-producing commercial
and industrial properties and undeveloped properties to determine how best to
maximize shareholder value. In certain circumstances, the review has, in the
past, resulted in the sale of certain properties and may, in the future, result
in the sale of certain of the properties listed on Pages 10 and 11, as well as
other properties which may be developed in the future. The Company continues to
invest in the development of additional leasable commercial and industrial
space and currently has 800,000 square feet under construction, and 500,000
square feet in the predevelopment stage. See Part I, Item 1, "Business" in
this Annual Report on Form 10-K.
10
<PAGE> 13
The Company's holdings also include lands adjacent to FECR's tracks, which may
be suitable for development into office and industrial parks offering both rail
and non-rail-served parcels. Certain other holdings are in urban or suburban
locations offering opportunities for development of office building structures
or business parks offering both office building sites and sites for flexible
space structure such as office/showroom/warehouse buildings. The Company
intends to develop infrastructure and construct buildings for lease on certain
of the properties.
The Company owned and managed approximately 18,833 acres of land at year-end
1998, which included approximately 464 acres on which the buildings set forth
immediately above are located, 2006 acres developed with infrastructure ready to
receive buildings, including the projects under development described in item 1,
Part 1 of this report, 15,179 acres of undeveloped properties, and 1,184 acres
owned by FECR. These properties are held for lease, development and/or sale, and
have a situs in fifteen counties of the state of Florida as follows:
<TABLE>
<S> <C>
Duval 1,520 acres
St. Johns 3,386 acres
Putnam 87 acres
Flagler 3,464 acres
Volusia 3,584 acres
Brevard 2,546 acres
Orange 85 acres
Indian River 5 acres
St. Lucie 610 acres
Martin 656 acres
Palm Beach 197 acres
Broward 61 acres
Dade 1,715 acres
Manatee 897 acres
Okeechobee 20 acres
------------
Total 18,833 acres
============
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
FECR has been named as a potentially responsible party ("PRP") by the United
States Environmental Protection Agency ("USEPA") for the remediation of three
designated Superfund sites. On the first site, the USEPA has alleged that FECR
caused certain materials, including waste oil, to be disposed at the site over
a period of years. The USEPA has offered all named PRPs an opportunity to
participate in its new pilot allocation program. This program is similar to
binding arbitration. Since FECR is participating in this program, its share of
the liability for the remediation will be fixed. FECR believes that its
liability for the remediation of the site will not be material.
On the second site, FECR was contacted by the USEPA during 1996, seeking
reimbursement of costs associated with the remediation of a site in Hialeah,
Florida, part of which includes a FECR right-of-way. An individual operated a
business on this site for a number of years. The owner of the business slightly
encroached upon FECR's right-of-way. Upon discovering this, FECR entered into a
lease agreement with the business owner rather than require the building be
removed. The individual has ceased doing business. The USEPA is seeking
reimbursement from FECR on the grounds that FECR was an "owner" of the site.
FECR had no involvement in the contamination but has been named as a PRP solely
as a result of its ownership of the encroachment property. The ultimate cost,
if any, is not expected to be material.
11
<PAGE> 14
The third Superfund site is located in Portsmouth, Virginia. A settlement
(approved by the court and USEPA) between the owner of the site and FECR was
achieved in late 1996 for $202,247. Unless additional impacts are found beyond
the original clean-up, FECR will have no further liability at the site.
FECR has recently become aware that contaminants, from historic railroad
operations in a yard adjacent to its railroad right-of-way may have migrated
through the movement of groundwater off-site. FECR is working closely with the
Florida Department of Environmental Protection to investigate this matter, and
to develop an appropriate plan of remediation, if required as a result of the
investigation. Possible alternatives include natural attenuation. Based on
information available to FECR as of the date of this report, the costs of
investigating and addressing this possible migration are not expected to be
material or cause material changes in the business.
Compliance with federal, state and local laws and regulations is a principal
goal of the Company. The Company, through its subsidiaries, has entered into a
number of consent orders with state regulatory agencies to remediate certain
identified sites. The Company continues to cooperate with federal, state and
local agencies to ensure its facilities are operated in compliance with
applicable environmental laws and regulations. The Company is not aware of any
monetary sanctions to be imposed, which, in the aggregate, are likely to exceed
$100,000, nor does it believe that corrections, if any, will necessitate
significant capital outlays or cause material changes in the business.
The Company is a defendant in a number of lawsuits and is involved in
government proceedings arising in the ordinary course of business, including
bodily injury claims and contract claims. While management of the Company
cannot predict the outcome of such litigation and other proceedings, management
does not expect these matters to have a materially adverse effect on the
consolidated financial condition, cash flows or results of operations of the
Company. The Company does carry comprehensive liability insurance for such
claims, but maintains a significant a self-insured retention amount, consistent
with the transportation industry's standards.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1998.
Executive Officers of the Registrant
FECI's officers are elected annually by the Board of Directors at its first
meeting held after the annual meeting of shareholders. Effective December 31,
1998, the former chairman, President and Chief Executive Officer, Carl F.
Zellers, Jr., retired. At a special board meeting held November 11, 1998, the
Board of Directors elected Robert W. Anestis, Chairman, President and Chief
Executive officer. At a special meeting held on March 1, 1999, the Board
elected Robert F. MacSwain, Executive Vice President-Special Projects and Heidi
J. Eddins, Senior Vice President and Secretary. There are no family
relationships among the officers, nor any arrangement or understanding between
any officer and any other person pursuant to which the officer was selected.
The following table sets forth certain information as of March 15, 1998,
relating to the Registrant's officers:
<TABLE>
<CAPTION>
Name, Age, Present Position Business Experience During Past 5 years
- --------------------------- ---------------------------------------
<S> <C>
Robert W. Anestis, 53, Present position since January 1999; formerly President, Anestis &
Chairman, President Company, an investment banking and financial advisory firm. Also,
and Chief Executive Officer Director, Champion Enterprises, Inc.; Member, Board of Advisors, CHB
Capital Partners, LP.
Robert F. MacSwain, 56 Present position since March 1, 1999, employed by Registrant
Executive Vice President-Special February, 1999. Formerly President, MacSwain & Company, a
Projects telecommunications and real estate management consulting firm.
Heidi J. Eddins, 42 Present position since March 15, 1999. Formerly Vice President,
Senior Vice President, Secretary and General Counsel, Providence and Worcester Railroad
Secretary and General Counsel Company from January 1998 - March 1999, and prior thereto, Secretary
and General Counsel.
T. Neal Smith, 59 Present position since March 1999. Prior thereto, Vice President,
Vice President, Finance and Accounting, and Secretary, between May 1998 and March 1,
Finance and Accounting 1999, and prior thereto Vice President, Secretary and Treasurer.
Gregory P. West, 39 Present position since May 1998. Prior thereto, Director, Budget &
Treasurer Special Projects, of Registrant.
</TABLE>
12
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The common stock of FECI, owned by 678 stockholders of record as of December
31, 1998 is traded on the New York Stock Exchange, with the symbol FLA.
The following table shows the high and low sales prices and dividends per share
by quarter for 1998 and 1997, after restatement to reflect the four-for-one
split of the Company's Common Stock which became effective June 1, 1998:
<TABLE>
<CAPTION>
Cash
Common Stock Price Dividends
1998 High Low Paid
---- ---- --- ---------
<S> <C> <C> <C>
First Quarter $ 28 5/8 $ 23 1/2 $ .025
Second Quarter 31 3/4 27 1/2 .025
Third Quarter 30 1/2 23 .025
Fourth Quarter 36 26 .025
1997
----
First Quarter 25 3/8 21 1/2 .025
Second Quarter 27 7/8 21 1/2 .025
Third Quarter 28 5/8 26 1/2 .025
Fourth Quarter 29 23 1/8 .025
</TABLE>
The Company currently intends to continue to pay quarterly cash dividends on
its outstanding shares of common stock. The determination of the amount of
future cash dividends, if any, to be declared and paid by the Company will
depend upon, among other things, the Company's financial condition, funds from
operations, level of capital expenditures, future business prospects, and other
factors deemed relevant by the Board of Directors.
On March 15, 1999, the closing price of the Company's common stock was $28.25.
13
<PAGE> 16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to the
Company's consolidated statements of income for each of the five years in the
period ended December 31, 1998, and with respect to the consolidated balance
sheets for the same periods are derived from the consolidated financial
statements that have been audited by KPMG LLP, independent auditors.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1994 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues $247,776 $250,520 $208,031 $201,107 $199,544
Operating expenses 189,939 198,198 170,425 166,479 152,989
-------- -------- -------- -------- --------
Operating Profit 57,837 52,322 37,606 34,628 46,555
Other income (net) 12,362 10,635 10,511 7,924 9,117
Income before income taxes
70,199 62,957 48,117 42,552 55,672
Provision for Income taxes
26,578 22,822 17,703 15,915 21,067
-------- -------- -------- -------- --------
Net income $ 43,621 $ 40,135 $ 30,414 $ 26,637 $ 34,605
======== ======== ======== ======== ========
Basic net income per share
$ 1.20 $ 1.11 $ 0.84 $ 0.74 $ 0.96
======== ======== ======== ======== ========
Diluted net income per share
$ 1.20 $ 1.11 $ 0.84 $ 0.74 $ 0.96
======== ======== ======== ======== ========
Weighted average shares
- -basic(a) 36,286 36,286 36,208 36,208 36,000
======== ======== ======== ======== ========
Weighted average shares -
diluted(a) 36,299 36,286 36,208 36,208 36,000
======== ======== ======== ======== ========
Cash dividends declared on
Common Stock $ 3,627 $ 3,624 $ 3,627 $ 3,616 $ 3,600
======== ======== ======== ======== ========
Cash dividends declared per
share on Common Stock
.10 .10 .10 .10 .10
======== ======== ======== ======== ========
</TABLE>
- -------------------
(a) The income per share amounts prior to 1998 have been restated as
required to comply with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share." See Note 3 to the Company's audited financial statements
included elsewhere in this Annual Report.
14
<PAGE> 17
<TABLE>
<CAPTION>
AT DECEMBER 31,
BALANCE SHEET DATA: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $ 867,755 $ 825,490 $789,681 $ 756,210 $ 722,494
Cash and Investments 85,423 103,144 94,229 93,275 108,924
Properties, Less Acc.
Deprec. & Amort. 720,891 663,672 636,019 608,640 561,637
Shareholders' equity 686,831 648,875 608,796 581,860 552,268
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis should be read in conjunction with Item
8-"Consolidated Financial Statements," Item 1-"Business," and Item
2-"Properties," included elsewhere herein. The following discussion contains
forward-looking statements. The company's actual results may differ
significantly from those projected in the forward-looking statements.
GENERAL OVERVIEW
FECI is a holding company engaged, through three wholly-owned subsidiaries, in
the transportation services industry (rail and trucking) and real estate
business.
Except for certain of the Company's trucking assets and operations, the
Company's assets and operations are located in the state of Florida.
Consequently, the Company's performance is significantly affected by the general
health of the Florida economy and by the general health of the national economy.
The Company's real estate operations are cyclical and are affected by local
demographic and general economic trends and the supply and rate of absorption of
new construction. Although the Company real estate business has a large
portfolio of income producing properties that provide stable operating results,
the Company's real estate earnings from period to period may be significantly
affected by the nature and timing of sales of development property and other
assets.
The Company generates rail-operating revenues primarily from the movement of
freight in both conventional freight cars and intermodal containers and
trailers on flatcars over its rail lines. Freight revenues are recorded at the
time delivery is made to the customer or the connecting carrier. Modest
non-freight operating revenues are derived from demurrage, switching, weighing,
special train and other transportation services as well as from services
rendered to freight customers and other outside parties by the Company's
Maintenance of Way, Communications and Signals and Maintenance of Equipment
Departments. Trucking revenues are generated by various services, including
full over-the-road service, intermodal pick up and delivery, and transportation
brokerage.
The Company's transportation operating expenses consist of salaries and wages
and related payroll taxes and employee benefits, depreciation, insurance and
casualty claim expense, diesel fuel, car hire, property taxes, materials and
supplies, purchased services and other expenses. Many of the Company's
operating expenses are of a relatively fixed nature and do not increase or
decrease proportionately with increases or decreases in operating revenues
unless the Company's management takes specific actions to restructure the
Company's operations.
Real estate operating expenses include the costs of real estate sales and of
managing commercial and industrial properties. The Company sells certain real
estate holdings when it determines its rate of return on such property is
advantageous to the Company and the shareholders. Real estate expenses can
fluctuate significantly year-to-year due to the costs of such sales. As new
buildings are completed and placed in the Company's inventory of leasable
properties, the Company incurs property management expenses such as building
maintenance, leasing, advertising costs and property taxes.
15
<PAGE> 18
The Company has one railroad customer, which accounted for approximately 13.5%,
12.5% and 15.3% of its operating revenues in 1996, 1997 and 1998, respectively.
The Company does not believe that this customer will cease to be a rail shipper
or will significantly decrease its freight volume in the foreseeable future. In
the event that this customer or another large customer should cease or
significantly reduce its rail freight operations, management believes that the
Company could restructure its operations to reduce operating costs by an amount
sufficient to offset the decrease in operating revenues.
Operating revenues in 1998 decreased by $2.7 million to $247.8 million from
$250.5 million in 1997. This $2.7 million decrease consisted of increases of
approximately $9.8 million in the transportation segments offset by a decrease
of approximately $12.5 million in the real estate segment. Of the $9.8 million
increase in the transportation segments of the Company, approximately $6.9
million was represented by FECR, and approximately $2.9 million was represented
by the trucking segment, International Transit, Inc. (ITI). Included in
transportation-rail revenues is an approximate $3.8 million increase pertaining
to miscellaneous rents and telecommunications profits, which included a
non-monetary gain of approximately $2.5 million. The decrease of approximately
$12.5 million in the real estate segment was comprised of an increase of
approximately $6.4 million in realty rental income, resulting from the placing
of new buildings in service and higher lease rates on buildings already in
service, and a decrease of approximately $18.9 million of revenues from sales of
realty property.
RESULTS OF OPERATIONS
Results for 1998 compared to 1997
Revenues
TRANSPORTATION
Operating revenues in the Company's transportation operations were
approximately $195 million in 1998, an increase of approximately $10 million
from $185 million in 1997.
RAIL
FECR handled 160,996 rail carloads in 1998 compared to 147,531 in 1997, an
increase of 13,465 carloads, or 9.1%. The railroad handled 325,639 intermodal
units in 1998 compared to 342,111 in 1997, a decrease of 16,472, or 4.8%
Rail revenues increased to $165 million in 1998 from $158 million in 1997, an
increase of approximately $7 million or 4.4%. Exclusive of the miscellaneous
rents and telecommunications profits discussed above, this increase was
primarily attributed to increases in shipments of aggregate and automotive
carload traffic. Aggregate shipments increased in 1998 by 10,400 carloads or
11.1% over 1997. This increase is reflective of a healthy Florida economy with
robust residential, commercial and highway construction. Automobile and
automotive-related traffic increased in 1998 by approximately 4,100 railcars or
24.6% over 1997. The increase in the number of automotive shipments is
primarily attributable to continuing strength in the shipment of new vehicles
to Miami as well as the opening in 1998 by Norfolk Southern of an automotive
handling facility on the Company's property in Titusville.
The decrease in intermodal shipments includes a decrease of approximately
23,700, or 9.5%, in trailers handled and an increase in containers handled of
7,300, or 7.9%. The 4.8% decrease in intermodal shipments was primarily
attributable to a service redesign by Norfolk Southern by which it ceased
marketing of certain terminals along the east coast of Florida.
Other carload traffic decreased in 1998 by approximately 1,300 carloads or 3.5%
from 1997. A contributing factor to this decrease in carload shipments was a
customer's determination in early 1998 to use an alternative means of shipping
coal. The customer and FECR, subsequently, in April 1998, executed a
transportation contract which resulted in the customer using the Company's rail
services again.
TRUCKING
Operating revenues generated by the Company's trucking subsidiary increased
approximately $2.9 million or 10.6%, to approximately $29.8 million in 1998
from $26.9 million in 1997. This increase is primarily attributable to a
significant increase in shipments between the trucking operation and the
Company's railroad
16
<PAGE> 19
by approximately 13,500 or 58.8% over 1997. Certain shipments originating or
terminating at locations distant from the Company's rail yards are picked up or
delivered by motor truck carriers, including the Company's trucking operations.
REALTY
The Company generates operating revenues in its realty business from both real
estate owned by FECR and real estate owned by GCC. FECR's realty income is
generated by leases and sales of non-operating properties. GCC generates
revenues from rent of its improved and certain unimproved properties and sales
of certain real estate assets.
Real estate revenues decreased in 1998 by approximately $12.5 million or 19.1%
from 1997 to $53.0 million in 1998 from $65.5 million in 1997. Rental revenues
increased by approximately $6.4 million or 16.5% from 1997. This increase in
rental income is primarily attributable to the addition of 600,000 square feet
of leasable space in a total of five new buildings and higher rents in existing
buildings. Revenues from real estate sales decreased in 1998 approximately $18.9
million from 1997. This decrease reflects the fact that the Company sold four
properties in 1997 generating approximately $23.7 million.
The Company uses a supplemental performance measure along with operating profit
to report its operating results for its real estate operations. This measure is
Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization
(EBITDA). EBITDA is not a measure of operating results or cash flows from
operating activities as defined by generally accepted accounting principles.
Additionally, EBITDA is not necessarily indicative of cash available to fund
cash needs and should not be considered as an alternative to cash flows as a
measure of liquidity. However, the Company believes that EBITDA provides
relevant information about its real estate operations and, along with operating
profit, is useful in understanding its real estate operating results.
Depreciation, amortization, interest expense and income taxes are excluded from
EBITDA. GCC generated EBITDA of approximately $27.1 million in 1998, compared
to $23.1 million in 1997, a $4 million increase, or 17%, over 1997. FECR
generated realty EBITDA of approximately $2.4 million in 1998, compared to $1.9
million in 1997, an increase of $.5 million, or 26%.
EXPENSES
Operating expenses overall decreased $8.3 million, in 1998 to approximately
$190 million from $198 million in 1997,or 4.2%, from 1997. Operating expenses
increased in 1998 by $5.8 million for transportation services, decreased
approximately $12.3 million in the real estate business and decreased $1.8
million for general and administrative expenses.
TRANSPORTATION
Exclusive of general and administrative expenses, transportation expenses
increased in 1998 by $2.4 million or 2.2% over 1997 for rail and $.7 million or
3.6% over 1997 for trucking operations. The increase in expenses for rail
operations was primarily attributable to increases in repair and maintenance
expenses for locomotives, rail cars and intermodal equipment, additional
payroll for transportation operations and increases in depreciation, casualty
and insurance, and equipment charges. Fuel expenses decreased $2.2 million. The
increase in trucking expenses are related to the increase in interchanges
between the trucking company and the railroad.
