Back to GetFilings.com

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission File No. 001-08728

FLORIDA EAST COAST INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act:

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, 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]

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

Based on the closing prices on June 30, 2002, the aggregate market values of the Class A and Class B common stock held by non-affiliates of the Registrant were approximately $377 million and $181 million, respectively, and $558 million in total.

The number of shares of the Registrant’s Class A common stock, no par value, outstanding is 17,035,511 shares and 799,084 shares of treasury stock, and the number of Class B shares, no par value, outstanding is 19,609,216 shares at March 6, 2003, with no shares of treasury stock.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 28, 2003 (the Proxy Statement) are incorporated in Part III of this Report by reference.

Forward-Looking Statements

This Form 10-K, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include the Company’s present expectations or beliefs concerning future events. The Company cautions that such statements are necessarily based on certain assumptions, which are subject to risks and uncertainties that could cause actual results to materially differ from those contained in these forward-looking statements. Such forward-looking statements may include, without limitation, statements that the Company does not expect that lawsuits, environmental costs, commitments, including future contractual obligations, contingent liabilities, financing availability, labor negotiations or other matters will have a material adverse effect on its consolidated financial condition, statements concerning future capital needs and sources of such capital funding, future growth potential of the Company’s lines of business, performance of the Company’s product offerings, other similar expressions concerning matters that are not historical facts, and projections relating to the Company’s financial results. The Company cautions that such statements are necessarily based on certain assumptions, which are subject to risks and uncertainties that could cause actual results to materially differ from those contained in these forward-looking statements. Important factors that could cause such differences include, but are not limited to, the changing general economic conditions (particularly in the state of Florida) as they relate to economically sensitive products in freight service and building rental activities; ability to manage through economic recessions or downturns in customer’s business cycles; industry competition; possible future changes in the Company’s structure, lines of business, business and investment strategies, and related implementation; legislative or regulatory changes; technological changes; volatility of fuel prices (including volatility caused by military actions); changes in depreciation rates resulting from future railway right-of-way and equipment life studies; the ability of the Company to complete its financing plans, settle future contractual obligations as estimated in time and amount and conclude labor negotiations in a satisfactory way; changes in insurance markets, including increases in insurance premiums and deductibles; the availability and costs of attracting and retaining qualified independent third party contractors; liability for environmental remediation and changes in environmental laws and regulations; the ultimate outcome of environmental investigations or proceedings and other types of claims and litigation; natural events such as weather conditions, floods, earthquakes and forest fires; discretionary government decisions affecting the use of land and delays resulting from weather conditions and other natural occurrences that may affect construction or cause damage to assets; the ability of the buyers to terminate contracts to purchase real estate from the Company prior to the expiration of inspection periods; failure or inability of third parties to fulfill their commitments or to perform their obligations under agreements; costs and availability of land and construction materials; buyers’ ability to close transactions; the Company’s future taxable income and other factors that may affect the availability and timing of utilization of the Company’s deferred tax assets; uncertainties, changes or litigation related to tax laws, regulations and the application thereof that could limit the tax benefits of the EPIK sale or of other possible transactions involving the Company, including the availability of the federal tax refund expected to be claimed by the Company related to the EPIK sale which is dependent in part on the Company’s ability to effectively carry back net operating losses against prior net income pursuant to recent tax law changes; and other risks inherent in the real estate and other business of the Company.

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

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

PART I

As used throughout this Form 10-K Annual Report, the terms “FECI” the “Company” and “Registrant” mean Florida East Coast Industries, Inc. and its consolidated subsidiaries.

ITEM 1.     BUSINESS

General

FECI is a holding company incorporated under the laws of the state of Florida in 1983, engaged, through two wholly owned subsidiaries, in the rail and real estate businesses. The Company’s rail subsidiary, Florida East Coast Railway, L.L.C. (FECR or Railway), connects many of the major population centers and port facilities of Florida’s east coast, and provides efficient service for its customers through multiple competitive connections to the rest of North America. The Company, primarily through its real estate subsidiary, Flagler Development Company (Flagler), is engaged in the acquisition, development, ownership, management, leasing and sale of commercial real estate. Flagler has extensive real estate holdings in Florida. During 2002, the Company sold its telecommunications subsidiary, EPIK Communications Incorporated (EPIK). Also, the Company discontinued the operations of its trucking subsidiary, Florida Express Carriers, Inc. (FLX). Certain drayage operations with moves to and from FECR’s rail facilities previously managed by FLX are now managed by FECR.

Financial information about FECI’s operating segments is contained in Items 7 and 8 of this Annual Report on Form 10-K.

Railway

General

FECR operates a Class II railroad along 351 miles of mainline track between Jacksonville and Miami, Florida, serving some of the most densely populated areas of the state. FECR also owns and operates approximately 276 miles of branch, switching and other secondary track and 159 miles of yard track, all wholly within Florida. FECR has the only coastal right-of-way between Jacksonville and Miami and is the exclusive rail-service provider to the Port of Palm Beach, Port Everglades (Fort Lauderdale) and the Port of Miami.

FECR serves approximately 850 carload and intermodal customers combined. The following table summarizes the Company’s freight shipments by commodity group and as a percentage of rail freight revenues:

TRAFFIC
Year Ended December 31
(dollars and units in thousands)

FECR connects with Norfolk Southern Railway Company (NS) and with CSX Transportation, Inc. (CSXT) at Jacksonville and is able to offer its customers competitive rail connections to the rest of North America. During 2002, approximately 42% of FECR’s freight revenues were attributable to traffic that originated on other railroads; approximately 7% was attributable to traffic that originated on FECR but bound for other destinations, and 51% was attributable to traffic that both originated and terminated on FECR’s system (local traffic). Haulage

1

operating agreements with NS and South Central Florida Express, Inc. (SCFE) generated 9% of FECR’s revenue in 2002. With the exception of haulage services provided for SCFE described below, FECR does not receive traffic from one railroad to be passed over its track to another railroad.