REALTY
Real estate expenses decreased in 1998 by approximately $12.3 million, or
24.9%, from 1997. This decrease in expenses is attributable to fewer property
sales in 1998 than 1997, resulting in a decrease in such sales expenses in 1998
by $20 million over 1997. Expenses related to rental properties increased in
1998 by approximately $7.7 million or 28.7% over 1997. This increase in rental
operating expenses in 1998 was the result of an increase of approximately $3.1
million in operating expenses of buildings having leasable space available on
January 1, 1998, an increase of approximately $900,000 for buildings providing
leasable space during 1998, and an increase in depreciation expenses of $3.7
million in 1998.
CORPORATE
The decline in corporate general and administrative expenses of $1.8 million in
1998 relates to a special charge recorded in 1997 of $3.5 million involving the
possible disposition of the Company, offset by increases in corporate salaries
and related benefits, severance accruals, professional fees and other
miscellaneous expenses.
17
<PAGE> 20
SUMMARY OF OPERATING EXPENSES
1998 VS. 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
RAIL OPERATING EXPENSES 1998 1997 Percentage
----------------------- -------- -------- ----------
<S> <C> <C> <C>
Compensation & Benefits $ 44,767 $ 43,534 2.8%
Fuel 8,610 10,829 (20.5%)
Equipment Rents (Net) 1,670 1,061 57.4%
Depreciation 14,809 14,440 2.6%
Purchased Services 17,026 15,829 7.6%
Repairs Billed to/by Others (Net) 1,544 2,006 (23.0%)
Casualty and Insurance 4,338 3,602 20.4%
Property Taxes 4,008 3,960 1.2%
Materials 10,657 10,102 5.5%
General & Administrative 16,010 13,578 17.9%
Other 1,779 1,463 21.6%
------------------------------------
Total Operating Expenses-Rail $125,218 $120,404 4.0%
====================================
TRUCKING OPERATING EXPENSES
Compensation & Benefits $ 3,439 $ 3,612 (4.8%)
Fuel 1,180 1,538 (23.3%)
Equipment Rents (Net) 1,624 1,405 15.6%
Depreciation 55 55 --
Purchased Services 11,511 10,063 14.5%
Repairs Billed to/by Others (Net) 1,236 1,520 (18.7%)
Casualty and Insurance 779 829 (6.0%)
Property Taxes 221 317 (30.3%)
General & Administrative 4,627 4,341 6.6%
Other 314 309 1.9%
------------------------------------
Total Operating Expenses-Trucking
$ 24,986 $ 23,989 4.2%
====================================
REALTY OPERATING EXPENSES
Realty Sales Expenses $ 2,563 $ 22,592 (88.7%)
Compensation & Benefits 1,043 185 463.8%
Depreciation 12,478 8,731 42.9%
Purchased Services 2,106 1,438 46.5%
Repairs Billed to/by Others (Net) 1,235 1,054 17.2%
Casualty and Insurance 145 527 (72.5%)
Property Taxes 8,291 6,924 19.7%
General & Administrative 4,655 4,324 7.7%
Other 4,581 3,643 25.7%
Total Operating Expenses-Realty
$ 37,097 $ 49,418 (24.9%)
====================================
Corporate General & Administrative $ 2,638 $ 4,387 (39.9%)
------------------------------------
Total Consolidated Operating
expenses $189,939 $198,198 (4.2%)
===========================================================================================
</TABLE>
OTHER INCOME
Other income, generated from investments and other transactions, increased to
$12.3 million from $10.6 million in 1998, an increase of $1.7 million or 16.2%
over 1997. This increase results from an increase in 1998 of approximately
$900,000 or 177.2% in dividend income over 1997, and a gain on investment
income
18
<PAGE> 21
in 1998 of $3 million or 101% over 1997. These increases were offset by a
decrease in 1998 of approximately $1.3 million from the nonrecurring sale of
certain rail properties and approximately $900,000 in interest income.
Income tax expenses increased in 1998 by approximately $3.8 million to $26.6
million over 1997, representing an effective rate of 37.9% compared to $22.8
million, representing an effective rate of 36.3% in 1997.
Net income for 1998 was $43.6 million, or $1.20 per diluted share compared to
net income in 1997 of $40.1 million, or $1.11 per diluted share.
SUMMARY OF OPERATING RESULTS
(IN THOUSANDS)
1998 VS. 1997
<TABLE>
<CAPTION>
%
1998 1997 Change
-------- -------- ------
<S> <C> <C> <C>
Transportation - rail
Operating Revenues $165,005 $158,075 4.4%
Operating Expenses 125,218 120,404 4.0%
-------- -------- -----
Operating Profit 39,787 37,671 5.6%
Intersegment Revenue and Expenses, Net 4,684 2,918 60.5%
-------------------------------------
Segment Operating Profit $ 44,471 $ 40,589 9.6%
======== ======== =====
* Misc. Rents & Telecom Profit $ 7,180 $ 3,221 123%
* Amounts are included in rail operating
revenues and are provided for use in calculating
rail operating ratios in accordance with industry
standards
Transportation - trucking
Operating Revenues $ 29,774 $ 26,911 10.6%
Operating Expenses 24,986 23,989 4.2%
-------- -------- -----
Operating Profit 4,788 2,922 63.9%
Less: Intersegment Expenses (4,740) (2,995) 58.3%
-------- -------- -----
Segment Operating Profit $ 48 $ (73) 165.8%
======== ======== =====
Real Estate Operations
Sales and Operating Revenue $ 52,997 $ 65,534 (19.1%)
Operating Expenses 37,097 49,418 (24.9%)
-------- -------- -----
Operating Profit 15.900 16,116 (1.3%)
Intersegment Revenues and Expenses, Net 56 77 (27.3%)
-------- -------- -----
Segment Operating Profit $ 15,956 $ 16,193 (1.5%)
======== ======== =====
Total Segments' Operating Profit 60,475 56,709 6.6%
Less: Corporate Gen. & Admin (2,638) (4,387) 39.9%
-------- -------- -----
Operating profit $ 57,837 $ 52,322 10.5%
======== ======== =====
</TABLE>
RESULTS FOR 1997 COMPARED TO 1996
Operating revenues increased in 1997 to $250.5 million from $208.0 million, an
increase of $42.5 million or 20.4% over 1996. Revenues generated by the
Company's transportation services increased in 1997 by approximately $12.0
million. Railroad revenues increased in 1997 by approximately $10.3 million, or
7.0%, over 1996. Trucking revenues increased in 1997 by approximately $1.7
million, or 6.9%, over 1996. Real estate revenues increased in 1997 by
approximately $30.5 million over 1996 generated by an approximate increase in
1997 of $4.6 million in rental income, or 13.3%, over 1996, and an approximate
increase of $25.9 million in revenues from land sales over 1996.
19
<PAGE> 22
TRANSPORTATION
RAIL
The increase in rail revenues was primarily attributed to the Company's
successful marketing efforts resulting in an increase of approximately 35,500
shipments, or 7.8%. This increase included an increase in 1997 of approximately
4,300 rail carloads, or 4.8%, over 1996 of the shipment of aggregates, an
increase of other carload shipments by 3,200 carloads or 9.7%, and an increase
in intermodal shipments in 1997 of 28,600 units, or 9.1%, over 1996. Trailer
shipments increased in 1997 by 19,500 or 9.1%, and container shipments increased
in 1997 by 9,100 units or 10.8% over 1996. Rail revenue increases were offset
partially by a decrease in 1997 of automotive shipments by approximately 600
carloads, or 3.2%, from 1996. This decrease was partially related to changes in
the operation of the rental car business whereby rental cars were held by car
rental agencies for longer periods of time before resale.
TRUCKING
Trucking revenues increased in 1997 by approximately $1.7 million, or 6.9%, from
1996. The number of shipments interchanged with FECR rose in 1997 by
approximately 1,600 units or 23.2%.
REALTY
Real estate revenues increased in 1997 by approximately $30.5 million over
1996. This increase was attributable to an approximate $25.9 million increase
in revenues from real estate sales and an approximate $4.6 million increase in
rental revenues.
OPERATING EXPENSES
Operating expenses increased in 1997 by approximately $27.8 million, or 16.3%,
over 1996. The increase in operating expenses includes a $26.9 million increase
in expenses in the Company's real estate operations, an increase of $3.3
million in corporate general and administrative expenses, offset by a decrease
of $2.4 million in transportation expenses.
TRANSPORTATION
Transportation expenses decreased in 1997 $2.4 million or 1.6% from 1996. The
decrease in transportation expenses resulted from a $3.7 million decrease in
expenses for the Company's rail operations and an increase of approximately
$1.3 million in expenses for the Company's trucking expenses.
The decrease in the rail operating expenses was primarily attributable to a
reduction in casualty and insurance expense of approximately $2.5 million
related to an accrual made in 1996 for a legal judgment concerning an asbestos
case of approximately $2.2 million. This judgment was subsequently reversed in
1997.
REALTY
The increase in real estate operating expenses was attributable to an
approximately $3.1 million increase in expenses of rental operations, and an
increase in the costs of property sales of approximately $22.2 million. The
increase of approximately $3.1 million in rental operating expenses consisted
of increases of approximately $1.1 million in depreciation, approximately $1.1
million in property taxes and approximately $.9 million in other costs.
CORPORATE
The increase of approximately $3.3 million in general and administrative
expenses primarily relates to a special charge of approximately $3.5 million
involving the possible disposition of the Company in 1996-97.
20
<PAGE> 23
SUMMARY OF OPERATING EXPENSES
(IN THOUSANDS)
1997 VS. 1996
<TABLE>
<CAPTION>
%
Railroad Operating Expenses 1997 1996 Change
- --------------------------- ---- ---- ------
<S> <C> <C> <C>
Compensation & Benefits $ 43,534 $ 42,925 1.4%
Fuel 10,829 10,815 0.1%
Equipment Rents (Net) 1,061 1,276 (16.8)%
Depreciation 14,440 14,945 (3.4)%
Purchased Services 15,829 16,745 (5.5)%
Repairs Billed to/by Others (Net) 2,006 2,100 (4.5)%
Casualty and Insurance 3,602 6,100 (41.0)%
Property Taxes 3,960 3,506 12.9%
Material 10,103 10,070 0.3%
General & Administrative 13,578 13,797 (1.6)%
Other 1,462 1,818 (19.4)%
----------------------------------
Total Operating Expenses - Rail $120,404 $124,095 (3.0)%
======== ======== ====
Trucking Operating Expenses
- --------------------------- 1997 1996 % Change
---- ---- --------
Compensation & Benefits $ 3,612 $ 3,091 16.9%
Fuel 1,538 1,563 (1.6)%
Equipment Rents (Net) 1,405 1,464 (4.0)%
Depreciation 55 54 1.9%
Purchased Services 10,063 10,137 (.7)%
Repairs Billed to/by Others (Net) 1,520 1,248 21.8%
Casualty and Insurance 829 871 (4.8)%
Property Taxes 317 229 38.4%
General & Administrative 4,341 3,724 16.6%
Other 309 333 (7.2)%
----------------------------------
Total Operating Expenses - Trucking $ 23,989 $ 22,714 5.6%
----------------------------------
Realty Operating Expenses
- ------------------------- 1997 1996 % Change
---- ---- --------
Realty Sales Expenses $ 22,592 $ 352 6,318.2%
Compensation & Benefits 185 5 3,600.0%
Depreciation 8,731 7,653 14.1%
Purchased Services 1,438 1,081 33.0%
Repairs Billed to/by Others (Net) 1,054 1,207 (12.7)%
Casualties and Insurance 527 360 46.4%
Property Taxes 6,924 5,839 18.6%
General & Administrative 4,324 2,742 57.7%
Other 3,643 3,296 10.6%
----------------------------------
Total Operating Expenses - Realty $ 49,418 $ 22,535 119.3%
----------------------------------
Corporate Gen. & Admin $ 4,387 $ 1,081 305.8%
----------------------------------
Total Consolidated Operating Expenses $198,198 $170,425 16.3%
</TABLE>
Other income in 1997 remained relatively the same from 1996, at $10.6 million
and $10.5 million, respectively.
Income taxes in 1997 increased by approximately $5.1 million in 1996 due to the
Company's increase in net income.
Net income for 1997 was $40.1 million, or $1.11 per diluted share, compared to
net income in 1996 of $30.4 million or $.84 per diluted share.
21
<PAGE> 24
SUMMARY OF OPERATING RESULTS
(IN THOUSANDS)
1997 VS. 1996
<TABLE>
<CAPTION>
%
1997 1996 Change
---- ---- ------
<S> <C> <C> <C>
Transportation - rail
Operating Revenues $158,075 $147,787 7.0%
Operating Expenses 120,404 124,095 (3.0)%
----------------------------------
Operating Profit 37,671 23,692 59.0%
Intersegment Revenue and Expenses, Net 2,918 2,340 24.7%
----------------------------------
Segment Operating Profit $ 40,589 $ 26,032 59.9%
==================================
Misc. Rents and Telecom Profit $ 3,221 $ 2,957 9.0%
* Amounts are included in rail operating revenues and
are provided for use in calculating rail operating
ratios in accordance with industry standards
%
1997 1996 Change
---- ---- ------
Transportation - trucking
Operating Revenues $ 26,911 $ 25,171 6.9%
Operating Expenses 23,989 22,714 5.6%
----------------------------------
Operating Profit 2,922 2,457 18.9%
Less: Intersegment Expenses (2,995) (2,364) 26.7%
----------------------------------
Segment Operating Profit $ (73) $ 93 (178.5)%
==================================
%
1997 1996 Change
---- ---- ------
Real Estate Operations
Sales and Operating Revenue $ 65,534 $ 35,073 86.9%
Operating Expenses 49,418 22,535 119.3%
----------------------------------
Operating Profit 16,116 12,538 28.5%
Intersegment Revenues and Expenses, Net 77 24 234.8%
----------------------------------
Segment Operating Profit $ 16,193 $ 12,562 28.9%
==================================
Total Segments' Operating Profit 56,709 38,687 46.6%
Less: Corporate Gen. & Admin (4,387) (1,081) 305.85
----------------------------------
Operating profit $ 52,322 $ 37,606 39.1%
==================================
</TABLE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition is strong as indicated by its working capital
position (current assets - current liabilities) of approximately $65 million
and its liquid investment portfolio. The working capital amount is also stated
as a ratio of current asset divided by current liabilities ("current ratio").
The Company's current ratio in 1998 was 2.8:1 and in 1997, 2.4:1. The Company's
total investment portfolio, including cash and investments, at December 31,
1998, was $85.4 million, compared to $103.1 million in 1997. The decrease in
the investment portfolio is attributable to capital expenditures and dividends
paid by the Company in excess of cash generated by operations. Capital
expenditures in 1998 were $89 million, of which approximately $27 million was
for transportation related expenditures and approximately $62 million was for
real estate development.
Capital expenditures for 1997 were $59 million, including $13 million for
transportation and $46 million for real estate.
Cash generated from operations at December 31, 1998 was $66 million, compared
to $57.3 million in 1997, an increase of $8.7 million, or 15.2%. During 1998,
net operating cash of $35 million was invested in a trading portfolio as a
result of the Company's determination to manage a portion of its investment
portfolio in an effort to enhance future returns.
22
<PAGE> 25
The Company's investment portfolio is invested in tax exempt municipals and
other highly liquid investments and marketable securities.
The Company has historically maintained large, highly liquid reserves to meet
the Company's cash requirements for rail operations and associated capital
expenditures and for real estate acquisition, construction and development. Due
to these reserves, the Company has historically not incurred debt in the
development of its real estate projects or for capital expenditures in its
transportation business. The Company, therefore, has no long- or short-term
debt. As the Company moves forward, it is possible that debt may be incurred in
situations where management determines financing leverage is appropriate.
With respect to the transportation business, the Company is not obligated under
any significant capital or operating leases, except for short-term leasing of
locomotives, freight cars, trailers, automobiles and trucks and data processing
equipment. Capital expenditures for 1999 are expected to be funded from current
operations, including the sale of properties, and the Company's investment
portfolio.
Cash flows from financing activities for the past three years represent
dividend payments. Cash dividends of $.10 per share were paid in each of the
three years, reflecting the Company's philosophy that shareholders receive a
current benefit at the same time that the Company is reinvesting most of its
earnings in an asset growth program.
ENVIRONMENTAL LIABILITIES
The Company is subject to proceedings arising out of environmental laws and
regulations, which primarily relate to the disposal and use of fuel and oil
used in the transportation business. It is the Company's policy to accrue and
charge against earnings environmental cleanup costs when it is probable that a
liability has been incurred and an amount can be reasonably estimated. As
assessments and cleanups proceed, these accruals are reviewed and adjusted.
Compliance with the federal, state, and local laws and regulations relating to
the protection of the environment has not affected the Company's capital
additions, earnings or competitive position, nor does management anticipate any
future problems will adversely affect the Company's financial situation based
upon the information available today.
Environmental expenditures for capital improvements and infrequent expenditures
for ongoing operations and maintenance have historically been insignificant to
the operations of the Company. Management does not anticipate any changes in
these expenditures.
These expenditures are expected to be funded from current operations
supplemented, as necessary, by cash and investments currently on hand and
through the sale of properties.
Year 2000 Readiness Disclosure:
General. Because many existing computer programs and microprocessors recognize
only the last two digits of years (and not the century designation), they may
be unable to accurately recognize and process dates beyond December 31, 1999,
and consequently may fail or may produce erroneous information. Specifically,
many existing information technology ("IT") products and systems and non-IT
products and systems containing embedded processor technology were originally
programmed to represent any date by using six digits (e.g., 12/31/99), as
opposed to eight digits (e.g., 12/31/1999). Accordingly, such products and
systems may experience miscalculations, malfunctions or disruptions when
attempting to process information containing dates that fall after December 31,
1999 or other dates, such as September 9, 1999 (9/9/99), a date traditionally
used by computer programmers as a default. These potential problems are
collectively referred to as the "Year 2000" problem.
The Company's Year 2000 Mission Statement is to keep the Company and the
railroad safely operational as it experiences the century rollover." To
address the Year 2000 problem, the Company established a Year 2000 Compliance
Steering Committee comprised of members of senior management and chaired by the
Chief Financial Officer. This Committee has been evaluating and managing the
costs and risks associated with becoming Year 2000 compliant.
23
<PAGE> 26
In late 1996, the Company initiated an IT project to design and implement a
Year 2000-compliant Wide Area Network. In the third quarter of 1998, the
Company created a Year 2000 Program Management Office (PMO) to coordinate and
direct the day-to-day efforts in achieving Year 2000 compliance. The Company
has also implemented a Year 2000 communications and awareness program which
includes a corporate website (www.feci.com) to convey the status of the Year
2000 Project and to share relevant information.
As part of its Year 2000 Project, the Company has been examining its IT and
non-IT systems, and evaluating the Year 2000 compliance of its software and
embedded technology, as well as EDI electronic interfaces with the Company's
trading partners for both "mission critical" and other functions. The Company
classified its Transportation and Intermodal systems as "mission critical" for
purposes of prioritizing its Year 2000 initiatives. Mission critical systems
also include hardware or software components that are crucial to the continued
operation of the railroad, such as rail, locomotives and signaling equipment.