FECR handles rail cars for SCFE between Fort Pierce and Jacksonville for interchange with CSXT or NS. SCFE is a short-line railroad operating under a twenty-year Trackage Rights Agreement over a branch line owned by FECR extending from Fort Pierce to Lake Harbor. A concurrent Car Haulage Agreement is in effect between Fort Pierce and Jacksonville.

FECR also handles certain types of traffic for NS from Jacksonville to Miami under a Haulage Agreement, whereby FECR receives specified revenues for each unit transported. In late 2001, FECR began offering a service that is known as the “Hurricane Train.” This extends FECR’s commercial reach into the Atlanta region. This service is operated pursuant to an agreement with NS.

FECR owns approximately 1,200 acres of ancillary properties within the state of Florida. The Company continues to evaluate these holdings and, when appropriate, engages in strategic activities (sales, development, etc.) that will create value for the Company. Sales of these properties are reported in other sales of the realty segment. The Company also actively manages its 100’ wide railroad right-of-way to generate miscellaneous rents and right-of-way lease profits, which are not reported as part of the railway segment but as other income. FECR leases its right-of-way to various tenants for uses, including telecommunications companies’ fiber optics systems pursuant to long-term leases. These rents also are included in other income. In addition, FECR generates revenues from the grant of licenses and leases to use railroad property and rights-of-way for outdoor advertising, parking lots and lateral crossings of wires and pipes by municipalities, and utility and telecommunications companies. These miscellaneous rents are included in other income.

Customers

One customer, Rinker Materials Corporation, generated approximately 19% of the Company’s rail revenues in 2002. FECR’s top five customers accounted for approximately 46% of 2002 freight revenues. The Company’s business could be adversely affected if its large customers suffered significant reductions in their businesses or reduced shipments of commodities transported by FECR.

Competition

Although the Company’s railroad is often the only rail carrier directly serving its customers, the Company’s railroad competes directly with other railroads that could potentially deliver freight to the Company’s markets and customers via different routes and use of multiple modes of transportation such as transload services. FECR’s primary rail competition is CSXT. FECR also competes directly with other modes of transportation, including motor carriers, ships and barges. Competition is based primarily upon the rate charged and the transit time required, as well as the quality and reliability of the service provided. Any improvement in the cost or quality of these alternate modes of transportation could increase competition from these other modes of transportation and adversely affect the Company’s business.

There is continuing strong competition among rail, water and highway carriers. Price is usually only one factor of importance as shippers and receivers choose a transport mode and a specific transportation company with which to do business. Inventory carrying costs, service reliability, ease of handling, and the desire to avoid loss and damage during transit are increasingly important considerations, especially for higher valued finished goods, machinery and consumer products.

Regulation

FECR is subject to regulation by the Surface Transportation Board (STB) of the U.S. Department of Transportation (USDOT). The STB has jurisdiction over some rates, conditions of service and the extension or abandonment of rail lines. The STB also has jurisdiction over the consolidation, merger or acquisition of control of and by rail common carriers. The USDOT, through the Federal Railroad Administration, regulates the safety of railroad operations, including certain track and mechanical equipment standards and certain human factor issues. The USDOT and OSHA have jurisdiction over a number of safety and health aspects of rail operations, including the movement of hazardous materials.

2

Rates in the rail industry were substantially deregulated by The Staggers Act of 1980 and subsequent legislation and regulation. The Staggers Act encouraged and enabled rail carriers to innovate and compete for business, thereby contributing to the economic health of the nation and to the revitalization of the industry. Accordingly, the nation’s rail carriers can be expected to vigorously oppose efforts to reimpose such economic regulation.

The Company’s railway operations are also subject to extensive environmental laws and regulations, including the federal Clean Air Act (CERCLA), and various other environmental laws and regulations. Violations of various statutory and regulatory programs can result in civil penalties, remediation expenses, natural resource damage claims, potential injunctions, cease and desist orders and criminal penalties. Some environmental statutes impose strict liability, rendering a person liable for environmental damage without regard to negligence or fault on the part of such person. In addition, the Company’s present and historic ownership and operation of real property, including rail yards, in connection with its transportation operations involve the storage, use or disposal of hazardous substances that may have contaminated and may in the future contaminate the environment. The Company may also be liable for the costs of cleaning any site at which it has disposed (intentionally or unintentionally) of hazardous substances by virtue of, for example, an accident, derailment or leak, or to which it has transported hazardous substances it generated, such as waste oil (see Item 3. Legal Proceedings).

Risks

Market Risks. FECR’s freight traffic is generally affected by overall economic conditions, particularly those in the state of Florida, and with respect to intermodal traffic, international economies, including the Caribbean and South America economies. Also, the level of state and federal highway and other public projects can affect the amount of aggregate loadings FECR’s customers request. There can be no assurance that the overall economy will rebound quickly from any slowdowns or that Florida’s will continue to experience higher than the national average growth.

Fuel Price Risks. FECR’s operations require significant amounts of diesel fuel. Prices of diesel fuel can vary greatly. Increases in fuel price may be passed along to customers through a “fuel surcharge” or otherwise, though often with delayed effect. However, there are no assurances that these surcharges will cover the entire fuel price increase for a given period, or that competitive market conditions will effectively allow freight providers the ability to pass along this cost.

Interchange Carrier Risks. Approximately 42% of FECR’s traffic is interchanged from CSXT, SCFE or NS. The ability of these carriers (CSXT and NS) to market and service southbound traffic into the Florida market will affect the amount of traffic FECR moves.

Economic Risks Associated with Rail Car Utilization. FECR earns per diem rents on the use of its car and intermodal fleet of equipment based on other railroads’ or transportation service providers’ use of the equipment. Future significant downturns in the overall U.S. economy or efforts by other railroads or transportation providers to improve equipment utilization practices could affect the utilization of and per diem rents for this equipment from other railroads and transportation service providers. Also, FECR, through operating agreements, currently leases approximately 1,800 rail cars from Greenbrier Leasing Corporation and other entities, with lease lengths of up to five to ten years, cancelable every three years. The lease terms call for FECR to be billed an hourly rate based upon the length of time the car is on-line versus off-line. As a car goes off-line, a revenue sharing arrangement goes into effect whereby Greenbrier and FECR apportion the revenue based upon the length of time the car is off-line.