In November 1998, the Company decided to outsource its information services
function to RailCar Management, Inc. (RMI). RMI is the developer of the
Company's current Transportation system, which is its "core" information
system. As part of this outsourcing initiative, RMI is upgrading the Company's
mission critical systems, which represents approximately 90% of the Company's
software code to the latest version of RMI's software. The Company has been
advised that its mission critical systems will be Year 2000 compliant once its
software is updated.
The Company's Legacy systems are being remediated by an outside vendor. The
Company expects to implement the remediated Legacy systems at the same time
that RMI upgrades the Transportation system software. All network and midrange
AS400 hardware have been upgraded with Year 2000-compliant systems.
The Year 2000 Project consists of four phases to address the following Year
2000 issues:
(1) an Inventory Phase to identify all computer-based systems and
applications which might not be Year 2000 compliant;
(2) 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;
(3) a Conversion Phase to implement the actions necessary to achieve
compliance, and to conduct tests necessary to verify that the systems are
operational; and
(4) an Implementation Phase to transition the compliant system into the
daily operations of the Company.
Overall, the Company's Year 2000 Project efforts are proceeding on schedule.
Management believes that the four phases mentioned above are approximately 80%,
60%, 30% and 20% complete, respectively, as of December 31, 1998, and
anticipates that all mission critical systems should be Year 2000 capable by
the third quarter of 1999.
In evaluating its equipment and systems, the Company has determined that they
rely on events rather than dates. Although certain of the Company's equipment
and systems may have embedded chips that do depend on dates, reasonable steps
are being taken to attempt to ensure that these systems do not present a Year
2000 risk to the Company. The Company's railway locomotives, all of which are
manufactured by General Motors, were determined to have no critical date
function. The railway also operates five movable bridges which are not date
dependent, based on the Company's evaluation.
Costs. In total, the Company expects to spend approximately $7.2 million for
its Year 2000 effort, including remediation efforts. As of December 31, 1998,
the Company has committed or expended approximately one half of that amount.
Risks. The Company's remediation efforts focus on the continued safe operation
of its rail and other transportation systems, encompassing employee safety and
the safety of the general public and the environments in which the Company
operates. Maintaining a continuity of service to its customers after the
millennium change is also a priority. The Company also focuses its efforts to
ensure that a Year 2000 issue does not disrupt its revenue.
24
<PAGE> 27
As part of its Year 2000 review, management has taken reasonable steps to
examine significant vendor and customer relationships to determine the degree
of such parties' Year 2000 readiness, and to develop strategies for working
with such parties to achieve Year 2000 capability. Should the Company encounter
difficulties 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.
Management is making every effort to ensure that the Year 2000 problem will not
have any adverse affect on the Company's daily operations. In the event the
Company's remedial efforts are not successfully implemented, or if the railroad
industry association which maintains the interline settlement system for the
nation's railroads or critical customers or suppliers fail to become Year 2000
compliant, contingency plans are in place to prevent an adverse impact on the
Company's financial performance, as noted below.
Based on management's current investigation and understanding of the Year 2000
risks confronting it, the Company believes that the Year 2000 problem is not
expected to materially affect its daily operations, nor is it expected to
adversely effect the Company's financial position or results of operations. The
Company believes its Year 2000 planning effort is adequate to address all major
risks.
Management believes that it has implemented reasonable measures, engaged
experienced Year 2000 consultants and personnel, and established a high level
of awareness concerning Year 2000 issues. Based on these actions, management
believes that it has provided an environment, which will enable the Company to
adequately review and update its systems to become Year 2000 ready by the end
of 1999.
Contingency Plans. Contingency planning is an established and ongoing effort
within the Company to address many types of potential operating disruptions,
including Year 2000 issues. For example, detailed emergency operating plans
already exist for unanticipated outages of electricity, telecommunications and
other essential services. Over the past ten years, the Company has developed,
tested and refined its Business Interruption Plans and procedures many times,
most notably in the aftermath of Hurricane Andrew. During that time, the
Company demonstrated its abilities to operate under local power outage
conditions that could potentially resemble Year 2000 events. The Company has
commenced work with other rail lines and trading partners to access and address
potential Year 2000 risks.
The Company's operations are primarily mechanical in nature, and the Company
has operated, in the past, without the use of computers or other information
technology. The Company has a manual process that has been tested in the past
and can be implemented in the event of a crisis.
The Company is refining its Business Interruption Plans with the goal of
including additional potential Year 2000 matters that could be overlooked. An
updated Year 2000 Contingency Plan is expected to be completed by June 1999.
As part of the Company's Year 2000 Project Inventory and Assessment Phases, the
Company determined that its mission critical suppliers supply fuel for the
locomotives and power for the signals, switches and information control computer
systems. Disruptions to both of these supply lines have been generally addressed
in the Company's current Business Interruption Plan. The Company's
implementation and adjustments to these matters are, in part, reflected in the
recently completed refurbishment of the Company's two million-gallon fuel
storage tank located in Miami, Florida, the southernmost part of its rail line.
This main tank, along with a smaller tank located in Jacksonville, Florida, are
already maintained for contingency planning purposes. The source for the Miami
tank is the same fuel line that provides fuel to the Miami International Airport
and is supported by Chevron Corporation. Regarding the rail power needs, the
Company has implemented battery and standby power generation in various critical
rail areas. Contingency planning continues to improve upon those operational
areas, including fuel availability, and other supplier chain dynamics as it
relates to the Year 2000 problem.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk related
primarily to the Company's investment portfolio. The portfolio is materially
comprised of fixed rate municipal securities with active secondary or resale
markets to ensure portfolio liquidity. The Company does not use derivative
financial instruments to hedge its investment portfolio. The Company manages
its interest rate exposure by monitoring the effects of market changes in
interest rates.
25
<PAGE> 28
The table below presents principal amounts and related weighted average
interest rates by year of maturity for the Company's investment portfolio,
segregated into trading and non-trading. The weighted average interest rates
for the various fixed-rate investments are based on the actual rates that
existed as of December 31, 1998.
Expected Contractual Maturities
<TABLE>
<CAPTION>
There- Fair
(In Thousands) 1999 2000 2001 2002 2003 after Total Value
---- ---- ---- ---- ---- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term Investments
Trading:
Tax Exempt Municipals
Fixed Rate $19,253 $2,724 $12,850 -- -- -- $34,827 $34,765
Weighted Average
Interest Rate 4.18% 5.69% 6.22% -- -- -- 5.05%
Available-For-Sale:
Tax Exempt Municipals
Fixed rate $ 1,014 -- -- -- -- -- $ 1,014 $ 1,003
Weighted Average
Interest Rate 4.75% -- -- -- -- -- 4.75%
Other Investments
Available-For-Sale:
U.S. Government Securities
Fixed Rate -- -- -- -- -- $ 600 $ 600 $ 646
Weighted Average
Interest Rate -- -- -- -- -- 7.25% 7.25%
Tax Exempt Municipals
Fixed Rate -- $2,035 $ 6,082 $3,036 $3,569 $16,276 $30,998 $32,401
Weighted Average
Interest Rate -- 5.50% 5.64% 5.30% 5.35% 5.81% 5.65%
Other debt securities
Fixed Rate -- -- $ 788 -- -- -- $ 788 $ 1,292
Weighted Average
Interest Rate -- -- 5.00% -- -- -- 5.00%
</TABLE>
As the table incorporates only those exposures that exist as of December 31,
1998, it does not consider those exposures or positions that could arise after
that date. As a result, the Company's ultimate realized gain or loss with
respect to interest rate fluctuations will depend on the exposures that arise
during the period and market interest rates.
INFLATION
In recent years, inflation has not had a significant impact on the Company's
operations.
26
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Board of Directors and Shareholders
Florida East Coast Industries, Inc.:
We have audited the consolidated balance sheets of Florida East Coast
Industries, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income and retained earnings, changes in
shareholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 1998. In connection with our
audits of the consolidated financial statements, we also audited the financial
statement schedules as listed in the accompanying index on page 48 of the
Annual Report on Form 10-K for the year 1998. These consolidated financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Florida East Coast
Industries, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
KPMG LLP
Jacksonville, Florida
February 5, 1999
27
<PAGE> 30
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Years ended December 31, 1998, 1997 and 1996
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating Revenues:
Transportation-Rail $ 165,005 $ 158,075 $ 147,787
Transportation-Trucking 29,774 26,911 25,171
Realty-Land Sales 7,973 26,901 982
Realty-Rents & Other 45,024 38,633 34,091
-------------------------------------------
Total Revenues 247,776 250,520 208,031
Operating Expenses:
Transportation-Rail 125,218 120,404 124,095
Transportation-Trucking 24,986 23,989 22,714
Realty-Sales 2,563 22,592 352
Realty-Rents & Other 34,534 26,826 22,183
Corporate General & Adm 2,638 4,387 1,081
-------------------------------------------
Total Expenses 189,939 198,198 170,425
Operating Profit 57,837 52,322 37,606
Other Income (Expense):
Dividends 1,372 495 399
Interest income 4,312 5,124 4,800
Interest expense (351) (385) (600)
Gains on sales and other disposition of properties 393 1,728 2,926
Investment income & other (net) 6,636 3,673 2,986
-------------------------------------------
Total Other Income 12,362 10,635 10,511
Income before income taxes 70,199 62,957 48,117
Provision for Income Taxes: (Note 8)
Current 25,334 22,720 17,551
Deferred 1,244 102 152
-------------------------------------------
Total Income Taxes 26,578 22,822 17,703
-------------------------------------------
Net Income 43,621 40,135 30,414
-------------------------------------------
Retained earnings:
Balance at beginning of year $ 594,132 $ 557,621 $ 530,834
Cash dividends (3,627) (3,624) (3,627)
-------------------------------------------
Balance at year-end $ 634,126 $ 594,132 $ 557,621
===========================================
Per share data:
Cash dividends $ 0.10 $ 0.10 $ 0.10
===========================================
Basic and diluted net income per share $ 1.20 $ 1.11 $ 0.84
===========================================
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 31
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
ASSETS 1998 1997
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,450 $ 30,845
Short-term investments (Note 6) 36,471 258
Accounts receivable, net 29,282 31,045
Materials and supplies 10,131 11,789
Other current assets (Note 8) 10,482 7,987
--------------------------
Total current assets 100,816 81,924
OTHER INVESTMENTS (NOTE 6) 34,502 72,041
PROPERTIES, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION
(NOTE 5) 720,891 663,672
OTHER ASSETS AND DEFERRED CHARGES 11,546 7,853
--------------------------
TOTAL ASSETS $ 867,755 $ 825,490
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 26,559 $ 20,580
Income taxes 1,446 4,630
Accrued property taxes 308 1,008
Accrued casualty and other reserves (Note 10) 4,992 5,143
Other accrued liabilities 2,998 3,005
--------------------------
Total current liabilities 36,303 34,366
DEFERRED INCOME TAXES (NOTE 8) 133,463 133,884
ACCRUED CASUALTY AND OTHER LONG-TERM LIABILITIES (NOTE 10) 11,158 8,365
SHAREHOLDERS' EQUITY:
Common stock, no par value; 50,000,000 shares authorized;
37,085,444 shares issued and 36,286,360 outstanding 62,000 60,802
Retained earnings 634,126 594,132
Accumulated other comprehensive income-unrealized gain
on securities, net (Notes 6 and 12) 1,217 3,296
Restricted stock deferred compensation (Note 13) (1,157) --
Treasury stock at cost (799,084 shares) (9,355) (9,355)
--------------------------
Total shareholders' equity 686,831 648,875
--------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 867,755 $ 825,490
==========================
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 32
FLORIDA EAST COAST INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED OTHER RESTRICTED STOCK
------------------ RETAINED COMPREHENSIVE DEFERRED TREASURY
SHARES AMOUNT EARNINGS INCOME COMPENSATION STOCK TOTAL
---------------------------------------------------------------------------------
(in thousands, except share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 37,085,444 $59,544 $530,834 $ 1,755 -- $(10,273) $581,860
COMPREHENSIVE INCOME:
NET INCOME -- -- 30,414 -- -- -- --
NET UNREALIZED GAIN ON SECURITIES, NET
OF RECLASSIFICATION ADJUSTMENT
(SEE NOTE 12) -- -- -- 149 -- -- --
TOTAL COMPREHENSIVE INCOME -- -- -- -- -- -- 30,563
DIVIDENDS DECLARED ON
COMMON STOCK ($.10) PER SHARE -- -- (3,627) -- -- -- (3,627)
---------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 37,085,444 59,544 557,621 1,904 -- (10,273) 608,796
COMPREHENSIVE INCOME:
NET INCOME -- -- 40,135 -- -- -- --
NET UNREALIZED GAIN ON SECURITIES, NET
OF RECLASSIFICATION ADJUSTMENT
(SEE NOTE 12) -- -- -- 1,392 -- -- --
TOTAL COMPREHENSIVE INCOME -- -- -- -- -- -- 41,527
DIVIDENDS DECLARED ON
COMMON STOCK ($.10) PER SHARE -- -- (3,624) -- -- -- (3,624)
PURCHASE OF MINORITY INTEREST (NOTE 4) -- 1,258 -- -- -- 918 2,176
---------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 37,085,444 60,802 594,132 3,296 -- (9,355) 648,875
COMPREHENSIVE INCOME:
NET INCOME -- -- 43,621 -- -- -- --
NET UNREALIZED LOSS ON SECURITIES, NET
OF RECLASSIFICATION ADJUSTMENT
(SEE NOTE 12) -- -- -- (2,079) -- -- --
TOTAL COMPREHENSIVE INCOME -- -- -- -- -- -- 41,542
DIVIDENDS DECLARED ON
COMMON STOCK ($.10) PER SHARE -- -- (3,627) -- -- -- (3,627)
RESTRICTED STOCK GRANTED NET OF
AMORTIZATION (NOTE 13) -- 1,198 -- -- (1,157) -- 41
---------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 37,085,444 $62,000 $634,126 $ 1,217 $(1,157) $ (9,355) $686,831
=================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
30
<PAGE> 33
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and
1996 (Dollars in thousands)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Income $ 43,621 $ 40,135 $ 30,414
Adjustments to reconcile net income to cash generated by operating activities:
Depreciation and amortization 28,885 24,098 23,506
Gain on disposition of assets (393) (1,728) (2,926)
Purchase of trading investments, net (34,754) -- --
Realized gains on investments (5,880) (2,926) (1,961)
Non-monetary fiber optic transaction (2,518) -- --
Deferred taxes 1,244 102 152
Stock compensation plans 41 -- --
Changes in operating assets and liabilities:
Accounts receivable 1,763 1,158 (3,614)
Other current assets (1,149) (746) (1,599)
Other assets and deferred charges (4,264) 2,513 75
Accounts payable 5,979 (2,125) 2,388
Income taxes payable (3,184) (22) 4,059
Accrued property taxes (700) (2,973) 628
Other current liabilities (158) (129) 191
Accrued casualty reserves and other long-term liabilities 2,793 4 (911)
--------------------------------------------
Net cash generated by operating activities 31,326 57,361 50,402
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of properties (89,028) (59,093) (55,633)
Purchases of investments:
Available-for-sale (57,145) (20,147) (21,928)
Held-to-maturity -- (7,997) (12,386)
Maturities and redemption of investments:
Available-for-sale 95,775 17,173 20,252
Held-to-maturity -- 14,500 27,798
Proceeds from disposition of assets 6,304 9,070 7,674
--------------------------------------------
Net cash used in investing activities (44,094) (46,494) (34,223)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (3,627) (3,624) (3,627)
--------------------------------------------
Net cash used in financing activities (3,627) (3,624) (3,627)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16,395) 7,243 12,552
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 30,845 23,602 11,050
--------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 14,450 $ 30,845 $ 23,602
============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 26,460 $ 23,637 $ 13,450
============================================
Cash paid for interest $ 351 $ 385 $ 600
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
1. NATURE OF BUSINESS
The principal operations of Florida East Coast Industries, Inc. (the "Company")
and its subsidiaries primarily relate to the transportation of goods by rail and
truck, and to the development, leasing, management and sale of real estate. The
rail segment of the Company operates only within the state of Florida with
approximately 48% of its revenues derived from local moves along the Company's
line. Approximately 40% of the rail segment's traffic is derived from five of
its largest customers, with approximately $25,200,000, $20,600,000 and
$20,700,000, 15.3%, 12.5% and 13.5% generated by one significant customer in
1998, 1997 and 1996, respectively. Presently, the realty segment of the Company
operates in Florida with its day-to-day operations managed by The St. Joe
Company. The trucking segment of the Company has operating rights within the
forty-eight states, but primarily operates within the midwest and southeast.
2. MAJORITY STOCKHOLDER
The Nemours Foundation, which is funded by the Alfred I. duPont Testamentary
Trust, owns approximately 5% of the Company's common stock as of December 31,
1998. The Trust is a majority shareholder of The St. Joe Company ("St. Joe")
common stock which owns directly approximately 54.0% of the Company's common
stock. Significant transactions with The St. Joe Company and its affiliates
("St. Joe") were the Company's payment of dividends, and the sharing of
personnel in the areas of environmental, legal and real estate for 1998, 1997
and 1996. In addition, in 1998, the Company engaged St. Joe to provide asset
management, property development, and construction coordination services to its
realty segment, Gran Central Corporation ("GCC"). Amounts paid to St. Joe for
these services in 1998 were $2,125,000 for asset management fees, $2,055,000 for
property management fees, $1,833,000 for development fees, and $1,804,000 for
construction coordination fees and leasing commissions.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Revenue Recognition
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 commencement of rental and lease
contracts. The Company uses the straight-line basis for recording the revenues
over the life of the lease contract.
Properties
Transportation properties are stated at historical cost and are depreciated and
amortized on the straight-line method over the estimated useful lives. Road
properties' depreciation is based on ten-year lives, and equipment properties on
lives varying from nine to 27.5 years. Gains and losses on normal retirements of
these items are credited or charged to accumulated depreciation. Miscellaneous
physical property consists principally of non-depreciable real property.
Real estate properties are stated at historical cost. Depreciation is computed
using the straight-line method over estimated asset lives of 15 years for land
improvements and 18 to 40 years for buildings.
32
<PAGE> 35
The Company reviews its property, plant and equipment for impairment whenever
events or changes in circumstances indicate the carrying value of an asset may
not be recoverable. Recoverability is measured by comparison of the carrying
amount to the net cash flows expected to be generated by the asset.
Materials and Supplies
New materials and supplies are stated principally at average cost which is not
in excess of replacement cost. Used materials are stated at an amount which does
not exceed estimated realizable value.
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128"), during 1997. All prior period net income
per share amounts have been restated to conform with the provisions of SFAS 128.