Trucking

During the third quarter of 2002, the Company adopted a plan to discontinue its regional long-haul trucking operations. The Company largely completed its operational shut down and disposition activities for the trucking operation during the fourth quarter of 2002. At December 31, 2002, the Company was working to wind down the remaining assets and liabilities of FLX and estimates the completion of such during the first quarter of 2003. Based on the latest information available, which could be subject to change during the wind down, management believes these assets and liabilities to be stated at their net realizable value.

The Company reported the results of the trucking operations and the estimated disposition loss as discontinued operations under the provisions of SFAS 144, and all periods presented have been restated accordingly.

3

Real Estate

General

FECI owns 100% of the stock of Flagler. Flagler is engaged in the acquisition, development, ownership, leasing, management and sale of real estate in the state of Florida.

Flagler owns and operates office and industrial properties in Florida. Flagler owned and operated 55 buildings as of December 31, 2002, with approximately 5.9 million rentable sq. ft. A schedule of these buildings is included in Part 1, Item 2 of this Report. At December 31, 2002, Flagler’s operating properties were 83% occupied. Flagler’s operating properties consist primarily of Class “A” office space and high-quality commercial/industrial facilities constructed after 1992. Flagler held five operating buildings, with 735,000 rentable sq. ft. of industrial and office space, in partnership (50/50) with Duke Realty Corporation at December 31, 2002. During January 2003, the Company purchased Duke Realty’s 50% interest in three Beacon Station warehouse buildings. At December 31, 2002, Flagler also owned and operated a 101,000 rentable sq. ft. commercial office building, accounted for as a discontinued operation, expected to be disposed of during 2003.

At December 31, 2002, Flagler had 1.1 million sq. ft. of properties in various phases of development, consisting of 181,000 rentable sq. ft. in lease-up, 290,000 rentable sq. ft. under construction, and 591,000 rentable sq. ft. in the pre-development phase, primarily located in the Orlando and Miami-Dade areas. For those projects in the pre-development phase, Flagler has invested in engineering, architectural planning and design.

Flagler owns 1,026 acres of unimproved land with entitlements for the construction of 14.7 million sq. ft. of additional office, industrial and commercial space. Additionally, Flagler owns 6,403 acres of unimproved, unentitled land or land with limited entitlements, primarily situated adjacent to FECR’s rights-of-way along the eastern coast of Florida, available for potential future development or disposition.

Projects under Development

The primary geographic focus of Flagler’s development activities has been in the Miami, Fort Lauderdale, Jacksonville and Orlando markets, all of which are active with local, regional and national development companies competing for land and tenants. Projects under development include:

	•		Gran Park at SouthPark – Orlando, FL: Located near the intersection of John Young Parkway and Beeline Expressway. Six buildings, totaling 836,000 sq. ft., have been completed. The park has entitlements for an additional 163,000 sq. ft. of office space. Pre-development is currently underway for a seventh building totaling 93,400 sq. ft.
			In 1999, based on the success of SouthPark, Flagler acquired an additional 90 acres adjacent to its existing park. The land has entitlements for 1.8 million sq. ft. of office space and 98,000 sq. ft. of commercial space. Construction is currently underway for a 60,000 sq. ft. build-to-suit (or single tenant) office building for Corinthian Colleges, Inc., scheduled for delivery in late 2003. The remainder of this property is currently in the master planning phase and initial site work began in 2002.
	•		Beacon Station – Miami, FL: Located northwest of Miami International Airport. Twenty-seven buildings, including one building held for sale, totaling 2.8 million sq. ft., have been completed and are owned by Flagler at December 31, 2002. The park has entitlements for an additional 4.4 million rentable sq. ft. of office, industrial and commercial space. Construction is currently underway for a 230,000 sq. ft. build-to-suit office building for Ryder Logistics, and pre-development is currently underway for two projects totaling 361,000 sq. ft. Flagler also held 540,000 rentable sq. ft. of developed industrial space at Beacon Station in partnership (50/50) with Duke Realty Corporation at December 31, 2002. During January 2003, the Company purchased Duke Realty’s 50% interest in the partnership. Flagler owns approximately 535 acres adjacent to this park for future development.
	•		Beacon Pointe at Weston – Weston, FL: Located in west Broward County at I-75 in Weston. In 1998, Flagler purchased 30 acres with entitlements for 400,000 sq. ft. of office space. Flagler has developed this project in partnership (50/50) with Duke Realty Corporation. Two office buildings, totaling 195,000 rentable sq. ft., have been completed. A third 97,000 sq. ft. office building is currently in the lease-up period. The remaining developable property within the park has entitlements for an additional 108,000 sq. ft. of office space.

4

	•		Deerwood North, formerly known as Gran Park at Deerwood – Jacksonville, FL: Located at the intersection of Southside Boulevard and Touchton Road, north of J. Turner Butler Boulevard. Deerwood North consists of two office buildings, totaling 270,000 rentable sq. ft., and entitlements for an additional 235,000 rentable sq. ft. of office space.
	•		Flagler Center, formerly known as Gran Park at Jacksonville – Jacksonville, FL: Located in south Jacksonville at the intersection of Old St. Augustine Road and I-95. Seven buildings, totaling 770,000 rentable sq. ft. within the park, are owned and operated by Flagler. The park has entitlements for an additional 4.2 million sq. ft. of office, industrial and commercial space on approximately 476 undeveloped usable acres. Construction is underway for an interchange at Old St. Augustine Road and I-95, which should provide more efficient access to the park, with completion of the interchange anticipated in 2004. Construction is also underway for the expansion of Old St. Augustine Road to four lanes, which should increase traffic flow near the park, with completion of the road widening anticipated for 2003.