The following weighted average number of shares of common stock were used in the
calculations for earnings per share. The diluted weighted average number of
shares includes the net shares that would be issued upon the exercise of stock
options and restricted shares using the treasury stock method.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Basic 36,286,360 36,286,360 36,207,948
Diluted 36,298,906 36,286,360 36,207,948
</TABLE>
Cash and Cash Equivalents
For purposes of cash flows, cash and cash equivalents include cash on hand, bank
demand accounts, money market accounts, and overnight repurchase agreements
having original maturities of less than three months.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards ("SFAS No.
109"), "Accounting for Income Taxes." Under Statement 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Investments
The Company classifies its debt and marketable equity securities in one of three
categories: trading, available-for-sale or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling them in the
near-term. Held-to-maturity securities are those securities in which the Company
has the ability and intent to hold until maturity. All other securities not
included in trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, which represents the
adjustment for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses on trading securities are included in
earnings. Unrealized holding gains and losses, net of the related tax effect on
available-for-sale securities, are excluded from earnings and are reported as a
separate component of shareholders' equity until realized.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the security.
Realized gains and losses for securities classified as available-for-sale and
held-to-maturity are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
33
<PAGE> 36
Pension Plan
On January 1, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits." SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefits. SFAS No.
132 does not change the method of accounting for such plans.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting prescribed by
"Accounting Principles Board Opinion No. 25," "Accounting for Stock Issued to
Employees ("APB Opinion No. 25"), and related interpretations, in accounting for
its restricted stock and stock options. As such, compensation expense would be
recorded on the date of the grant only if the current market price of the
underlying stock exceeded the exercise price.
Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and net unrealized gains (losses) on
available-for-sale securities and is presented in the consolidated statements of
shareholders' equity and comprehensive income. The Statement requires only
additional disclosures in the consolidated financial statements; it does not
affect the Company's financial position or results of operations. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS No. 130.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
4. ACQUISITIONS
In July 1997, the Company purchased the remaining 20% of the outstanding stock
of International Transit, Inc. (ITI), a regional truckload carrier, through the
issuance of treasury stock. This non-cash transaction has been excluded from the
Statements of Cash Flows.
34
<PAGE> 37
5. PROPERTIES
Properties consist of (in thousands):
<TABLE>
<CAPTION>
Transportation Properties: 1998 1997
------------------------- ---- ----
<S> <C> <C>
Road $340,262 $326,103
Equipment 201,348 194,310
Miscellaneous Physical Property 4,765 2,269
Construction in Progress 2,300 6,395
-------------------------
548,675 529,077
Less Accumulated Depreciation & Amortization 222,884 213,230
-------------------------
$325,791 $315,847
=========================
Real Estate Properties:
Land and Land Improvements $181,292 $171,408
Buildings 237,210 194,124
Construction in Progress 28,585 21,984
-------------------------
447,087 387,516
Less Accumulated Depreciation & Amortization 51,987 39,691
-------------------------
$395,100 $347,825
=========================
</TABLE>
Real estate properties having a net book value of $256.6 million at December 31,
1998 are leased under non-cancelable operating leases with expected aggregate
rentals of $164.1 million which are due in years 1998-2003 in the amounts of
$41.2, $36.3, $31, $21.9 and $13 million, respectively, and $20.7 million
thereafter.
35
<PAGE> 38
6. INVESTMENTS
Other investments are held as a development fund created to accumulate capital
expected to be required for future improvement of the Company's real estate
properties. During 1997, the Company transferred substantially all of its
held-to-maturity securities to available-for-sale in support of the Company's
real estate development plans. Unrealized gains or losses at the time of
transfer were not material to the financial statements. For 1998, there were
gross realized gains of $6,975,000 and gross realized losses of $1,095,156 from
available-for-sale securities. 1997 and 1996 amounts were insignificant to the
consolidated financial statements.
Investments at December 31, 1998 consist of (in thousands):
<TABLE>
<CAPTION>
Carrying Fair Unrealized Unrealized
Cost Value Value Gain (Loss)
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-term Investments
Trading:
Cash $ 90 $ 90 $ 90 $ -- $ --
Tax exempt municipals $34,827 $34,765 $34,765 $ -- $ (62)
--------------------------------------------------------
Total trading investments $34,917 $34,855 $34,855 $ -- $ (62)
========================================================
Short-term investments
Available-for-sale:
Cash $ 613 $ 613 $ 613 $ -- $ --
Tax exempt municipals $ 1,014 $ 1,003 $ 1,003 $ -- $ (11)
--------------------------------------------------------
$ 1,627 $ 1,616 $ 1,616 $ -- $ (11)
--------------------------------------------------------
Total short-term investments $36,544 $36,471 $36,471 $ -- $ (73)
========================================================
Other investments
Available-for-sale
U.S. Government Securities
Maturing in 1 to 5 years $ 600 $ 646 $ 646 $ 46 $ --
Tax exempt municipals
Maturing in 1 to 5 years $14,722 $15,265 $15,265 $ 543 $ --
Maturing in 5 to 10 years $12,010 $12,896 $12,896 $ 886 $ --
Maturing in more than 10 years $ 4,266 $ 4,240 $ 4,240 $ -- $ (26)
Other Debt Securities $ 788 $ 1,292 $ 1,292 $ 504 $ --
Equity Securities $ 163 $ 163 $ 163 $ -- $ --
--------------------------------------------------------
Total Other Investments $32,549 $34,502 $34,502 $ 1,979 $ (26)
========================================================
</TABLE>
36
<PAGE> 39
Investments at December 31, 1997 consist of (in thousands):
<TABLE>
<CAPTION>
Carrying Fair Unrealized Unrealized
Cost Value Value Gain (Loss)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-term investments
Available-for-sale
U.S. Government securities $ 258 $ 258 $ 258 $ -- $ --
----------------------------------------------------------------
258 $ 258 $ 258 $ -- $ --
----------------------------------------------------------------
Other Investments
Available-for-sale
U.S. Government securities
Maturing in 1 to 5 years $ 7,969 $ 8,020 $ 8,020 $ 51 $ --
Maturing in 5 to 10 years 600 621 621 21 --
Tax exempt municipals
Maturing in 1 to 5 years 19,750 20,158 20,158 408 --
Maturing in 5 to 10 years 18,326 19,304 19,304 978 --
Maturing in more than 10 years 3,408 3,388 3,388 -- (20)
Other debt securities 788 1,690 1,690 902 --
Equity securities 15,826 18,860 18,860 3,034 --
----------------------------------------------------------------
$66,667 $72,041 $72,041 $ 5,394 $ (20)
================================================================
</TABLE>
7. COLLATERAL TRUST 5% BONDS
There were outstanding at December 31, 1998 and 1997, $11,956,100 and
$12,185,100, respectively, of the Company's Collateral Trust 5% Bonds (the
"Bonds") due in 2001. Direct obligations of the U.S. Government, the cash flows
from which approximately coincide as to timing and amount with the scheduled
interest and principal payments on the Bonds, are held in trust for the purpose
of making such payments. Accordingly, the Bonds are considered to be
extinguished and, therefore, are not reflected in the Company's financial
statements.
37
<PAGE> 40
8. INCOME TAXES
Total income tax expense for the years ended December 31, 1998, 1997 and 1996
was allocated as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income from continuing operations $ 26,578 $ 22,822 $ 17,703
Shareholders' equity, for recognition of unrealized
holding gain (loss) on investments available-for-sale (1,354) 883 93
-------------------------------------------
$ 25,224 $ 23,705 $ 17,796
===========================================
</TABLE>
Income tax expense attributable to income from continuing operations differed
from the amounts computed by applying the statutory federal income tax rate to
pretax income as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Amount computed at statutory federal rate $ 24,569 $ 22,035 $ 16,841
Effect of dividends received exclusion and tax-free interest
(1,169) (914) (908)
State taxes (net of federal benefit) 2,499 2,238 1,688
Other (net) 679 (537) 82
--------------------------------------------
$ 26,578 $ 22,822 $ 17,703
============================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Accrued casualty and other reserves $ 4,938 $ 5,096
Amortization of fiber optic income 122 245
Other 431 415
-------------------------
Total deferred tax asset $ 5,491 $ 5,756
-------------------------
Deferred tax liabilities:
Properties, principally due to differences in depreciation $103,751 $101,610
Deferred gain on land sales 28,456 28,933
Deferred profit on bonds extinguished 945 1,201
Unrealized holding gain on investments
available-for-sale 724 2,078
Other 1,943 2,350
-------------------------
Total deferred tax liabilities $135,819 $136,172
-------------------------
Net deferred tax liabilities $130,328 $130,416
=========================
</TABLE>
38
<PAGE> 41
There was no valuation allowance provided for deferred tax assets as of December
31, 1998 and 1997 as the Company believes the results of future operations will
generate sufficient taxable income to realize the deferred tax assets.
Included in other current assets are deferred tax assets of $3,135 and $3,468 at
December 31, 1998 and 1997, respectively.
9. SEGMENT INFORMATION
During 1998, the Company adopted 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.
Under the provisions of SFAS 131, the Company determined it has three reportable
operating segments. These are the transportation rail segment, transportation
trucking segment and realty segment. The transportation rail segment provides
rail transportation for a variety of commodities along the East Coast of Florida
between Jacksonville and Miami. The transportation trucking segment provides
truckload transportation for a wide range of general commodities throughout the
midwest and southeastern United States. The realty segment is engaged in the
development, leasing, management, operation and sales of its property.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates the
transportation segment's performance based on operating profit or loss from
operations before other income and income taxes. Operating profit is operating
revenue less directly traceable costs and expenses. The Company evaluates the
realty segment based on operating profit and EBITDA. EBITDA is defined as
earnings before interest expense, income taxes, depreciation and amortization.
EBITDA excludes other income. EBITDA is considered a key financial measurement
in the realty industry.
Intersegment revenues for transactions between the transportation rail and
transportation trucking segments are based on quoted rates, which are believed
to approximate the cost that would have been incurred had similar services been
obtained from an unrelated third party.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies.
39
<PAGE> 42
Information by industry segment follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES:
External customers:
Transportation-Rail $ 165,005 $ 158,075 $ 147,787
Transportation-Trucking 29,774 26,911 25,171
Realty 52,997 65,534 35,073
-----------------------------------------------
247,776 250,520 208,031
Intersegment:
Transportation-Rail 4,740 3,512 2,709
Realty 152 495 427
-----------------------------------------------
$ 252,668 $ 254,527 $ 211,167
===============================================
OPERATING PROFIT (LOSS):
Transportation-Rail $ 44,471 $ 40,589 $ 26,032
Transportation-Trucking 48 (73) 93
Realty 15,956 16,193 12,562
-----------------------------------------------
$ 60,475 $ 56,709 $ 38,687
===============================================
EBITDA-REALTY: $ 29,455 $ 25,032 $ 20,380
===============================================
IDENTIFIABLE ASSETS:
Transportation-Rail $ 422,081 $ 392,647 $ 365,650
Transportation-Trucking 8,062 7,451 7,147
Realty 434,778 422,851 406,487
-----------------------------------------------
$ 864,921 $ 822,949 $ 779,284
===============================================
CAPITAL EXPENDITURES:
Transportation-Rail $ 26,725 $ 13,151 $ 14,430
Transportation-Trucking 150 136 167
Realty 62,153 45,806 41,036
-----------------------------------------------
$ 89,028 $ 59,093 $ 55,633
===============================================
DEPRECIATION AMORTIZATION
Transportation-Rail $ 15,751 $ 14,803 $ 15,361
Transportation-Trucking* 647 564 492
Realty 12,487 8,731 7,653
-----------------------------------------------
$ 28,885 $ 24,098 $ 23,506
===============================================
</TABLE>
*-Includes amortization of goodwill of $469,000, $405,000, and $340,000 for
1998, 1997 and 1996, respectively.
40
<PAGE> 43
The following table provides reconciliation of reportable operating segment
revenues, operating profit, and assets to the Company's consolidated totals:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Total revenues for reportable segments $ 252,668 $ 254,527 $ 211,167
Elimination of intersegment revenues (4,892) (4,007) (3,136)
-----------------------------------------
Total consolidated revenues $ 247,776 $ 250,520 $ 208,031
=========================================
OPERATING PROFIT:
Total profit for reportable segments $ 60,475 $ 56,709 $ 38,687
Unallocated amounts:
General corporate expenses (2,638) (4,387) (1,081)
-----------------------------------------
Operating profit $ 57,837 $ 52,322 $ 37,606
=========================================
ASSETS
Total assets for reportable segments $ 864,921 $ 822,949 $ 779,284
Unallocated amounts:
General corporate assets 2,834 2,541 10,397
-----------------------------------------
Consolidated total $ 867,755 $ 825,490 $ 789,681
=========================================
</TABLE>
10. ACCRUED CASUALTY AND OTHER RESERVES AND OTHER LONG-TERM LIABILITIES
Accrued casualty reserves and other long-term liabilities increased
approximately $2.8 million which primarily represented an accrued benefit
liability for the Pension Plan established for senior management at the November
1998 Board of Directors' meeting.
The Company maintains comprehensive liability insurance for bodily injury and
property claims for risks with respect to losses for third-party liability,
property damage and group health insurance coverage provided employees but
maintains a significant self-insured retention for these exposures. 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 matters.
The Company is subject to proceedings arising out of environmental laws and
regulations, which primarily relate to the disposal and use of fuel and oil used
in the transportation business. It is the Company's policy to accrue
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.
FECR has been named as a potentially responsible party ("PRP") by the United
States Environmental Protection Agency ("USEPA") for the remediation of three
designated Superfund sites. On the first site, the USEPA has alleged that FECR
caused certain materials, including waste oil, to be disposed at the site over a
period of years. The USEPA has offered all named PRPs an opportunity to
participate in its new pilot allocation program. This program is similar to
binding arbitration. Since FECR is participating in this program, its share of
the liability for the remediation will be fixed. FECR believes that its
liability for the remediation of the site will not be material.
On the second site, FECR was contacted by the USEPA during 1996, seeking
reimbursement of costs associated with the remediation of a site in Hialeah,
Florida, part of which includes a FECR right-of-way. An individual operated a
business on this site for a number of years. The owner of the business slightly
encroached upon FECR's right-of-way. Upon discovering this, FECR entered into a
lease agreement with the business owner
41
<PAGE> 44
rather than require the building be removed. The individual has ceased doing
business. The USEPA is seeking reimbursement from FECR on the grounds that FECR
was an "owner" of the site. FECR had no involvement in the contamination but has
been named as a PRP solely as a result of its ownership of the encroachment
property. The ultimate cost, if any, is not expected to be material.
The third Superfund site is located in Portsmouth, Virginia. A settlement
(approved by the court and USEPA) between the owner of the site and FECR was
achieved in late 1996 for $202,247. Unless additional impacts are found beyond
the original clean-up, FECR will have no further liability at the site.
FECR has recently become aware that contaminants, from historic railroad
operations in a yard adjacent to its railroad right-of-way may have migrated
through the movement of groundwater off-site. FECR is working closely with the
Florida Department of Environmental Protection to investigate this matter, and
to develop an appropriate plan of remediation, if required as a result of the
investigation. Possible alternatives include natural attenuation. Based on
information available to FECR as of the date of this report, the costs of
investigating and addressing this possible migration are not expected to be
material or cause material changes in the business.
The Company has accrued its estimated share of the total estimated cleanup costs
for these 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 many issues
relate 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, liquidity, or results of operations of the Company. A
reserve for potential environmental liabilities amounted to $2.0 million for
1998, as well as 1997. Environmental liabilities will be paid over an extended
period and the timing of such payments cannot be predicted with any confidence.
GCC, 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 NW 106th Street Interchange on the Homestead
Extension of the Florida Turnpike and to subsidize any annual operating deficit
of the Department for 15 years 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 approximately
$1.1 million. No assessment or related accruals to this agreement have been
made.
11. RETIREMENT PLANS
The Company sponsors three 401(k) plans. Contributions are at the employee's
discretion with upper limits of 10% of compensation before taxes subject to
maximum limits imposed by the IRS ($10,000 in 1998) and an additional
contribution up to 10% of after tax compensation, also subject to maximum limits
imposed by the IRS. In 1998, total contributions, including the Company's match,
if any, were limited by IRS regulations to $30,000.
401(k) Plan for Salaried Employees
The amounts of matching contributions by the Company for this plan covering the
years 1998, 1997 and 1996 were approximately $356,000, $334,000 and $351,000,
respectively. The expenses associated with this plan were approximately $14,000,
$13,000 and $12,000 in 1998, 1997 and 1996, respectively. In accordance with the
terms of the plan, in 1998, the Company matched the employee's contributions
$1.00 for $1.00 up to the first $1,200 contributed by the employee. For employee
contributions in excess of $1,200, the Company matches $.25 for every $1.00 in
pretax employee contributions.
401(k) Plan for Hourly Wage Employees and/or Employees Covered by Collective
Bargaining Agreement
This is a non-contributory plan and was instituted in April 1995. The expenses
associated with this plan were approximately $5,737 in 1998, $6,400 in 1997 and
$4,200 in 1996, respectively.
42
<PAGE> 45
International Transit, Inc. (401(k) Plan
In 1998, the Company matched employee contributions $.25 for each $1.00
contributed up to contributions totaling 6% of employee's compensation. The
amounts of matching contributions by the Company were approximately $23,000 and
$22,000 for 1998 and 1997, respectively. The Company did not match contributions
in 1996. Expenses for this plan were approximately $5,000 and $1,000 for 1998
and 1997, respectively.
Pension Plan
During 1998, the Company adopted a non-funded defined benefit plan covering nine
officers of the Company. The benefits are based on years of service and the
employee's compensation during the five years before retirement. The cost of
this program is being funded on a current basis; however, the Company has
accrued approximately $3.8 million for liability under the plan.