The following is a summary of the Company’s development activity as of December 31, 2002:

Customers

Flagler leases to approximately 230 tenants in a variety of industries, including financial services, distribution, hospitality services and import/export. Flagler’s largest commercial tenant occupied approximately 3% of leased space at December 31, 2002.

Competition

The real estate industry is generally characterized by significant competition. If market conditions reflect that sales of properties would provide appropriate returns, the Company may decide to sell certain of its developed properties. There are numerous developers and real estate companies that compete with the Company in seeking properties for acquisition, resources for development and prospective tenants. Competition may adversely affect the Company’s ability to attract and retain tenants, achieve favorable rental rates and control expenses of operation. The Company may compete with entities having greater financial and other resources. There can be no assurance that the existence of such competition may not have a material adverse effect on the Company’s business, operations or cash flows.

Regulation

Development of real property in Florida entails an extensive approval process involving overlapping regulatory jurisdictions. Real estate projects must generally comply with the provisions of the Local Government Comprehensive Planning and Land Development Regulation Act (Growth Management Act). In addition, development projects that exceed certain specified regulatory thresholds require approval of a comprehensive Development of Regional Impact (DRI) application. Compliance with the Growth Management Act and the DRI process is usually lengthy and may have a material adverse effect on the Company’s real estate development activities.

5

The Growth Management Act requires counties and cities to adopt comprehensive plans guiding and controlling future real property development in their respective jurisdictions. After a local government adopts its comprehensive plan, all development orders and development permits it issues must be consistent with the plan. Each such plan must address such topics as future land use, capital improvements, traffic circulation, sanitation, sewerage, potable water, drainage and solid wastes. The local government’s comprehensive plans must also establish “levels of service” with respect to certain specified public facilities and services to residents. Local governments are prohibited from issuing development orders or permits if facilities and services are not operating at established levels of service, or if the projects for which permits are requested will reduce the level of service for public facilities below the level of service established in the local government’s comprehensive plan. If the proposed development would reduce the established level of services below the level set by the plan, the development order will require that the developer, at the outset of the project, either sufficiently improve the services to meet the required level, or provide financial assurances that the additional services will be provided as the project progresses.

The Growth Management Act is, in some instances, significantly affecting the ability of developers to obtain local government approval in Florida. In many areas, infrastructure funding has not kept pace with growth. As a result, substandard facilities and services are delaying or preventing the issuance of permits. The Growth Management Act could adversely affect the ability of developers in Florida, including Flagler, to develop real estate projects.

Continued growth and development of properties in Florida have prompted efforts to pass legislation to curtail or more intensely regulate such development and to amend the Growth Management Act.

The DRI review process includes an evaluation of the project’s impact on the environment, infrastructure and government services, and requires the involvement of numerous federal, state and local governmental, zoning and community development agencies and authorities. Local government approval of any DRI is subject to appeal to the Governor and Cabinet by the Florida Department of Community Affairs, and adverse decisions by the Governor or Cabinet are subject to judicial appeal.

In addition, a substantial portion of the developable property in Florida, including certain of the Company’s property, is raw land located in areas where its development may affect the natural habitats of various endangered or protected wildlife species, or in sensitive environmental areas such as wetlands and coastal areas, which are subject to extensive and evolving federal, state and local regulation. Accordingly, federal, state and local wildlife protection, zoning and land use restrictions, as well as community development requirements, may become increasingly restrictive and, as a result, significant limitations may be imposed on the Company’s ability to develop its real estate holdings in accordance with their most profitable uses.

The Company’s ownership and development of real estate are subject to extensive and changing federal, state and local environmental laws, the provisions and enforcement of which may become more stringent in the future. Pursuant to those laws, the owner or operator of real estate may be required to perform remediation regardless of the cause of the contamination. The sale or development of properties may also be restricted due to environmental concerns, the protection of endangered species, or the protection of wetlands. In addition, violations of various statutory and regulatory programs can result in civil penalties, remediation expenses, natural resource damages, potential injunctions, cease and desist orders and criminal penalties. The Company is not presently aware of any material contamination, or any material adverse environmental development issues relating to its real estate operations. However, there can be no assurance that environmental issues will not arise in the future relating to the real estate operations.

Risks

Market Risks. There can be no assurance that the U.S. economy in general, or the economy of the Southeast and Florida in particular, will not continue to be affected by the recession or recover as expected in the future. Certain significant expenditures associated with the development, management and servicing of real estate (such as real estate taxes, maintenance costs and debt payments, if any) generally could not be reduced even if an economic downturn caused less revenues to be generated from the Company’s properties.

Development Risks. The Company’s real estate development activities require significant capital expenditures. The Company has obtained funds for its capital expenditures and operating activities through cash flow from operations, property sales and financings. There can be no assurances that funds available from cash flow, property sales and financings will continue to 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

6

projects, may 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, not economically feasible.

Joint Venture Risks. The Company has entered into certain joint venture relationships and may initiate future joint venture projects as part of its overall development strategy. A joint venture may involve special risks associated with the possibility that (i) the venture partner at any time may have economic or business interests or goals that are inconsistent with those of the Company, (ii) the venture partner may take actions contrary to the instructions, requests or interests of the Company, or contrary to the Company’s policies or objectives with respect to its real estate investments, (iii) the venture partner could experience financial difficulties, or (iv) the joint venture properties may require deficit or capital funding as the result of unexpected future events (e.g., economic slowdown, etc.). Actions by a venture partner 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, a joint venture partner may dedicate time and resources to existing commitments and responsibilities outside of the joint venture activities.

Telecommunications

FECI, during the fourth quarter of 2002, completed the sale of its wholly owned telecommunications subsidiary, EPIK, to Odyssey Telecorp, Inc. (Odyssey), a privately held holding company specializing in telecom network assets. FECI had previously announced its decision to exit the telecommunications business.

The consideration included a cash payment of $500,000, a potential earnout payment of up to $30.0 million based on EPIK’s future performance, and a warrant to acquire 15% of the outstanding stock of Odyssey. In addition, FECI provided Odyssey with up to $17.0 million for Odyssey’s use in connection with EPIK, which FECI recorded as a transaction expense. FECI has accounted for the sale of EPIK and its operations as a discontinued operation. FECI wrote down the entire book value of EPIK’s long-lived assets at September 30, 2002, resulting in a carrying value for EPIK of negative $39.1 million. Consequently, FECI recorded a modest accounting gain ($10.0 million after tax) on the sale, even though it has assigned only nominal carrying value to the earnout and warrants. The Company is a guarantor of certain obligations of EPIK relating to its lease of office space in Orlando and certain severance costs associated with the termination of executives. Primarily as a result of the sale of EPIK, the Company expects to claim a cash income tax refund of approximately $75 million in its 2002 federal tax return and to carry forward tax-deductible losses that are expected to provide an additional $50 million of federal and state tax benefits in future years. However, there can be no guarantee that or when the expected tax refund will be received or benefits realized for tax carry forward losses.

Financial Information about FECI’s Segments

The Company had total segment operating revenues of $301.5 million and an operating profit of $89.6 million in 2002. (See Note 8. Segment Information of the Financial Statements and Supplementary Data set forth in Part II, Item 8 of this Report on Form 10-K). The Company’s total railroad operating revenues were $166.8 million and real estate revenues were $134.9 million. Segment operating profit was $42.1 million for the railroad and $59.1 million for real estate. During 2002, the Company sold EPIK and discontinued FLX’s trucking operations. The Financial Statements have been restated to reflect these transactions. The financial results of these two businesses, along with certain buildings sold or held for sale, are accounted for and shown in discontinued operations, which includes a loss from operation of discontinued operations of $168.6 million and a gain on disposition of discontinued operations of $10.8 million.

Sources and Availability of Raw Materials

All raw materials FECR and Flagler use, including fuel, track materials and building construction materials, are available in adequate supply from multiple sources.

Seasonality

FECR’s rail traffic is relatively stable throughout the year with higher volumes ordinarily occurring during the second and last quarters of the year. The Company’s real estate business is not generally seasonal.

7

Working Capital

At December 31, 2002, the Company’s current assets exceeded current liabilities by $162.9 million. The Company had a $300 million revolving credit facility at December 31, 2002 (see Note 15 of the Financial Statements) whose size was reduced to $200 million in early 2003. At December 31, 2002, $53 million was drawn on the facility (see also Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations). At December 31, 2002, the Company had cash and cash equivalent balances of $83.9 million, including $70.4 million then designated for possible use to purchase real property via tax-free exchange.

Employees

FECI employed 24 people; FECR employed 775, and Flagler had 35 employees as of December 31, 2002. During 2003, certain additional positions within Flagler are expected to be filled to facilitate the strategic direction and transactions of the real estate operation. Approximately 595 of FECR’s employees are represented by the labor unions: United Transportation Union (UTU) (train and engine service employees), Brotherhood of Maintenance of Way Employees (BMWE) (track maintenance and structures) and International Brotherhood of Electrical Workers (IBEW) (seven crafts, including agents and clerical, carmen, maintenance of equipment foremen, roadway shop, signals and communications, train dispatchers, boilermakers, electricians, machinists, sheetmetal workers and shop laborers).

FECR is a party to Collective Bargaining Agreements (CBAs) with these three national labor unions. Within the next twelve months, each of these agreements becomes amendable. In March 2003, the CBAs between the IBEW and the Company covering signals and communications and machinists, sheetmetal, etc. crafts, which includes approximately 92 employees, become amendable. On December 1, 2003, the Train and Engine and Yardmaster Agreements are amendable. The UTU is the representative body for these crafts, with approximately 250 employees represented. On December 31, 2003, five additional Agreements become amendable covering clerks, dispatchers, roadway shop, carmen and foremen, representing a total of 137 employees. These crafts are also represented by the IBEW. In February 2004, the CBA between the BMWE and the Company covering approximately 130 employees becomes amendable.

Company Web Address

The Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available through the Company’s website (www.feci.com) as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission and are available free of charge upon request from the Company.

ITEM 2. PROPERTIES

The Company’s material physical properties at December 31, 2002 are listed below and are grouped by industry segment.

Railway

FECR owns three connected four-story buildings in St. Augustine, Florida, which are used by FECI and FECR as corporate headquarters. FECR also owns a railroad right-of-way, generally 100 feet wide, along the east coast of Florida extending for 351 miles used for its railroad operations and related communications. FECR also owns and operates approximately 276 miles of branch, switching and other secondary track, and 159 miles of yard track, various rail car marshalling yards, trailer/container and automobile loading and unloading facilities, signaling system facilities, and a number of operating offices, shops and service house buildings.

On March 2, 1998, FECR entered into a Trackage Agreement with SCFE providing for, among other things, the exclusive operation and maintenance of 56 miles of branch mainline.

Tracks, their bridges and the fixed property and signal improvements supporting the transportation effort are maintained to a level equaling the needs of service. The mainline and its passing tracks are, in general, constructed of 132-pound per yard continuous welded rail supported on concrete crossties. These facilities

8

provide a reliable infrastructure for the conduct of a transportation service suited to the business demands of the railway’s customers, to include unrestricted movement of double-stacked containers, tri-level automobiles and heavier axle rail cars.

The branch mainlines, way switching and yard tracks are, for the most part, of 115-pound per yard materials supported by wood ties.

FECR owns or leases 74 diesel electric locomotives; 2,287 freight cars; 669 trailers for highway revenue service; numerous pieces of rail-mounted and non-rail-mounted work equipment, and numerous automobiles used in maintenance and transportation operations. Generally, FECR’s equipment is in good physical condition, considering its years of service and operating utilization.