43
<PAGE> 46
The following sets forth the plans benefit obligation and unfunded status at
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
CHANGE IN BENEFIT OBLIGATION:
<S> <C>
Benefit obligation at beginning of year $ 0
Service cost 30
Interest cost 48
Amendments - initial year of adoption 4,295
-------
Benefit obligation and unfunded status at end of
year 4,373
-------
Unrecognized prior service cost (4,212)
-------
Accrued benefit cost $ 161
=======
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEET (IN THOUSANDS):
Accrued benefit liability $(3,746)
Intangible asset $ 3,585
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 30
Interest cost 48
Amortization of prior service
cost 83
-------
Net periodic benefit cost $ 161
=======
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31:
DISCOUNT RATE 6.75%
RATE OF COMPENSATION INCREASE 5.00%
</TABLE>
44
<PAGE> 47
12. COMPREHENSIVE INCOME
The related tax effects allocated to each component of other comprehensive
income are as follows:
<TABLE>
<CAPTION>
TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
BALANCE AT DECEMBER 31, 1996 AMOUNT OR BENEFIT AMOUNT
-----------------------------------------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains rising during period $ 2,200 $ (821) $ 1,379
Less: reclassification adjustment for gains realized
in income 1,961 (731) 1,230
-----------------------------------------
Net unrealized gain on securities 239 (90) 149
-----------------------------------------
Other comprehensive income $ 239 $ (90) $ 149
=========================================
<CAPTION>
TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
BALANCE AT DECEMBER 31, 1997 AMOUNT OR BENEFIT AMOUNT
-----------------------------------------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains rising during period $ 5,149 $ (1,921) $ 3,228
Less: reclassification adjustment for gains realized
in income 2,927 (1,091) 1,836
-----------------------------------------
Net unrealized gain on securities 2,222 (830) 1,392
-----------------------------------------
Other comprehensive income $ 2,222 $ (830) $ 1,392
=========================================
<CAPTION>
TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
BALANCE AT DECEMBER 31, 1998 AMOUNT OR BENEFIT AMOUNT
-----------------------------------------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains rising during period $ 2,447 $ (839) $ 1,608
Less: reclassification adjustment for gains realized
in income 5,880 (2,193) 3,687
-----------------------------------------
Net unrealized loss on securities (3,433) 1,354 (2,079)
-----------------------------------------
Other comprehensive income $ (3,433) $ 1,354 $ (2,079)
=========================================
</TABLE>
45
<PAGE> 48
13. STOCK-BASED COMPENSATION
Effective June 1, 1998, the Company adopted the 1998 Stock Incentive Plan (the
"Plan"), whereby awards may be granted to certain employees and non-employee
directors of the Company in the form of restricted shares of Company stock or
options to purchase Company stock. Awards are discretionary and are determined
by the Compensation Committee of the Board of Directors. The total amount of
awards available under the Plan is 1.6 million shares.
On October 30, 1998, the Company granted Mr. Robert W. Anestis, Chairman and CEO
of the Company, 40,000 restricted shares of the Company's common stock. The
restricted shares vest in equal installments on the first five anniversaries of
the date of the grant. The Company has recorded deferred compensation of
approximately $1.2 million for the unamortized portion of this grant as of
December 31, 1998. Compensation expense related to this grant totaled
approximately $41,000 in 1998.
During 1998, options were granted to certain officers and non-employee directors
of the Company totaling 651,872 shares. The options vest from one to five years
from the date of the grant and expire generally 10 years after date of the
grant. The options were granted with exercise prices equal to the market price
of the Company's stock on the date of grant, which ranged from $27.38 to $29.94.
At December 31, 1998, there were 908,128 additional award shares available for
the grant under the Plan.
The per share weighted-average fair value of stock options granted during 1998
was $10.63 on the date of grant using the Black Scholes option-pricing model
with the following weighted average assumptions: .36% expected dividend yield,
risk-free interest rate of 4.8%, weighted-average expected volatility of 26% and
an expected life of 6.3 years.
The Company applies APB No. 25 in accounting for its Plan and, accordingly, no
compensation cost has been recognized for the stock options in the consolidated
financial statements. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<S> <C>
Net income - pro forma $42.3 million
Per share - pro forma $1.17 per share basic and diluted
</TABLE>
As of December 31, 1998, 651,872 options were outstanding with a weighted
average remaining contractual life of 8.8 years and a weighted average exercise
price of $29.72, including 30,000 options currently exercisable at $27.375.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
---- ----
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues $65,215 $63,732 $62,072 $56,757 $59,168 $60,907 $71,007 $59,438
Other Income $ 4,299 $ 2,060 $ 2,986 $ 3,017 $ 2,529 $ 2,797 $ 3,013 $ 2,296
Operating Expenses $51,643 $45,129 $46,664 $46,503 $45,537 $44,485 $59,831 $48,346
Net Income $10,715 $12,967 $11,652 $ 8,287 $10,896 $12,011 $ 8,863 $ 8,365
Basic and diluted net income per
share $ 0.29 $ 0.36 $ 0.32 $ 0.23 $ 0.31 $ 0.33 $ 0.24 $ 0.23
================================================================================================================================
</TABLE>
46
<PAGE> 49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Election of Directors-Nominees,"
"General Information Relating to the Board of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy
Statement for its 1999 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Proxy Statement"), is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Election of Directors-Executive
Compensation" and "Retirement Plans" in the Proxy Statement is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Election of Directors-Security
Ownership of Certain Beneficial Owners" and "Security Ownership of Management"
in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the captions "Election of Directors-Compensation
Committee Interlocks and Insider Participation," "Independent Certified Public
Accountants" and "Other Matters" in the Proxy Statement is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements and schedules listed in the accompanying Index
to Financial Statements and Financial Statement Schedules are filed as
part of this Annual Report.
2. EXHIBITS
The Exhibits listed on the accompanying Index to Exhibits are filed as
part of this Annual Report.
(b) REPORTS ON FORM 8-K
1. Filed November 11, 1998:
Company announced the retirement of C.F. Zellers, Jr. as CEO, and the
selection of Robert W. Anestis as the new Chairman, President and CEO
effective January 1, 1999.
47
<PAGE> 50
FLORIDA EAST COAST INDUSTRIES, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[ITEM 14(A)]
<TABLE>
<CAPTION>
Reference
Form 10-K
Page Number
-----------
<S> <C>
Consolidated Statements of Income and Retained Earnings
for each of the three years ended December 31, 1998 28
Consolidated Balance Sheets at December 31, 1998 and 1997 29
Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income 30
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1998 31
Notes to Consolidated Financial Statements 32-46
Independent Auditors' Report 27
Financial Statement Schedules:
II-Valuation and Qualifying Accounts 53
III-Real Estate and Accumulated Depreciation 54-55
</TABLE>
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or the notes thereto.
Financial statements and schedules of Florida East Coast Industries, Inc. (not
consolidated) are omitted since it is primarily a holding company and all
subsidiaries included in the consolidated financial statements being filed, in
the aggregate, do not have minority equity interests and/or indebtedness to any
person other than the Company or its consolidated subsidiaries in amounts which
together exceed five percent of the total assets as shown by the consolidated
balance sheet at the end of any year covered by this Report.
48
<PAGE> 51
FLORIDA EAST COAST INDUSTRIES, INC.
INDEX TO EXHIBITS
(ITEM 13[A] 3.)
<TABLE>
<CAPTION>
S-K
Item 601 Documents Page Number
- -------- --------- -----------
<S> <C> <C>
(3)(a) Articles of Incorporation *
(3)(b) By-Laws *
(10) Management Agreement dated November 1, 56
1998, between Florida East Coast Industries, Inc.
and RailCar Management, Inc.
(10) Asset Management Agreement dated January 1,
1998, between Gran Central Corporation and The
St. Joe Company as reported in third quarter 1998
Form 10-Q. **
(21) Subsidiaries of Florida East Coast Industries, Inc. 51
(24) Power of Attorney 52
</TABLE>
*Incorporated herein by reference to Exhibits filed in connection with Florida
East Coast Industries, Inc.'s Registration Statement on Form S-14 as filed with
the Securities and Exchange Commission on February 17, 1984 (File No. 2-89530).
**Incorporated herein by reference to Exhibits filed in the third quarter 1998
Form 10-Q.
49
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 1, 1999.
FLORIDA EAST COAST INDUSTRIES, INC.
- ------------------------------------
(Registrant)
By:/s/ T. Neal Smith
----------------------------------------------
T. Neal Smith, Vice President & Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated:
<TABLE>
<S> <C>
R.W. Anestis* W.L. Thornton*
- ------------------------------------------------- --------------------------------------
R.W. Anestis Chairman, President, Chief Executive W. L. Thornton, Director - 3/15/99
Officer and Director - 3/15/99
R.S. Ellwood* J.C. Belin*
- ------------------------------------------------- --------------------------------------
R.S. Ellwood, Director - 3/15/99 J.C. Belin, Director - 3/15/99
J.N. Fairbanks* A.C. Harper*
- ------------------------------------------------- --------------------------------------
J.N. Fairbanks, Director - 3/15/99 A.C. Harper, Director - 3/15/99
A. Henriques* J.J. Parrish, III*
- ------------------------------------------------- --------------------------------------
A. Henriques, Director - 3/15/99 J.J. Parrish, III, Director - 3/15/99
P.S. Rummell* T. Neal Smith*
- ------------------------------------------------- --------------------------------------
P.S. Rummell, Director - 3/15/99 By: T. Neal Smith, Attorney-in-Fact
G.P. West*
- -------------------------------------------------
G.P. West, Treasurer & Asst. Secretary - 3/15/99
</TABLE>
50
*Such signature has been affixed pursuant to Power of Attorney.
<PAGE> 53
21. Listing of parent and subsidiaries
Parent - Florida East Coast Industries, Inc.
Subsidiaries - Florida East Coast Railway Company
Florida East Coast Deliveries, Inc.
Railroad Concrete Crosstie Corporation
Railroad Track Construction Company
Gran Central Corporation
Dade County Land Holding Company, Inc.
International Transit, Inc.
51
<PAGE> 54
<TABLE>
<CAPTION>
FLORIDA EAST COAST INDUSTRIES, INC.
SCHEDULE II (CONSOLIDATED) - VALUATION AND QUALIFYING ACCOUNTS - FOR THE THREE YEARS
ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
Balance at Additions
Beginning Charged Balance at
of Year to Expense Payments End of Year
------- ---------- -------- -----------
<S> <C> <C> <C> <C>
RESERVES INCLUDED IN LIABILITIES
1998
Casualty and other reserves $11,434 $3,733 $4,559 $10,608 [a]
======= ====== ====== =======
1997
Casualty and other reserves $10,776 $6,596 $5,938 $11,434 [a]
======= ====== ====== =======
1996
Casualty and other reserves $11,221 $6,205 $6,650 $10,776 [a]
======= ====== ====== =======
</TABLE>
[a] Includes $4,992, $5,143 and $5,038 in current liabilities at December 31,
1998, December 31, 1997 and December 31, 1996, respectively. The remainder
is included in "Accrued Casualty Reserves and Other Long-Term Liabilities."
52
<PAGE> 55
FLORIDA EAST COAST INDUSTRIES, INC.
SCHEDULE III (CONSOLIDATED) - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Initial Cost to Company Carried at Close of Period
----------------------- --------------------------
Costs Capitalized
Subsequent to Land & Land Buildings and
Description Encumbrances Land Acquisition Improvements Improvements Total
----------- ------------ ---- ----------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Duval County
Office Buildings (9) -0- $6,550 $71,144 $12,930 $64,764 $77,694
Office/Showroom/Warehouses (8) -0- 2,931 43,329 6,758 39,502 46,260
Office/Warehouses (2) -0- 1,806 9,935 3,833 7,908 11,741
Front Load Warehouse -0- 30 2,546 409 2,167 2,576
Rail Warehouses -0- 36 2,865 694 2,207 2,901
Land w/Infrastructure -0- 4,504 6,163 10,667 0 10,667
Unimproved Land & Misc. Assets -0- 6,969 469 6,969 469 7,438
St. Johns County
Unimproved Land -0- 3,039 0 3,039 0 3,039
Flagler County
Unimproved Land -0- 4,403 0 4,403 0 4,403
Volusia County
Unimproved Land -0- 3,627 0 3,627 0 3,627
Brevard County
Unimproved Land -0- 9,387 0 9,387 0 9,387
Putnam County
Unimproved Land -0- 2 0 2 0 2
Indian River County
Unimproved Land -0- 1 0 1 0 1
St. Lucie County
Unimproved Land -0- 643 0 643 0 643
Martin County
Land w/Infrastructure -0- 3,638 1,514 5,152 0 5,152
Unimproved Land -0- 1,414 0 1,414 0 1,414
Seminole County
Unimproved Land -0- 2 0 2 0 2
Palm Beach County
Office/Showroom/Warehouse (1) -0- 217 2,880 599 2,498 3,097
Rail Warehouses (2) -0- 461 4,241 557 4,145 4,702
Cross Docks (2) -0- 274 3,629 1,262 2,641 3,903
Unimproved Land -0- 2,433 0 2,433 0 2,433
<CAPTION>
Depreciable Life Used
in Calculation in
Accumulated Date Capitalized Latest Income
Depreciation or Acquired Statement
------------ ---------------- ----------------------
<C> <C> <C>
Duval County
Office Buildings (9) $11,413 1985 3 to 40 years
Office/Showroom/Warehouses (8) 8,006 1987 3 to 40 years
Office/Warehouses (2) 1,382 1994 3 to 40 years
Front Load Warehouse 101 1998 3 to 40 years
Rail Warehouses 118 1998 3 to 40 years
Land w/Infrastructure 1,014 3 to 40 years
Unimproved Land & Misc. Assets 215 1998 5 years
St. Johns County
Unimproved Land 0 Various
Flagler County
Unimproved Land 0 Various
Volusia County
Unimproved Land 0 Various
Brevard County
Unimproved Land 0 Various
Putnam County
Unimproved Land 0 Various
Indian River County
Unimproved Land 0 Various
St. Lucie County
Unimproved Land 0 Various
Martin County
Land w/Infrastructure 278 Various
Unimproved Land 0 Various
Seminole County
Unimproved Land
Palm Beach County
Office/Showroom/Warehouse (1) 1,089 3 to 40 years
Rail Warehouses (2) 1,486 3 to 40 years
Cross Docks (2) 1,323 3 to 40 years
Unimproved Land 0
</TABLE>
53
<PAGE> 56
FLORIDA EAST COAST INDUSTRIES, INC.
SCHEDULE III (CONSOLIDATED) - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Initial Cost to Company Carried at Close of Period
----------------------- --------------------------------------------
Costs Capitalized
-----------------
Subsequent to Land & Land Buildings and
------------- ----------- -------------
Description Encumbrances Land Acquisition Improvements Improvements Total
----------- ------------ ---- ----------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Broward County
Rail Warehouse (1) -0- 85 1,708 405 1,388 1,793
Land w/Infrastructure -0- 5,431 370 5,801 0 5,801
Unimproved Land -0- 2,418 1 2,419 0 2,419
Manatee County
Unimproved Land -0- 101 0 101 0 101
Dade County
Double Front Load Warehouse (1) -0- 972 6,176 1,986 5,162 7,148
Rail Warehouses (6) -0- 4,283 25,158 8,119 21,322 29,441
Office/Showroom/Warehouses (5) -0- 2,442 17,584 5,766 14,260 20,026
Office/Warehouses (8) -0- 4,444 31,923 9,345 27,022 36,367
Front Load Warehouses (8) -0- 4,819 26,067 9,782 21,104 30,886
Office/Service Center (1) -0- 344 3,495 873 2,966 3,839
Cross Dock (1) -0- 137 1,018 137 1,018 1,155
Transit Warehouse (1) -0- 3 217 3 217 220
Land w/Infrastructure -0- 25,223 10,327 35,550 0 35,550
Unimproved Land & Misc. Assets -0- 13,816 394 14,210 0 14,210
Orange County
Office Building (1) -0- 1,276 12,123 2,274 11,125 13,399
Office/Showroom/Warehouse (1) -0- 1,543 6,006 2,411 5,138 7,549
Land w/Infrastructure -0- 6,672 844 7,329 187 7,516
TOTALS $126,376 $292,126 $181,292 $237,210 $418,502
======== ======== ======== ======== ========
<CAPTION>
Depreciable Life Used
---------------------
in Calculation in
-----------------
Accumulated Date Capitalized Latest Income
----------- ---------------- -------------
Depreciation or Acquired Statement
------------ ----------- ---------
<C> <C> <C>
Broward County
Rail Warehouse (1) 751 1986 3 to 40 years
Land w/Infrastructure 4 1992 3 to 40 years
Unimproved Land Various
Manatee County
Unimproved Land Various
Dade County
Double Front Load Warehouse (1) 1,442 1993 3 to 40 years
Rail Warehouses (6) 5,425 1988 3 to 40 years
Office/Showroom/Warehouses (5) 4,850 1988 3 to 40 years
Office/Warehouses (8) 4,791 1990 3 to 40 years
Front Load Warehouses (8) 5,255 1991 3 to 40 years
Office/Service Center (1) 427 1994 3 to 40 years
Cross Dock (1) 327 1987 3 to 40 years
Transit Warehouse (1) 3 Various 3 to 40 years
Land w/Infrastructure 1,754 Various 3 to 40 years
Unimproved Land & Misc. Assets 0 Various 3 to 40 years
Orange County
Office Building (1) 394 3 to 40 years
Office/Showroom/Warehouse (1) 128 3 to 40 years
Land w/Infrastructure 11 1995 3 to 40 years
TOTALS $ 51,987
========
</TABLE>
Notes:
(A) The aggregate cost of real estate owned at December 31, 1998
for federal income tax purposes is approximately $328,810,000.
(B) Reconciliation of real estate owned (in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at Beginning of Year $365,532 $333,830 $266,673
Amounts Capitalized 62,153 45,806 67,589
Amounts Retired or Adjusted (9,183) (14,104) (432)
-------- -------- --------
Balance at Close of Period $418,502 $365,532 $333,830
======== ======== ========
</TABLE>
(C) Reconciliation of accumulated depreciation (in thousands of
dollars):
<TABLE>
<S> <C> <C> <C>
Balance at Beginning of Year $39,691 $33,507 $25,922
Depreciation Expense 12,487 8,731 7,653
Amounts Retired or Adjusted (191) (2,547) (68)
------- ------- -------
Balance at Close of Period $51,987 $39,691 $33,507
</TABLE>
54
<PAGE> 1
AGREEMENT REGARDING SOFTWARE LICENSING AND IMPLEMENTATION,
AND ONGOING SUPPORT AND MANAGEMENT SERVICES
THIS AGREEMENT is made and entered into effective as of this 1st day of
December, 1998, by and between RAILCAR MANAGEMENT, INC. ("RMI"), a Georgia
corporation, and FLORIDA EAST COAST INDUSTRIES, INC. ("FEC"), a Florida
corporation.
W I T N E S S E T H
WHEREAS, RMI has developed railroad application software ("RS/4000",
"ISS/4000" and "AXIS", collectively the "Software"), which is described in
Exhibit A hereto, and RMI wishes to provide services using the Software to
railroads in North America; and
WHEREAS, FEC desires that RMI provide such services and other computer
related services to FEC, and RMI wishes to provide such services to FEC;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged and accepted, the
parties agree as follows:
1. SYSTEM IMPLEMENTATION SERVICES. On December 1, 1998, or as soon as
practicable thereafter, RMI and FEC will begin the System Implementation
Services as described in this Section 1, and said services shall continue until
(i) the System Implementation Services are fully performed as hereinafter
provided, or (ii) termination occurs as specified in Section 5 hereof.
(a) Description. The System Implementation Services have two phases: (1)
System Enhancement and Interface Build, and (2) System Implementation and
Training. The first phase, System Enhancement and Interface Build, includes
making enhancements to the Software and developing certain system
interfaces. The enhancements and interfaces to be developed during this
phase are shown in Exhibit F hereto. During the System Implementation and
Training phase, RMI and FEC will install the Software at FEC, train the
system users and begin "Initial Production Operation" (as defined herein).