FECR currently leases approximately 1,800 rail cars from Greenbrier Leasing Corporation and other entities, with lease lengths of up to five to ten years, cancelable every three years. The lease terms call for FECR to be billed an hourly rate based upon the length of time the car is on-line versus off-line. As a car goes off-line, a revenue sharing arrangement goes into effect whereby Greenbrier and FECR apportion the revenue based upon the length of time the car is off-line.

FECR also owns lands outside of the right-of-way. These holdings include certain properties in downtown Miami and large rail yards in Jacksonville, Fort Pierce and Miami. Some of FECR’s land portfolio includes the following:

     Right-of-Way Corridors

Several corridors, upon which rail service is not currently provided, remain under control of FECR. The corridor in Volusia and Brevard Counties is approximately 25 miles in length and contains 331 acres.

Also, a corridor extends from Edgewater to Maytown connecting to the Aurantia to Benson Junction corridor. This corridor is approximately 16 miles in length and contains 191 acres.

A corridor extends southerly for approximately six miles from the Miami International Airport to a major metropolitan mall in Miami-Dade County. The northerly portion of this corridor remains in rail service.

     Miami River Property

This site is located along SW 3rd Street and consists of 6.8 acres, with approximately 345 ft. frontage on the Miami River. This prime location is located near the Downtown Government Center in the downtown district of Miami. FECR has a contract for the sale of this property for $16.3 million, with closing scheduled for the second quarter of 2003. In the event the buyer defaults under the contract, FECR’s remedy is limited to retaining the buyer’s deposit.

     Miller Shops West

An approximate 200-acre parcel is located along the headwaters of the San Sebastian River in St. Augustine. This parcel is part of FECR’s former mechanical shop property.

     Cadillac Gauge Property

This property is located in an industrial area on Cidco Road in Cocoa, Florida. This property has over 100,000 sq. ft. of warehouse space on 72 acres of land. The property offers a variety of uses and is currently being marketed for sale.

9

Real Estate

At year-end 2002, Flagler’s commercial and industrial portfolio included 55 buildings aggregating 5.9 million rentable sq. ft. Flagler’s income-producing properties are detailed below:

FLAGLER’S INCOME-PRODUCING PROJECTS
(at December 31, 2002)

Certain of these buildings are mortgaged to secure loans with outstanding amounts of $243.8 million as of December 31, 2002.

Note: Flagler also owned a 101,000 rentable sq. ft. commercial office building, located in Beacon Station, held for sale at December 31, 2002, and accounted for as a discontinued operation. An additional 735,000 sq. ft. of rentable office and industrial product was owned in partnership (50/50) with Duke Realty Corporation. These properties are located in Weston and Miami, Florida. During January 2003, Flagler purchased Duke Realty Corporation’s 50% interest in three Beacon Station buildings located in Miami.

The Company periodically reviews its inventory of income-producing commercial and industrial properties and undeveloped properties to determine how best to maximize its value, including possible sale of properties if market conditions warrant. The Company will continue to develop additional rentable commercial and industrial space if market conditions warrant, and currently has 181,000 sq. ft. in lease-up, 290,000 sq. ft. under construction, and 591,000 sq. ft. in the pre-development phase, (see Part I, Item 1. Business, in this Report on Form 10-K).

10

Flagler’s land portfolio includes the following major land holdings:

     Ball Tract

A 2,170-acre tract located in northern St. Johns County along the US 1 corridor between Jacksonville and St. Augustine. The property fronts US 1 to the west, the Intracoastal Waterway to the east, and lies between two large mixed-use residential and commercial communities under development. This property is currently under contract for sale, the closing of which is expected in 2003.

     Lemberg North

A 580-acre tract located in northern St. Johns County along US 1 between Jacksonville and St. Augustine. The property fronts the western boundary of FECR’s mainline which is immediately adjacent to US 1. Flagler expects to develop the property as a rail-oriented industrial park, but must first seek and obtain various approvals from state, regional and local governmental entities.

     Miller Shop

An approximate 270-acre tract, partially owned by Flagler and FECR (Flagler, 70 acres; FECR, 200 acres), located in St. Johns County along US 1 at the northern boundary of the city of St. Augustine. The property fronts US 1 on the east, and the San Sebastian River on the west. Flagler expects to master plan this property for a variety of mixed uses of commercial, industrial and residential.

     Fort Pierce K-4

A 565-acre tract located in St. Lucie County at the southeast quadrant of the intersection of I-95 and the Florida Turnpike. The land use designation for the property is for mixed-use development, with 160 acres of the property presently zoned for heavy industrial. The remainder is presently zoned for agriculture residential. When market analysis reflects the proper demand for industrial use, the property could be developed as industrial zoned property. Various approvals from state, regional and local government entities will be required. This property is currently being marketed for sale.

     107th Avenue Property (Section 8)

A 465-acre undeveloped tract located in west Dade County bounded by NW 107th Avenue (west), NW 90th Street (north), NW 74th Street (south) and NW 97th Avenue (east). The property is contiguous to the southeast corner of Beacon Station, Flagler’s 850-acre master planned commercial and industrial development, and plans are to develop the property in a similar manner.

     Downtown Miami Lots

A 9-acre tract located in downtown Miami fronting on NW 1st Avenue adjacent to the Miami Arena and less than one block from an announced federal courthouse. The future land use designation and zoning of the property are for office/mixed-use. Flagler is evaluating the development of the property for the allowable use.

     Port Everglades

A 97-acre tract of developable land located in sections of Port Everglades Industrial Park, Broward County, Florida. The Company is currently developing this land with industrial warehouses. This property is leased with an initial term of 35 years and six additional 10-year lease extension options.