The "System Implementation Services" are defined in Exhibit B hereto.
(b) Initial Production Operation. The parties agree to jointly work towards
"Initial Production Operation" of the Software at FEC, and acknowledge that
the duties defined in this Section 1 require the mutual cooperation, support
and efforts of both parties. "Initial Production Operation" is defined as
the capability for actual use of the Software in a production environment
for FEC with reasonably substantial completeness of the functionality
specified in both Exhibit A and Exhibit F. Accordingly, RMI and FEC promise
and agree to cooperate and perform all duties, tasks, and services required
herein in a timely manner using their best efforts and acting in good faith.
(c) Ownership. FEC agrees that all materials developed pursuant to this
Section 1 including, but not limited to, any software and related
documentation which may be developed specifically for FEC through the
efforts of RMI's employees or its agents (whether or not compensated) in
cooperation with FEC shall be the exclusive property of RMI, and FEC shall
have no interest therein except as expressly licensed as herein provided.
1
<PAGE> 2
RMI may, at its discretion, require FEC's agents and employees participating
in the System Implementation Services and otherwise involved with the
Software to execute a statement (reasonably satisfactory to FEC)
acknowledging RMI's ownership rights as described in this Paragraph (c).
2. ONGOING SERVICES; LICENSE. Commencing on December 1, 1998, or as soon as
practicable thereafter, RMI shall provide, and FEC hereby accepts, I/T
Management Services, Support Services and Consulting Services (collectively the
"Ongoing Services") as defined in this Section 2. Subject to the termination
provisions of Section 5 hereof, the initial term of this Agreement with respect
to the Ongoing Services as stipulated herein shall be for sixty (60) months. At
the end of the initial term and each extension term, the term shall be
automatically extended for an additional period of twelve (12) months
("extension term") unless notice of cancellation is given by either party at
least sixty (60) days prior to the end of the initial term or any subsequent
extension term.
(a) I/T Management Services. RMI's I/T Management Services hereunder will
provide certain management and coordination of FEC's information technology
function on an ongoing basis for the following areas and as specified by the
parties hereto from time-to-time: data center, computer applications, vendor
oversight, system interfaces, information technology personnel, and year
2000 issues. The "I/T Management Services" are described in Exhibit C
hereto.
(b) Support Services. RMI will provide Support Services to FEC to maintain
the Software, provide certain changes and new releases to the Software, and
provide telephone support to users of the Software on an ongoing basis.
Additionally, RMI may provide certain enhancements and on-site support for
the Software as mutually agreed upon by RMI and FEC. The "Support Services"
are described in Exhibit G hereto.
(c) Consulting Services. During the term of the Ongoing Services as set
forth above, RMI may provide additional services (herein referred to as
"Consulting Services") as mutually agreed upon by RMI and FEC on a
project-by-project basis.
(d) License. RMI hereby grants to FEC, during the term of this Section 2 and
subject to the terms and conditions of this Agreement (including, without
limitation, the termination provisions contained in Section 5 hereof), a
non-exclusive, non-assignable, non-transferable and world-wide right and
license to use the Software (including any source code) for its own internal
operational purposes. FEC shall be deemed to own only the magnetic or other
physical media on which the Software is originally or subsequently recorded
or fixed, but an express condition of this license is that at no time shall
FEC acquire any ownership of the Software recorded on the original media
copies or subsequent copies of the Software, regardless of the form or media
in or on which the original and other copies may subsequently exist. This
license is not a sale of FEC's copy of the Software or any subsequent copy.
At the time of delivery of the Software and any enhancements, a copy of the
source code will be delivered therewith.
3. JOINT EFFORT. The parties agree that the duties defined in Section 1 and
Section 2 require the mutual cooperation, support and efforts of all parties.
Accordingly, RMI and FEC promise and agree to cooperate and perform all duties,
tasks, and services required herein in a timely manner using their best efforts
and acting in good faith. In the event that any of the personnel of any party
assigned to perform duties hereunder becomes unable to perform the tasks
anticipated by this Agreement by reason of death, prolonged sickness, disability
or otherwise, the assigning party will as promptly as practicable (and in no
event more than thirty (30) days from the
2
<PAGE> 3
beginning of such inability to perform) replace such personnel.
During the term of Section 1 or Section 2, the following additional provisions
shall apply:
(a) RMI will assign certain of its qualified personnel to the tasks
described herein on a full-time or part-time basis, at the offices of RMI or
FEC or both, as deemed reasonably necessary by RMI. The personnel of RMI so
assigned will be chosen solely by RMI and, except as specifically provided,
may be replaced or reassigned at RMI's sole discretion. Such personnel shall
be and remain the employees or independent contractors of RMI, subject to
the supervision and discipline of RMI alone; they shall not be the
employees, servants or agents of FEC for any purpose and neither RMI nor FEC
shall make any representation to any person to the contrary. RMI will have
the sole responsibility for payment and administration of their wages,
salaries and other compensation, employment taxes and tax deductions, fringe
benefits, workers' compensation coverage and all other incidents of the
employer-employee and principal/agent relationship without exception.
(b) In the event of misconduct or unsatisfactory performance, FEC may
request replacement of personnel assigned by RMI to this project. Such
requests will not be unreasonably denied.
(c) FEC agrees to make available, at no cost to RMI, reasonable access to
all management, supervisory and other FEC personnel, as RMI may reasonably
require to perform its duties hereunder in a timely fashion.
(d) FEC, with the assistance of RMI, will provide to RMI all data of FEC
reasonably required by RMI to perform its duties pursuant to this Agreement.
(e) RMI and FEC acknowledge and agree that RMI is an independent contractor
to FEC providing personnel and services to accomplish those tasks and
services set forth in this Agreement.
4. PRICE AND PAYMENT
(a) System Implementation Services. In consideration of the performance of
the System Implementation Services described in Section 1, FEC agrees and
promises to pay RMI fees in accordance with the "Implementation Services
Fees" shown in Exhibit E hereto.
(b) Management Services Fees. FEC agrees to pay RMI fees for the I/T
Management Services and Support Services rendered by RMI hereunder as
described in Section 2 monthly in advance in accordance with the fee
schedule set forth in Exhibit E (the "Management Services Fees"). RMI may
change the Management Services Fee schedule each April 1 during the term to
reflect any increase or decrease from the previous calendar year in the
"Employment Cost Index" for compensation, private industry white-collar
workers, as published by the United States Department of Labor, Bureau of
Labor Statistics (or any reasonably comparable successor or alternative
index). FEC shall be notified of any changes in the Management Services Fees
at least 30 days prior to effectuation of such changes; provided, however,
there shall be no increase in such fees payable during the first twelve (12)
months under this Agreement.
(c) Consulting Services Fees. RMI will provide its Consulting Services to
FEC on such terms and conditions as mutually agreed upon between the
parties.
(d) Payment Terms.
3
<PAGE> 4
(i) FEC agrees to pay the fees as indicated above, as well as all fees
then in effect for all other services requested by FEC in writing and
provided by RMI in addition to services set forth herein (RMI's fees for
additional services are shown in Exhibit E), at the time specified
herein, or if not specified, within thirty (30) days of receipt of RMI's
invoice.
(ii) FEC will be responsible for and reimburse RMI for or pay directly
all reasonable travel, long distance telephone, living and out-of-pocket
expenses incurred by RMI personnel in providing services under this
Agreement. This does not include travel and living expenses incurred by
RMI employees designated as full time residents of Jacksonville, Florida
while in Jacksonville or St. Augustine, Florida.
(iii) A late charge of one and one-half percent (1-1/2%) per month may,
at the discretion of RMI, be due and payable on any amount not received
by RMI by the prescribed due date.
5. TERMINATION
Section 1 of this Agreement shall terminate at the end of its respective term as
provided for in such section, without affecting the validity or continuing
effectiveness of the remainder of this Agreement.
With regard to the entire Agreement, this Agreement shall continue in full force
and effect until terminated as follows:
(a) If both Section 1 and Section 2 of this Agreement have terminated as
provided therein, then the entire Agreement shall terminate; or
(b) In the event either party makes a general assignment for the benefit of
creditors or files a voluntary petition in bankruptcy or petitions for
reorganization or arrangement under the bankruptcy laws, or if a petition in
bankruptcy is filed against either party, or if a receiver or trustee is
appointed for all or any part of the property and assets of either party,
the other party may terminate this Agreement; or
(c) Either party (the "Nondefaulting Party") may terminate this Agreement if
it reasonably determines in good faith that the other party has failed to
comply with any of the terms and conditions of this Agreement (including,
without limitation, non-payment) and has failed to cure such failure within
sixty (60) days after receiving written notice from the Nondefaulting Party
describing such failure in reasonable detail; or
(d) Should FEC desire to discontinue the Ongoing Services and Section 2 of
this Agreement, FEC may at any time, upon prior written notice to RMI of at
least ninety (90) days, terminate this Agreement by paying RMI the "Adjusted
Termination Fee" as shown in Exhibit D hereof at the time such notice is
given.
If termination under this Section 5: (i) is pursuant to Section 5(a) hereof, or
(ii) is pursuant to Section 5(b) or Section 5(c) hereof and is not initiated by
RMI, or (iii) is pursuant to Section 5(d) hereof and all Adjusted Termination
Fees are paid by FEC to RMI, then FEC may request within thirty (30) days
following such termination, and RMI shall grant immediately upon such request, a
perpetual, fully-paid, non-assignable, non-transferable, world-wide and
non-exclusive right and license to use the Software AS IS, solely for its own
internal operational purposes (the "License"), with no further liability,
warranty or obligation whatsoever on the part of RMI (including, without
limitation any obligation to render services with respect to or to update the
Software),
4
<PAGE> 5
and FEC may, at its option, receive the source code for the Software,
all subject to all conditions set forth in Sections 6, 7 (provided that all
obligations with respect to confidential information that is not a trade secret
shall continue in full force and effect until two (2) years after the
termination of the License), 9 and 10 hereof.
All obligations of either party accrued through termination, in whole or in
part, for any reason whatsoever, shall survive such termination. Upon
termination of this Agreement, except as otherwise provided herein, FEC shall
through its best efforts and to the best of its knowledge, destroy (if directed
by RMI) or return any trade secrets or confidential information of RMI in FEC's
possession.
6. OWNERSHIP. FEC agrees that all software and related documentation, whether
existing or developed pursuant to this Agreement, including, but not limited to,
any custom software and related documentation which may be developed
specifically for FEC through the efforts of RMI's employees or its agents
(whether or not compensated) in cooperation with FEC shall become a part of the
Software for all purposes under this Agreement and be the exclusive property of
RMI, and FEC shall have no interest therein except as expressly provided for
herein. The term "Software" as used in this Agreement shall include all such
software and related documentation developed pursuant to this Agreement.
7. CONFIDENTIALITY.
(a) FEC acknowledges and agrees that the Software and Ongoing Services
include and will include proprietary "trade secrets" and confidential
information of RMI, developed at substantial effort and cost to RMI, the use
and disclosure of which must be continuously controlled. FEC also
acknowledges that RMI may disclose to FEC other proprietary "trade secrets"
and other confidential information of RMI pertaining to the use, operation,
development and technical specifications of the Software and Ongoing
Services. FEC and its employees, agents and representatives shall maintain
the confidentiality of such trade secrets and confidential information of
RMI using any and all reasonable measures. Except as expressly permitted in
this Agreement, FEC and its employees, agents and representatives shall not
use for their own benefit, publish or otherwise disclose to others any of
such trade secrets and confidential information. The provisions of this
Paragraph shall remain in full force and effect with respect to any trade
secrets of RMI so long as such information disclosed by RMI to FEC remains a
trade secret; and with respect to any information disclosed by RMI to FEC
which is confidential information but not a trade secret, this Paragraph
shall continue in full force and effect until two (2) years after the
termination of this Agreement.
(b) RMI acknowledges and agrees that all business and financial information,
development plans and strategies, data and sources of data, names of and
personnel information about FEC, its customers and suppliers, are and will
be proprietary "trade secrets" and confidential information of FEC,
developed at substantial effort and cost to FEC, the use and disclosure of
which must be continuously controlled. RMI also acknowledges that FEC may
disclose to RMI other proprietary "trade secrets" and confidential
information of FEC. RMI shall maintain the confidentiality of all
proprietary information of FEC using any and all reasonable measures. Except
as expressly permitted in this Agreement, RMI shall not use for its own
benefit, publish or otherwise disclose to others any of such trade secrets
and confidential information. The provisions of this Paragraph shall remain
in full force and effect with respect to any trade secrets of FEC so long as
such information disclosed by FEC to RMI remains a trade secret; and with
respect to any information disclosed by FEC to RMI which is confidential
information but not a trade secret, this Paragraph shall continue in full
force and effect until two (2) years after the termination of this
Agreement.
5
<PAGE> 6
(c) The obligations under this Section shall not apply to any information
which the party who received it from the other can establish: (i) has
rightfully entered the public domain; (ii) was independently developed by
such party prior to receiving it from the other party; or (iii) has been
rightfully received from a third party without an obligation to keep it
confidential.
(d) The provisions of this Section shall survive any termination of this
Agreement, in whole or in part, for any reason whatsoever.
8. WARRANTY.
THE FOLLOWING WARRANTIES ARE THE SOLE AND EXCLUSIVE WARRANTIES OF RMI HEREUNDER.
ANY AND ALL OTHER CONDITIONS OR WARRANTIES WHATSOEVER, ORAL OR WRITTEN, WHETHER
EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, INCLUDING WITHOUT LIMITATION ANY
IMPLIED CONDITIONS OR WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE, ARE HEREBY EXCLUDED AND DISCLAIMED.
(a) With respect to the Ongoing Services provided herein, it will be the
responsibility of FEC, and FEC hereby agrees, to verify the accuracy of the
inputted data contained in the system. The sole and exclusive remedy of FEC
for any defect or imperfection in a report, record or other accounting, or
for breach of warranty or other breach of this Agreement with respect to the
Software or Ongoing Services (including year 2000 compliance as set forth in
Section 8(c) below) shall be, at RMI's option, (1) the correction of the
defect or imperfection (provided RMI is notified of the defect or
imperfection within 30 days of the date the report, record or other
accounting was generated) or the cure of the breach, or (2) refund of the
charges paid for the report, record or matter in question for the month or
months affected by the defect or imperfection or breach. In no event shall
RMI's liability pursuant to this Agreement for any claim arising hereunder
exceed the amount paid by FEC hereunder during the six month period
preceding the claim.
(b) Commencing upon completion of the System Implementation Services and
continuing for six (6) months thereafter, RMI warrants: that the Software
will perform substantially in accordance with functional specifications on
the specified operating environment as set forth in Exhibit A hereto; that
all units of the Software will be fit for the ordinary purposes for which
such software is used; that the Software will be of average and even kind
and quality within each unit and among all units; and that the Software
units will conform to any sample of such software tested and approved by
FEC. RMI's entire liability and FEC's sole and exclusive remedy in the event
the Software fails to perform as warranted shall be the best efforts by RMI
to correct program defects by repair or replacement.
(c) RMI warrants that the Software will operate correctly with regard to
year 2000 operation, meaning that the Software will provide reasonably
correct operation of its material functionality in comparing dates,
calculating dates and sorting or sequencing dates before, during and after
December 31, 1999. RMI will perform a "Y2K Software Test" of the Software
within 60 days following Initial Production Operation at a date and time to
be mutually agreed upon by RMI and FEC. The Y2K Software Test, using
sufficient test data and accessing all major Software functionality, will
demonstrate the capability of the Software to comply with the above
definition. Should the initial or any subsequent Y2K Software Test fail,
then RMI shall use its best efforts to make the necessary modifications to
the Software to correct such failure, and then perform the Y2K Software Test
again at a mutually agreeable date and
6
<PAGE> 7
time. This process shall continue until the Y2K Software Test is
successfully completed. RMI and FEC hereby agree that the successful
completion of the Y2K Software Test shall fully satisfy all of RMI's
warranties regarding year 2000 compliance of the Software, and RMI shall
have no further obligation or liability of any kind with respect thereto.
(d) RMI warrants that it has the full corporate power and authority and
right to grant the usage to the Software (and any sublicenses related
thereto) as herein provided and that the Software does not infringe any
United States or international copyright, patent, trade secret or trademark
rights or other proprietary rights of any third parties. RMI shall
indemnify, defend and hold FEC harmless from any and all losses,
liabilities, judgments, awards and costs, including attorneys' fees, arising
out of or related to any claim or cause of action which may be made by any
third person or entity against FEC for violation or infringement of a
patent, pending patent application, trade secret, copyright, trademark,
license or proprietary right with respect to the Software. If the Software
should become the subject of a successful claim of infringement of a trade
secret, trademark, copyright or patent, RMI's entire liability and FEC's
sole and exclusive remedies shall be for RMI, at its option, to use its best
efforts to procure for FEC the right to continue using the Software, or to
replace it or modify it to make it noninfringing, and for RMI to be
responsible for payment of any judgment or costs awarded in a suit or
proceeding asserting a successful infringement claim.
(e) RMI's warranties as set forth above are the only warranties made with
respect to the Software and services provided hereunder and, except as
otherwise may be agreed to by the parties in writing, will not be enlarged,
diminished or affected by, and no obligation or liability will arise or grow
out of, the rendering of technical programming or other advice or service in
connection with the Software licensed to FEC or otherwise hereunder. RMI
shall not be obligated under these warranties to correct defects (a) unless
FEC has allowed RMI to install all corrections for the Software from RMI a
reasonable time in advance of encountering the defect, (b) attributable to
improper or incorrect usage or operation of the Software, (c) caused by
FEC's alteration, modification, enhancement or conversion of the Software,
or (d) arising from hardware related problems or third party software
problems.
9. LIMITATION ON CONSEQUENTIAL DAMAGES.
IN NO EVENT EXCEPT FOR WILLFUL MISCONDUCT OR GROSS NEGLIGENCE AND UNDER NO
CIRCUMSTANCES WILL RMI BE LIABLE TO FEC OR ANY OTHER PERSON OR ENTITY FOR ANY
SPECIAL, COLLATERAL, EXEMPLARY, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF
ANY NATURE OR KIND WHATSOEVER, WHETHER BY REASON OF INDEMNIFICATION OR
OTHERWISE, IN CONNECTION WITH OR ARISING BY REASON OF: (i) THE PROVISION OF THE
SOFTWARE, SERVICES AND RELATED DOCUMENTATION, OR (ii) RMI'S (AND ITS AGENTS',
EMPLOYEES' AND REPRESENTATIVES') PERFORMANCE OR FAILURE TO PERFORM HEREUNDER
(AND ANY ACTS OCCURRING IN CONNECTION THEREWITH) OR THE BREACH OF ANY WARRANTY
OR BREACH OF ANY OF THE PROVISIONS OF THIS AGREEMENT, OR (iii) YEAR 2000 ISSUES,
OR (iv) ANY IMPERFECTION OR DEFECT IN THE SOFTWARE OR SERVICES OR RELATED
DOCUMENTATION, OR IN ANY REPORT, DOCUMENT OR ACCOUNTING GENERATED IN CONNECTION
WITH THE SERVICES, REGARDLESS OF WHETHER BASED IN TORT OR IN CONTRACT.
The provisions of this Section 9 shall survive any termination of this
Agreement, in whole or in part, for any reason whatsoever.
7
<PAGE> 8
10. TAXES. FEC shall pay all taxes including, without limitation, sales, use,
personal property or excise taxes, which may be imposed by a taxing authority
with respect to the Software and Ongoing Services and with respect to the use of
the Software and Ongoing Services by FEC, but specifically excluding any tax
based upon RMI's net or gross income, or imposed upon RMI in lieu of such taxes
on net or gross income, as a result of transactions under or the existence of
this Agreement, unless FEC furnishes RMI with a certificate of exemption from
payment of such taxes.
11. FORCE MAJEURE. Neither RMI nor FEC shall be liable to the other party for
any delay or failure to perform (except for the failure to pay any monies owed)
arising out of causes beyond its reasonable control, including but not limited
to riots, epidemics, unusually severe weather, fire, flood, war, acts of the
enemy, no availability of hardware, embargoes or work stoppages, labor disputes
or strikes. RMI and FEC shall notify each other forthwith upon hearing of any
event which may result in any delay or failure to perform.
12. MISCELLANEOUS.
(a) Binding Effect. This Agreement shall inure to the benefit of and shall
be binding upon the parties hereto and their successors and assigns
permitted pursuant to Section 12(c) hereof.
(b) Governing Law. This Agreement shall be deemed to be made in, and in all
respects shall be interpreted, construed and governed by and in accordance
with, the laws of the State of Georgia.
(c) Assignment. Neither party may assign this Agreement or any interest
herein or part hereof without the prior written consent of the other party
except to corporate successors to a party (by way of merger, consolidation,
reorganization or sale of all or substantially all of the assets of a party)
which do not materially diminish the financial status of the party.
(d) Expenses. RMI and FEC shall bear their own respective expenses incurred
in connection with the preparation and execution of this Agreement.
(e) Headings. The Section and Paragraph headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning
or interpretation of this Agreement.
(f) Notices. All communications provided for hereunder shall be in writing
and shall be delivered in person, sent by confirmed telecopy or private
overnight courier, or deposited in the United States mail, first class,
registered or certified, return receipt requested, with proper postage
prepaid (or deposited with such comparable international mail service as is
then available) and,
(i) If to RMI, addressed to:
Railcar Management, Inc.
Suite 303
1819 Peachtree Road, N.E.
Atlanta, Georgia 30309-1847
Attention: President
8
<PAGE> 9
(ii) If to FEC, addressed to:
Florida East Coast Industries, Inc.
One Malaga Street
St. Augustine, Florida 32084
Attention: President
Notices shall be deemed given when received.
(g) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.
(h) Entire Agreement and Waiver. This Agreement embodies the entire
agreement and understanding between the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements and understandings
relating to such subject matter. This Agreement may be modified only by a
written instrument signed by each of the parties hereto. No waiver of any
term, provision or condition of this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be, or shall
constitute, a waiver of any other provision hereof, whether or not similar,
nor shall such waiver constitute a continuing waiver, and no waiver shall be
binding unless executed in writing by the party making the waiver.
(i) Severability. The unenforceability or invalidity of any provision or
provisions of this Agreement shall not render any other provision or
provisions herein contained unenforceable or invalid.
(j) Export Laws and Regulation. FEC shall not transfer or use the Software
or System Implementation Services or Ongoing Services or any related
documentation (or any part thereof) outside the United States or Canada
where such transfer or use is prohibited or is regulated by any law or
regulation of the United States of America without the prior approval
required by such law or regulation.
(k) Exhibits. Each and every Exhibit to this Agreement is hereby
incorporated herein and is made an integral part hereof. Any reference
herein to "this Agreement," "herein," "hereunder" or like terms shall
include by reference the terms and provisions contained in any such Exhibit.
(l) Announcement. The cooperative arrangement between RMI and FEC for the
services described herein may be announced by either party only upon the
prior written consent of the other party.
(m) No Agency. This Agreement shall not create a partnership, joint venture,
employment or agency relationship between FEC and RMI. Neither of the
parties shall have the right to incur debts or obligations in the name of
the other party without the express written consent of that party.
IN WITNESS WHEREOF, the parties hereto intending to be legally bound have
caused this Agreement to be executed as of the date and year first above
written.
9
<PAGE> 10
FLORIDA EAST COAST INDUSTRIES, INC.
By: _________________________
Title:___________________
Attest: _____________________
Title: _________________
RAILCAR MANAGEMENT, INC.
By: _________________________
Title:___________________
Attest: _____________________
Title: _________________
10
<PAGE> 11
EXHIBIT A
This Exhibit A is made a part of that certain AGREEMENT REGARDING SOFTWARE
LICENSING AND IMPLEMENTATION, AND ONGOING SUPPORT AND MANAGEMENT SERVICES
between Railcar Management, Inc. and Florida East Coast Industries, Inc dated as
of the 1st day of December, 1998.
A. RS/4000 PRODUCT DESCRIPTION
YARD & INVENTORY CONTROL
- All main tracks, yards, TOFC/COFC facilities and sidings defined in data
base
- Maintain standing order of cars in a train or on a track
- Inquire on location of any loaded or empty car or container in system
- Produce switch lists/work orders for train crews
- Identify cars or containers containing hazardous commodities or high/wide
loads
- Proper hazardous handling instructions attached to Hazmat cars and
printed on crew work orders
- Inbound EDI consist converted to Inbound Interchange
- Car and Train movements generated between tracks and stations using
"point and shoot" methodology
- Car movement history maintained for demurrage, car hire and management
reporting systems
TRAIN OPERATIONS
- Train blocking and scheduling
- Train consists exchanged between major yards
- Train history maintained
- Automatic Setouts and scheduled downline pickups maintained
- EDI exchange of train consists with connecting carriers
INTERMODAL OPERATIONS
- Complete ramp activity including the capture of in-gate/out-gate
transactions and associated documentation
- Trailer/Container on Flat Car (TOFC/COFC) movement transactions captured
- Relationship of trailer and flat car maintained throughout the system
- Trailer/Container off-rail inventory maintained
- EDI bills of lading accepted from customers
A.1
<PAGE> 12
WAYBILL CONTROL
- Movement waybill attached to all cars/containers
- Repetitive patterns used for entry of originating loads
- Automatic reverse route capability
- Complete compliance with DOT requirements for HAZMAT
- Produce a hard copy waybill
- EDI waybill exchange with connecting carriers
- EDI bill of lading received from customers
- Movement waybill becomes revenue waybill
SWITCHING/MISCELLANEOUS BILLING
- Switching or miscellaneous billing automatically generated using
repetitive patterns
- Switching settlements generated against connecting carriers
- Miscellaneous billing generated against online customers
- Payable billing for items such as joint facilities or trackage rights
usage also automatically generated
- Data available for extract to A/R system
DEMURRAGE BILLING
- Uses car movement records generated by system
- Demurrage master for defining multiple tariffs or contracts
- Automatically computes demurrage charges
- Trial run permits allowances and other adjustments
- Prepares final Demurrage Invoice
OTHER FUNCTIONS
- Operator level security/restricted access
- Traffic Reports
- Query capability
B. ISS/4000 PRODUCT DESCRIPTION
AUTOMATIC RATING AND RATE MANAGEMENT
ISS/4000 accepts qualifying EDI 417 transactions from RMI's RS/4000
transportation system. With ISS/4000, the rating process is a robust "Rate
Management System." The structure of the rating data store in ISS/4000 allows
for multiple rates and divisions based on commodity, weight, and other factors.
Additionally, the
A.2
<PAGE> 13
automatic rate selection logic has been enhanced to increase the probability
that the system will automatically select the correct rate. If the system is
unable to select the correct rate, it will narrow the choices, and interactively
display them to the user. These features result in a system that can
automatically rate a high percentage of waybills, with little or no human
intervention, for railroad cars as well as intermodal equipment.
FREIGHT BILLING
ISS/4000 contains full featured Freight Billing modules. This includes an
improved audit trail of all changes made to a waybill and the ability to issue
Correction and Credit Bills.
ISS PROCESSING
[ ] create and send revenue waybills to ISS in EDI 426 format
[ ] exchange other EDI message within the scope of ISS processing,
including 426 revenue waybills, functional acknowledgements, CISS
(Central ISS) report requests, and report responses
[ ] send status inquiries and status responses
[ ] import transportation waybills in EDI 417 format
[ ] print or view responses from CISS (864)
CASH APPLICATION
All freight bills generated by ISS/4000 will be posted to the Cash Application
module. As payments are received, they are easily posted, and up to six levels
of aging can then be tracked by the system. The Cash Application module supports
the issuance of various customer statements, including Past Due notices.
TRIAL BALANCE
The Trial Balance maintains a detailed history of all transactions that affect
the freight revenue that is ultimately posted to the General Ledger. This
includes automatic updates from the rating process, any corrections made through
re-rating, adjustments made from within the Cash Application module, ISS and
abstract interline settlements, as well as manual adjustments.
This file can be used to produce revenue estimates and various Trial Balance
reports sorted by road and/or type of traffic. A complete audit trail of
original and adjusting entries can be maintained historically for any period of
time.
C. AXIS PRODUCT DESCRIPTION
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<PAGE> 14
AXIS combines the data from all RMI products (IRCS, RS/4000, ISS/PC, ISS/4000,
and Car Hire Payable Accounting) into a centralized "Data Warehouse." The AXIS
database has the ability to store historical data for one railroad or multiple
railroads, making it possible to analyze traffic patterns over multiple
properties. The combination of a well designed relational database, and modern
data manipulation tools, allows users of AXIS to perform "what if" analysis on a
number of variables that impact a railroad's performance.
AXIS can provide the foundation for a corporate-wide management information
system. Much more than a historical reporting tool, AXIS provides a module for
Budget Analysis.
Utilizing Client/Server technology to store the data on a file server, access to
the AXIS database is provided to multiple management users through a
Windows-based graphical front-end. AXIS requires a Windows NT File Server
running Microsoft SQL Server, with client PC's running Windows 95 or Windows NT.
In case of any conflict between this Exhibit and the body of this Agreement as
it relates solely to the product descriptions, this Exhibit is controlling and
not expanded by the body of the Agreement.
A.4
<PAGE> 15
EXHIBIT B
This Exhibit B is made a part of that certain AGREEMENT REGARDING SOFTWARE
LICENSING AND IMPLEMENTATION, AND ONGOING SUPPORT AND MANAGEMENT SERVICES
between Railcar Management, Inc. and Florida East Coast Industries, Inc dated as
of the 1st day of December, 1998.
SYSTEM IMPLEMENTATION SERVICES DESCRIPTION
The System Implementation Services are logically divided into two phases: (1)
System Enhancement and Interface Build, and (2) System Implementation and
Training.
1. SYSTEM ENHANCEMENT AND INTERFACE BUILD
RMI will design, code and test the development projects listed in Exhibit F
attached hereto. The functionality provided by these development projects will
be delivered by RMI as part of the Software during this phase, and are included
in the definition of "Initial Production Operation".
FEC personnel may design, program, and/or test certain additional portions of
the Software as mutually agreed to by RMI and FEC.
2. SYSTEM IMPLEMENTATION AND TRAINING
During the System Implementation and Training phase, RMI and FEC will perform
the following tasks:
- RMI, with assistance from FEC, will develop the "Implementation Plan"
which will specify the tasks and responsibilities necessary to implement
the Software in production operation at FEC.
- Based upon data and information supplied by FEC, RMI shall determine
the additional computer hardware, if any, (including any and all
communications hardware and software, systems software, physical
planning requirements, and similar items) required at FEC's location to
support processing for the Software as contemplated under this
Agreement. FEC shall be responsible for the acquisition, at FEC's
expense, and timely installation of said hardware in its offices in
Jacksonville, Florida.
- RMI shall assist FEC in determining the computer hardware (including
any and all communications hardware and software, systems software,
physical planning requirements, and similar items) required at FEC's
locations to support the Software as contemplated under this Agreement.
FEC shall be responsible for the acquisition, at FEC's expense, and
timely installation of said equipment in its offices.
- FEC, with the assistance of RMI, shall: (A) establish the data
communications required to operate the Software for the service
contemplated herein, (B) input the initial data records required to
establish the various master and other files required for processing
operation, and (C) verify the communications and data correctness and
completeness.
- RMI shall deliver the current version of the Software to FEC, and FEC
shall install said Software on computer systems at FEC's offices. RMI,
with assistance from FEC, shall verify the correctness and
B.1
<PAGE> 16
completeness of the current version of the Software.
- RMI will assist FEC in defining and building master files for the
Software.
- RMI will provide user training to be performed as mutually determined
by RMI and FEC, and assist FEC in the effort to execute the
Implementation Plan to implement the Software.
- FEC, with the assistance of RMI, shall perform such system testing and
parallel operation of the Software as is reasonably necessary to verify
that RMI is ready to begin the Ongoing Services specified in Section 2
hereof.
In case of any conflict between this Exhibit and the body of this Agreement as
it relates solely to the System Implementation Services description, this
Exhibit is controlling and not expanded by the body of the Agreement.
B.2
<PAGE> 17
EXHIBIT C
This Exhibit C is made a part of that certain AGREEMENT REGARDING SOFTWARE
LICENSING AND IMPLEMENTATION, AND ONGOING SUPPORT AND MANAGEMENT SERVICES
between Railcar Management, Inc. and Florida East Coast Industries, Inc dated
as of the 1st day of December, 1998.
MANAGEMENT SERVICES DESCRIPTION
In general, RMI will provide, using reasonable business efforts, ongoing
management, coordination and general oversight of FEC Information Technology
(I/T) requirements. This includes the following areas:
- Current FEC day-to-day I/T management issues
- Transportation System Software (RS/4000, ISS/4000 and AXIS)
- System Interfaces to Ramp System (OASIS), Digicon Train Control,
J. D. Edwards
- FEC I/T personnel (including coordination with RMI I/T personnel)
- FEC Data Center and general I/T infrastructure
- Budget management (annual preparation and ongoing management)
- Availability, back up and recovery plans
- Vendor management (all I/T related vendor/suppliers to FEC)
- Strategic I/T planning
- Management and coordination of the Y2K Software Test as herein defined.
Additionally, RMI shall manage and coordinate FEC's efforts relating to
FEC's overall year 2000 compliance, solely with respect to computer
hardware and software systems managed by RMI, by providing management
of identification, remediation and testing related to said compliance.
IN ADDITION TO ANY OTHER LIMITATION ON LIABILITY SET FORTH IN THE
AGREEMENT, THE PARTIES AGREE THAT THE MAXIMUM LIABILITY OF RMI WITH
RESPECT TO THE YEAR 2000 MATTERS DESCRIBED HEREIN, WHETHER ARISING IN
CONTRACT, TORT OR OTHERWISE, SHALL NOT EXCEED THE PORTION OF THE
PREVIOUSLY PAID MANAGEMENT SERVICES FEES ALLOCABLE TO YEAR 2000
MATTERS, WHICH THE PARTIES ACKNOWLEDGE AND AGREE SHALL EQUAL 10% OF
SAID FEES.
RMI will appoint a senior manager experienced in data center management,
information technology, RMI's Software products and their operation, personnel
management and budget preparation and management. This manager will be resident
in Jacksonville, Florida and the work location will be the offices at the
current FEC data center in Jacksonville, Florida.
Specifically, there are five major areas of work effort for RMI as it relates to
FEC's I/T requirements: (1) General Management, (2) Data Center Management, (3)
Applications Management and (4) I/T Personnel Management. (5)The fifth area is
participating in an 18 month project called FEC First. This project provides the
modification and implementation of the RMI Software and building the system
interfaces required.
C.1
<PAGE> 18
(1) GENERAL MANAGEMENT:
RMI will be responsible for the development of an annual I/T Operations Plan and
an I/T Budget Plan, and the reasonable business efforts adherence to both. This
will include monthly reporting on progress toward accomplishing the annual plans
as well as data center operations statistics, major accomplishments and issues.
This also includes progress reports on the FEC First Project.
(2) DATA CENTER MANAGEMENT:
RMI will be responsible, on a reasonable business efforts basis, for day-to-day
operations including establishing and documenting standard operating procedures,
production schedule management and physical facilities management. This also
includes hardware management, capacity planning, network management, systems
availability, and back-up and recovery plans. In addition, RMI will establish
the appropriate help desk operation and coordinate FEC/RMI data center(s)
management and manage all I/T vendor relationships.
(3) FEC APPLICATIONS MANAGEMENT:
RMI will perform a current applications inventory audit to determine: (i) the
applications that remain (peer systems) after the Software is implemented, (ii)
the applications replaced by the Software, and (iii) the applications that will
not be used. RMI will, on a reasonable business efforts basis, develop a plan
for each major peer system for a maintenance and enhancement schedule, and
personnel and budget requirements.
RMI will also manage, on a reasonable business efforts basis, ongoing
application development at FEC including the following tasks: translate FEC user
requests into I/T projects, quantify and prioritize the projects, gain FEC/RMI
concurrence and sequence projects into overall plans.
(4) I/T PERSONNEL MANAGEMENT:
This area will require a great deal of cooperation between FEC and RMI senior
management, as some personnel resources will remain FEC employees, some will be
independent contractors, as well as some vendor/suppliers will continue to have
direct agreements with FEC. These personnel will be taking day-to-day and
overall work direction from RMI.
RMI, on a reasonable business efforts basis, will direct and coordinate all
personnel-related resources related to I/T at FEC. RMI will combine the current
FEC personnel, contractors and RMI personnel into one logical work team for the
first year of the contract. During that year, RMI and FEC will determine the
appropriate placement/ownership (FEC or RMI) of the current and future
resources, be they FEC, RMI or contracting/consulting resources. This includes
the management of all vendors associated with FEC I/T such as ARCO, IBM, ICS,
OA, etc.
Notwithstanding anything in this Exhibit C or this Agreement to the contrary,
FEC agrees to indemnify and hold harmless, on an after-tax basis, RMI and its
agents and employees from and against any and all claims, liabilities, losses,
actions and expenses (including attorney fees) suffered or incurred by RMI
arising out of, or relating to, FEC's employees and independent contractors or
relationships between FEC and its employees and independent contractors
including, without limitation, payroll taxes, workers'
C.2
<PAGE> 19
compensation, unemployment, discrimination claims of any kind and wrongful
termination claims.
(5) FEC FIRST PROJECT MANAGEMENT:
This project involves the replacement of the current FEC transportation
management system with the RMI Software and connecting those products to the
OASIS ramp management products from Optimization Alternatives. RMI will oversee
the implementation of both. A great deal of teamwork and coordination will be
required from between RMI and FEC Management and all parties involved. RMI is
responsible for that coordination.