11

Overview of FECI Land Holdings

The Company owned and managed 9,068 acres of land at year-end 2002, which included 456 acres on which buildings are located; 1,026 acres of developable land with entitlements, including the projects under development described in Item 1, Part 1 of this Report; 6,403 acres of undeveloped land, including the undeveloped properties described in Item 1, Part I of this Report, and 1,183 acres owned by FECR. These properties are held for lease, development and/or sale and are in fourteen counties of the state of Florida as follows:

ITEM 3.   LEGAL PROCEEDINGS

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

The Company is subject to proceedings and consent decrees arising out of historic disposal of fuel and oil used in the transportation business. It is the Company’s policy to accrue environmental cleanup costs when it is probable that a liability has been incurred and an amount can be reasonably estimated. As assessments and cleanups proceed, these accruals are reviewed and adjusted.

The Company is participating, together with several other potentially responsible parties (PRPs), in the remediation of a site in Jacksonville, Florida, pursuant to an agreement with the United States Environmental Protection Agency (USEPA). The site previously accepted waste oil from many businesses. The Company has accrued its estimated share of the total estimated cleanup costs for the site. Based upon management’s evaluation, the Company does not expect to incur additional amounts, even though the Company may have joint and several liability.

FECR is investigating sites where contaminants from historic railroad operations may have migrated off-site through the movement of groundwater or contaminated soil. FECR, if required as a result of the investigation, will develop an appropriate plan of remediation, with possible alternatives including natural attenuation and groundwater pumping and treatment. Historic railroad operations at the Company’s main rail facilities have resulted in soil and groundwater impacts. In consultation with the Florida Department of Environmental Protection (FDEP), the Company operates and maintains groundwater treatment systems at its primary facilities. FECR is one of several PRPs alleged to have contributed to the environmental contamination at and near the Miami International Airport. The allegations are contained in a lawsuit filed by Miami-Dade County. The Company

12

does not currently possess sufficient information to reasonably estimate the amount of remediation liability, if any, it may have in regard to this matter. While the ultimate results of the claim against FECR cannot be predicted with certainty, based on information presently available, management does not expect that resolution of this matter will have a material adverse effect on the Company’s financial position, liquidity or results of operation.

The Company monitors a small number of sites leased to others or acquired by the Company or its subsidiaries. Based on management’s ongoing review and monitoring of the sites and the ability to seek contribution or indemnification from the PRPs, the Company does not expect to incur material additional costs, if any.

It is difficult to quantify future environmental costs as many issues relate to actions by third parties or changes in environmental regulations. However, based on information presently available, management believes that the ultimate disposition of currently known matters will not have a material effect on the financial position, liquidity or results of operations of the Company.

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 2002.

13

PART II

ITEM 5.   MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Price Range of Common Stock and Dividend Policy

The common stock of FECI is traded on the New York Stock Exchange with the symbols FLA (Class A common) and FLA.b (Class B common). As of March 6, 2003, there were 560 holders of record of the Company’s Class A common stock and 1,076 holders of record of Class B common stock.

The following table shows the high and low sales prices and dividends per share by quarter for 2002 and 2001:

The Company pays quarterly cash dividends on its outstanding shares of common stock. The determination of the amount of future cash dividends, if any, to be declared and paid by the Company will depend upon, among other things, the Company’s financial condition, funds from operations, level of capital expenditures, future business prospects and other factors deemed relevant by the Board of Directors. The closing prices of the Company’s Class A and Class B common stock were $23.35 and $23.00, respectively, as of March 6, 2003.

Equity Compensation Plan Information is presented in the Proxy Statement.

14

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, 2002, and with respect to the consolidated balance sheets for the same periods are derived from the consolidated financial statements. This selected financial data should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Notes to the Financial Statements and Supplementary Data (Item 8) included elsewhere herein. Income statement data, discontinued operations and earnings per share results for years 1998-2001 have been reclassified to treat EPIK, FLX and certain Flagler buildings as discontinued operations, consistent with 2002’s presentation.

15

ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis should be read in conjunction with Item 8. Financial Statements, Item 1. Business, and Item 2. Properties, included elsewhere herein. The following discussion contains forward-looking statements (see cautionary statement at the front of this Report). The Company’s actual results may differ significantly from those projected in the forward-looking statements.

GENERAL OVERVIEW

FECI is a holding company engaged in the rail and real estate businesses through two wholly owned subsidiaries.

The Company’s assets and operations are located in the state of Florida. Consequently, the Company’s performance is significantly affected by the general health of the Florida economy, while more broadly affected by the national economy, and international economies, including the Caribbean and South America.

The Company generates rail operating revenues primarily from the movement of freight in both conventional freight cars and intermodal shipments of containers and trailers on flatcars over its rail lines. Starting in November of 2002, certain drayage operations previously performed by FLX were assumed by FECR. Freight and drayage revenues are recorded as freight moves from origin to destination. Modest non-freight operating revenues are derived from demurrage and detention (equipment per diem paid by customers), switching, weighing, special train and other transportation services. The Company has one railroad customer that accounted for approximately 19%, 19% and 18% of the railroad’s operating revenues in 2002, 2001 and 2000, respectively. The Company does not believe that this customer will cease to be a rail shipper, or will significantly decrease its freight volume in the near future.

The Company’s rail expenses consist of salaries and wages, related payroll taxes and employee benefits, depreciation, insurance and casualty claim expense, diesel fuel, car hire, property taxes, materials and supplies, purchased services and other expenses. Many of the railway’s operating expenses are of a relatively fixed nature, and do not increase or decrease proportionately with increases or decreases in operating revenues unless the Company’s management takes specific actions to restructure the Company’s operations. The Company experiences increases/decreases in fuel costs as the price of diesel fuel fluctuates in the market.

The Company’s real estate operations are cyclical and are affected by local demographic and general economic trends and the supply and rate of absorption of new construction. Although the Company’s real estate business has a large portfolio of income-producing properties expected to provide reasonably stable operating results, the Company’s real estate earnings may be significantly affected from period to period by the nature and timing of sales of developed property and other real estate assets.