RMI, on a reasonable business efforts basis, will be responsible to understand
and document affected applications and develop an implementation plan for the
following areas; hardware requirements, data file conversions, application
staging plan, application testing and quality assurance, capacity and systems
testing and cut-over plan. In addition, RMI, on a reasonable business efforts
basis, will ensure all applications are provided for after the implementation as
well as the ongoing maintenance and enhancement schedule for the RMI and OA
products.
In case of any conflict between this Exhibit and the body of this Agreement as
it relates solely to the Management Services description, this Exhibit is
controlling and not expanded by the body of the Agreement.
C.3
<PAGE> 20
EXHIBIT D
This Exhibit D is made a part of that certain AGREEMENT REGARDING SOFTWARE
LICENSING AND IMPLEMENTATION, AND ONGOING SUPPORT AND MANAGEMENT SERVICES
between Railcar Management, Inc. and Florida East Coast Industries, Inc dated as
of the 1st day of December, 1998.
ADJUSTED TERMINATION FEE
The Adjusted Termination Fee shall be computed from the following table:
TERMINATION DATE AMOUNT
---------------- ------
On or before 1/1/00 $ 1,216,719
On or before 1/1/01 $ 978,957
On or before 1/1/02 $ 757,111
On or before 1/1/03 $ 518,304
On or before 11/30/03 $ 258,389
D.1
<PAGE> 21
EXHIBIT E
This Exhibit E is made a part of that certain AGREEMENT REGARDING SOFTWARE
LICENSING AND IMPLEMENTATION, AND ONGOING SUPPORT AND MANAGEMENT SERVICES
between Railcar Management, Inc. and Florida East Coast Industries, Inc dated as
of the 1st day of December, 1998.
IMPLEMENTATION SERVICES FEES
RMI will perform the System Enhancement and Interface Build services described
herein for a fixed fee of Eight Hundred Sixty-Two Thousand Five Hundred Dollars
($ 862,500) U.S. Dollars. RMI will invoice FEC, and FEC will pay RMI, in
accordance with the following schedule:
- $ 287,500 upon execution of this Agreement
- $ 287,500 on January 15, 1999
- $ 287,500 on "Initial Production Operation" (as defined in the Agreement)
RMI will perform the System Implementation and Training services described
herein for a fixed fee of Two Hundred Fifty Thousand Dollars ($250,000) U.S.
Dollars. RMI will invoice FEC, and FEC will pay RMI, in accordance with the
following schedule:
- $ 125,000 on February 15, 1999
- $ 125,000 upon completion of the services
Additionally, RMI and FEC hereby agree to the following incentive payments:
1. SYSTEM MODIFICATIONS. Should RMI complete development of all enhancements
specified in Exhibit F hereto (excluding the "OASIS Interface" modification)
and the Software is ready for Initial Production Operation (as defined
herein) on or before April 30, 1999, then FEC shall pay RMI an additional
incentive payment as follows:
If on or before April 15, 1999, $100,000, or
If on or before April 30, 1999, $50,000.
If said development is not complete on or before April 30, 1999, then RMI
shall pay FEC the sum of $1,000 per day (up to a maximum of sixty (60) days)
for each day beyond April 30, 1999 until said development is complete.
2. OASIS INTERFACE. Should RMI complete development of the "OASIS Interface"
modification specified in Exhibit F hereto and said enhancement is ready for
Initial Production Operation (as defined herein) on or before April 30,
1999, then FEC shall pay RMI an additional incentive payment as follows:
If on or before April 15, 1999, $100,000, or
If on or before April 30, 1999, $50,000.
If said development is not complete on or before April 30, 1999, then RMI
shall pay FEC the sum of $1,000 per day (up to a maximum of sixty (60) days)
for each day beyond April 30, 1999 until said development is complete.
E.1
<PAGE> 22
MANAGEMENT SERVICES FEES
The Management Services Fees are as follows:
- $134,750 per month from 12/1/98 through 1/31/00 (14 months)
- $122,500 per month from 2/1/00 through 11/30/03 (46 months)
E.2
<PAGE> 23
EXHIBIT F
This Exhibit F is made a part of that certain AGREEMENT REGARDING SOFTWARE
LICENSING AND IMPLEMENTATION, AND ONGOING SUPPORT AND MANAGEMENT SERVICES
between Railcar Management, Inc. and Florida East Coast Industries, Inc dated as
of the 1st day of December, 1998.
SOFTWARE ENHANCEMENT AND INTERFACE LIST
A. OASIS INTERFACE/INTERMODAL ENHANCEMENTS
Involves the over-all concept of replacing the RIMS interface with an OASIS
interface. Enhancements are:
1. TEMPORARY INTERFACE TO RIMS
RMI will build a temporary interface to the RIMS system. Given the extremely
short life of this requirement, the interface will contain only the minimal
functions necessary to run the ramp and railroad until the OASIS system is
installed.
2. RS/4000 WILL EXCHANGE RAMPING INFORMATION FROM OASIS
RMI will accept a ramping event from OASIS. This event would update inventory
and history in RS/4000.
3. SYNCHRONIZED INTERMODAL INVENTORY
This involves maintaining the inventory of trailers/containers, railcars and
chassis in both systems. RMI will be sending a track list of cars to OASIS for
ramping and de-ramping. Events will occur in OASIS that influence RS/4000's
inventory as well as movement history for reporting.
4. ENHANCED INTERMODAL INVENTORY REPORTS
Many reports currently in use in RIMS will be re-written in either OASIS or
RS/4000. Some of these include reports similar to the Online Inventory report,
customs reports, and equipment disposition reports.
5. BAD ORDER TRAILER/CONTAINER REPORTING
This enhancement will result in bad order information being maintained in both
OASIS and RS/4000. RS/4000 will pass the bad order information along with the
equipment as it moves over the railroad. The initial effort is to expand the
databases to record and pass this information. Automated notification for bad
order equipment to customers or the maintenance department is a separate phase.
6. ENHANCED CREDIT CHECKS/CREDIT HOLD
F.1
<PAGE> 24
This enhancement involves using the customer master to determine if a piece of
equipment is on hold due to credit problems. Checks will be made when
trailers/containers move both in and out gate. Equipment on hold will be marked
in inventory and a message written to a new "on hold" queue for further work.
7. RAIL/INTERMODAL NOTIFICATIONS
This area involves automatically faxing notifications to the consignee or
drayage firms based on certain events. These events would either be fed via
OASIS or car/train movements in RS/4000. The customer master will be expanded to
determine which type of notification via fax is required.
8. ENHANCED CHASSIS INVENTORY
OASIS provides a method of maintaining a chassis inventory. RS/4000 will pass
and receive chassis info in conjunction with OASIS.
9. SWITCHING/DETENTION INTERFACE FOR INTERMODAL
This interface involves passing information from OASIS up to RS/4000 for the
purpose of preparing detention and miscellaneous charges. A separate item is
listed in this document to cover the actual modifications necessary to handle
the billing in these new areas.
B. RAIL YARD/TRAIN OPERATION ENHANCEMENTS
1. ADDITIONAL SWITCHLISTS AND TRAINLISTS
Several new switchlists and/or minor changes to existing switchlists and
trainlists will be added to the base RS/4000 system
2. RAILCAR NOTIFICATION ENHANCEMENTS
This enhancement provides for automatically faxing notifications to the
consignee for arrivals or constructive placement, similar to the notifications
for intermodal. The customer master would possibly be expanded to determine
which type of autofax is required. Also needed for railcars.
3. DIGICON INTERFACE
FEC using a Train Control system that requires information from RS/4000. Digicon
will send RS/4000 a request for info and RS/4000 will in turn send back train
info such as tonnage, length, and number of cars and crew.
4. EDI TRAIN CHECK
This concept involves adding some checks to trains and consists so that
hazardous edits are more stringent. Units that fail the checks go to an error
queue.
F.2
<PAGE> 25
C. MISCELLANEOUS BILLING
1. ENHANCE MISCELLANEOUS BILLING TO HANDLE INTERMODAL BILLING
Involves enhancing the incidental billing module to bill for several new types
of charges generated by intermodal moves. OASIS will pass along information such
as flips, in-gate and out-gate must be passed to the RS/4000 incidental billing
module in such a manner that charges can be generated. In addition, the
movements will be passed in such a way that detention can be generated. These
charges include:
FEC chassis charges
Flips
Detention
Delays
Turn Arounds
Volume Billing
Container in yard billing
2. MODIFY DEMURRAGE BILLING FILE TO ENCOMPASS DETENTION
Involves enhancing the demurrage module to calculate detention for intermodal
equipment. Both the charges file and the master will be enhanced
3. ADD A "MISSING CHARGE QUEUE" FILE
Recognize movements that meet criteria for generating a charge. The charges go
to a suspense file for user review.
4. ADD JDE INTERFACE FOR MISCELLANEOUS BILLING
In conjunction with Freight Billing, the charges generated would be interfaced
to JD Edwards.
5. ENHANCE DEMURRAGE TO DO GROUP BILLING BY PARENT COMPANY
This enhancement will provide the ability to group demurrage invoices together
where multiple rail-served centers are owned by a parent company.
6. ENHANCE RS/4000 TO HANDLE FEC HAULAGE
Involves the over-all concept of replacing the Haulage billing module with a new
method of recognizing and calculating intermodal and rail haulage moves. In
summary, the new inbound blocking table would be used to automatically recognize
haulage moves. Haulage moves would then be invoiced using the Incidental Billing
module. TRAIN II would be modified to properly account for haulage interfaces
with the industry.
7. MODIFY INCIDENTAL CHARGE MASTER FOR HAULAGE
Expand the incidental charge master to account for items such as billing by
hitch and minimums for intermodal.
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<PAGE> 26
8. ADD NEW INTERMODAL EQUIPMENT FILE
Add a new master file to indicate equipment on a unit by car type (May be able
to use existing files and expand those). Used to keep track of hitches per car
type.
9. EXPAND INBOUND BLOCKING TABLE FOR HAULAGE RECOGNITION
Expand the new inbound blocking table to be able to recognize haulage moves.
(Make sure items like interchange road, station, and car type are included in
the decision making process). The inbound blocking table, once it recognizes the
move as haulage, would apply a haulage RWC.
10. TRAIN II INTERFACE
FEC currently uses a TRAIN II reporting file to determine how haulage should be
reported. We need a detailed study in this area to make sure we are handling
this correctly.
11. NEW HAULAGE BILLING REPORTS
A new haulage report will be added to the system to permit reporting to carriers
the haulage is being made for.
D. ISS ENHANCEMENTS
1. ENHANCED RATING
Several enhancements to the rating/auto-rating enhancements including:
1. Ability to auto-rate by price authority
2. Distinguish between through and child revenue rates.
3. Add ability to use new rate based on customer reaching a volume
threshold.
2. ENHANCE REVENUE PROTECTIONS
This involves enhancing both RS/4000 and ISS/4000 so that if certain key fields
are altered in RS/4000 that ISS/4000 is somehow flagged. (For example, weight, #
of cars, route, payment method, etc.) Also, if a waybill is cancelled or deleted
this information must come across.
3. ADD NEW REPORTS
Several new reports to be identified will be required to enable the users to
work with the system. Further analysis required. Also be able to separate
reports by queue so that, for example, error reports will print only for a
specific queue.
4. JDE INTERFACE
An interface to JDE from the freight billing system will be added. This includes
the ability to not print a freight bill but still extract it to JDE.
5. PARENT/CHILD RATING ENHANCEMENTS
ISS/4000 will be enhanced to recognize need for and the automatic creation of
child revenue
F.4
<PAGE> 27
waybills once the parent notification waybill has been generated or received and
rated. Also have need to estimate, for revenue posting to trial balance
purposes, any rated parent notification waybill w/o a revenue child.
6. ENHANCE MISCELLANEOUS BILLING IN ISS
ISS/4000 will be modified so that Miscellaneous Billing coming from CSXT will be
ignored.
7. ISS FILE CONVERSION FROM EXISTING SYSTEM
This area involves converting FEC's current ISS files into an ISS/4000 format to
facilitate transition to the new system. The design calls for capturing all
active waybills currently in settlement cycle at ISS Central. In addition
cancelled or null settled waybills less than one year old unless they have been
re-introduced and settled will be converted.
8. EDI ENHANCEMENTS
RS/4000 will be updated to handle the EDI messages currently in use on FEC that
is not supported by RS/4000. The additional EDI messages will be supported
either through RMI's EDI handler or through the EDI handler currently in use on
FEC.
E. MARKETING/SALES/CUSTOMER SERVICE ENHANCEMENTS
1. MODIFY CUSTOMER MASTER
Provide modifications to the Customer Master to incorporate new features
required for customer service enhancements. This includes the addition of a
"parent/child" relationship. Add sales person assigned to task.
2. ADD "ON HOLD QUEUE" SCREEN
Provide a new screen that shows all units "on hold" for any reason (customs, bad
order, no bill). This screen can also be used to look at cars with invalid
Hazmat Bills or No Bill loads.
3. TRACING
Provide capability to trace all moves, intermodal or rail. RS/4000 will maintain
intermodal events for combined inventory for customer service personnel.
4. AXIS REPORTS
AXIS will be enhanced to provide FEC specific reports for marketing and sales
personnel.
F.5
<PAGE> 28
EXHIBIT G
This Exhibit G is made a part of that certain AGREEMENT REGARDING SOFTWARE
LICENSING AND IMPLEMENTATION, AND ONGOING SUPPORT AND MANAGEMENT SERVICES
between Railcar Management, Inc. and Florida East Coast Industries, Inc dated as
of the 1st day of December, 1998.
SUPPORT SERVICES DESCRIPTION
Subject to the termination provisions herein, RMI shall provide the following
"Support Services":
(1) Software maintenance. RMI shall use its best efforts to maintain the
Software to operate in conformity with all descriptions and
specifications contained in any documentation or user's manuals
furnished therewith, including all descriptions and specifications for
all improved or modified versions of the Software generally released by
RMI to other users of the Software. RMI shall use its best efforts to
correct, as soon as is reasonably practicable, all errors in the
Software discovered by FEC. In addition, to the extent that the Software
uses such standards, RMI shall use its best efforts to maintain the
Software to reasonably comply on a timely basis with prevailing railroad
industry standards published by the Electronic Data Interchange
Association or any other organization recognized as having authority to
promulgate such standards. RMI shall not be obligated to correct errors
attributable to improper or incorrect usage or operation of the Software
(a) caused by FEC's misuse, alteration, modification or conversion of
the Software, or (b) arising from hardware related problems or third
party software problems.
(2) Changes and New Releases. RMI will provide new releases of the
Software (including documentation updates) on a regular, ongoing basis
as commonly released by RMI to other users of the Software. Special
coding and manual updates for changes made between releases will be
distributed by RMI as RMI reasonably determines is needed.
(3) Telephone Support. RMI will provide reasonable telephone support to
FEC. The term "reasonable telephone support" shall not include efforts
to remedy defects in Software, which efforts shall be provided by RMI
without limitation as to time and at RMI's sole cost. The term
"reasonable telephone support" shall mean the answering of questions
requiring a reasonable amount of time, generally during the same
telephone call, and limited in the sole discretion of RMI to five (5)
hours per month (noncumulative) for all such telephone calls, after
which such services may be billed at RMI's standard hourly service rate
as shown in Exhibit E. Telephone support will be available Monday
through Friday, holidays excluded, from 8:00 A.M. to 6:00 P.M. Eastern
Time. RMI shall maintain a customer service representative on call for
emergency calls outside the normal service hours. All long distance
telephone charges will be borne by FEC.
(4) Enhancements. Enhancements to the Software will be made available
to FEC at then current market prices (as determined by reference to
amounts paid by similar users on similar computer systems). For purposes
of the preceding sentence, "enhancements" to the Software shall mean
future new software modules and major add-on features not part of the
Software as originally installed, and new capabilities or software
programs which are generally released as new or different from the
Software as originally installed; enhancements shall refer to modules or
features that provide new functionality rather than
G.1
<PAGE> 29
alterations to methodology of existing functionality.
(5) On-Site Support. Subject to availability of RMI personnel, on-site
support services shall be provided by RMI personnel at RMI's standard
per diem rates as shown in Exhibit E plus reimbursement of out-of-pocket
expenses.
(6) Custom Software. Custom software changes are not included as part of
the Support Services described herein. A "custom" software change for
purposes of this Agreement is any change or added function which is not
useful to the general marketplace or is not part of the current Software
version and release.
In case of any conflict between this Exhibit and the body of this Agreement as
it relates solely to the Support Services description, this Exhibit is
controlling and not expanded by the body of the Agreement.
G.2
<PAGE> 1
21. Listing of parent and subsidiaries
Parent - Florida East Coast Industries, Inc.
Subsidiaries - Florida East Coast Railway Company
----------------------------------
Florida East Coast Deliveries, Inc.
Railroad Concrete Crosstie Corporation
Railroad Track Construction Company
Gran Central Corporation
------------------------
Dade County Land Holding Company, Inc.
International Transit, Inc.
---------------------------
<PAGE> 1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each of the undersigned Directors of Florida
East Coast Industries, Inc., a Florida corporation ("Corporation"), which is
about to file with the Securities and Exchange Commission, Washington, D.C.
20549, under the provisions of the Securities Exchange Act of 1934, as amended,
an Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
hereby constitutes and appoints R.W. Anestis and T.N. Smith as his true and
lawful attorneys-in-fact and agent, and each of them with full power to act,
without the other in his stead, in any and all capacities, to sign the 1998
Annual Report of Florida East Coast Industries, Inc., on Form 10-K and to file
on behalf of the Corporation such Annual Report and amendments with all exhibits
thereto, and any and all other information and documents in connection
therewith, with the Securities and Exchange Commission, hereby granting unto
said attorneys-in-fact and agent, and each of them, full power and authority to
do and perform any and all acts and things requisite and ratifying and
confirming all that each said attorneys-in-fact and agent or any one of them,
may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands on the date
indicated below:
/s/ R.W. Anestis /s/ T.N. Smith
- ------------------------------------- ----------------------------------------
R.W. Anestis, Chairman, President, T.N. Smith, Vice President and Secretary
Chief Executive Officer and Director
/s/ J.C. Belin /s/ R.S. Ellwood
- ------------------------------------- ----------------------------------------
J.C. Belin, Director R.S. Ellwood, Director
/s/ J.N. Fairbanks /s/ A.C. Harper
- ------------------------------------- ----------------------------------------
J.N. Fairbanks, Director A.C. Harper, Director
/s/ A. Henriques /s/ J.J. Parrish, III
- ------------------------------------- ----------------------------------------
A. Henriques, Director J.J. Parrish, III, Director
/s/ P.S. Rummell /s/ W.L. Thornton
- ------------------------------------- ----------------------------------------
P.S. Rummell, Director W.L. Thornton, Director
Date: March 15, 1999
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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0
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