Flagler has a portfolio of land, which includes land held for future development (entitled and unentitled), surplus land, some of which is under contract or held for sale, and land located in the parks that is under the existing buildings and undevelopable. The Company believes that Flagler’s more than 2,000 acres (916 acres of entitled land, 1,123 acres of unentitled land), which are held for development, are capable of supporting in excess of 10 years of future development. The Company’s determination to develop or sell property is based on market conditions. Flagler holds approximately 4,400 acres of surplus land, of which 3,800 acres are either on the market or under contract for sale. The Company expects approximately 75% of those 3,800 acres to close in 2003, and the remaining amount to be sold over the next several years. Flagler owns an additional 456 acres of land, which is located under the buildings, and 849 acres of land in the parks that is considered undevelopable.

FECR owns approximately 1,200 acres of land that is held for lease, development and/or sale. There are 198 acres currently on the market or under contract for sale. FECR continues to evaluate the appropriate uses for the remaining land.

Real estate operating revenues are generated from (i) rental agreements on its commercial and industrial portfolio of buildings, as well as rents on its land holdings, (ii) sales of land and/or buildings and (iii) development services provided to customers.

16

Real estate operating expenses include costs of managing its commercial and industrial properties and costs associated with land and building sales. The Company incurs property management expenses, such as building maintenance, leasing costs and property taxes, beginning when buildings are completed and placed in the Company’s inventory of leasable properties. The Company sells certain real estate holdings when the return on such sales is considered advantageous, causing fluctuations in costs of real estate sales based on the volume and timing of such dispositions.

Passive revenues are generated from leases of railroad right-of-way to telecommunication and other companies for the installation of fiber optic and other conduits and additional uses of the right-of-way (e.g., signboards). These revenues, along with their associated expenses, are recorded net in other income.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Net cash generated by operating activities was $55.3 million, $18.0 million and $134.5 million in the years ended December 31, 2002, 2001 and 2000, respectively. The year-to-year fluctuations in net cash generated by operating activities resulted mainly from activities associated with the construction of a telecommunications network and certain related facilities during these years, including significant working capital fluctuations. Net cash generated by operating activities is expressed net of gains on asset disposals, primarily building and land sales which also fluctuate. Asset dispositions generated pretax gains of $51.0 million, $13.4 million and $9.6 million in 2002, 2001 and 2000, respectively.

In addition to cash generated by operating activities, cash was generated by asset disposals, primarily building and land sales, in the amounts of $88.8 million, $22.5 million and $17.6 million, before taxes, in the years ended December 31, 2002, 2001 and 2000, respectively. The Company has undertaken building and land sales opportunistically. While the Company expects to generate cash from future building and land sales, the magnitude and timing of such sales is not readily predictable and may fluctuate.

As a result primarily of the Company’s sale of EPIK in late 2002, the Company expects to claim a cash federal income tax refund of approximately $75 million for that year, which may be refunded to the Company in mid-2003. The Company’s claim is subject to review by the Internal Revenue Service. Additionally, as a result primarily of the EPIK sale, the Company expects to carry forward losses of $109 million (pretax), which are expected to be deductible from taxable income on the Company’s federal tax returns in future years. However, the Company cannot guarantee its realization of these expected future tax benefits, which are subject to possible future changes in federal income tax laws and differing interpretations thereof, among other factors.

Although in recent years the Company has not increased its rate of per share dividend payments and has not undertaken material stock repurchases, the Company may do so in the future.

During the years ended December 31, 2002, 2001 and 2000, respectively, the Company invested approximately $27 million, $57 million and $62 million at Flagler. In 2002, 2001 and 2000, the Company’s capital investments at Flagler included investments to develop real property and construct commercial buildings for lease. The Company expects to make additional investments in realty in the future, the amounts and timing of which are expected to be, among other things, the timing and extent of marketplace demand. The Company expects to make investments at Flagler, including investments intended to support Flagler’s future growth, in the range of $80 million to $100 million in 2003, which is predicated on Flagler experiencing a recovery in marketplace demand over 2002’s levels. The actual amount invested is expected to depend in large part on the timing and extent of actual marketplace demand. In 2002, 2001 and 2000, the Company’s capital investments at FECR were approximately $30 million, $33 million and $32 million. In 2002, 2001 and 2000, the Company’s capital investments at EPIK were approximately $5 million, $156 million and $178 million, primarily to construct a telecommunications network and certain related facilities. The Company sold EPIK and exited the telecommunications business in late 2002.

Historically, net cash generated by FECR’s and Flagler’s operating activities has exceeded these businesses’ maintenance capital needs. Although the amount of future cash generated by FECR and Flagler is subject to uncertainty due to the vagaries of business conditions and other factors, the Company expects that FECR and Flagler will continue to generate cash in excess of their maintenance capital needs. The Company expects additional net cash flow from future building and land sales. Further, the Company expects to be able to obtain external financing, if required, through mortgage loans on rental property investments once such properties are leased

17

up, or through its revolving credit facility or other possible sources of external financing. However, no assurances can be given as to the availability in future capital markets of these or other sources of external financing on terms acceptable to the Company or otherwise. Any reduction in cash generated by the Company’s operating activities, which could occur, for example, were demand for the Company’s services to decline, may reduce cash available for investment and reduce the availability and/or increase the cost of external capital for the Company.

At December 31, 2002, the Company had a $300 million revolving credit facility (see Note 15 of the Financial Statements) pursuant to an agreement, as amended from time to time, between the Company and certain banking institutions (the Credit Facility Agreement). The borrowings under the credit agreement are secured by the capital securities of FECR and FLX. The description herein of the revolving credit facility is qualified in its entirety by reference to the Credit Facility Agreement, which is incorporated as Exhibit 10(b) to the Company’s Reports on Form 10-K for the years ended December 31, 2002, 2001 and 2000. The Credit Facility Agreement was extended for an additional year and amended on February 7, 2003. The amendments provide for a reduction in the Facility’s size to $200 million and other modifications, including an increase in the stock repurchase and special dividend limit to $150 million (which may be increased in 2004 to $200 million if certain financial ratio tests are met), and an increase in the non-recourse mortgage financing limit from $250 million to $325 million. At December 31, 2002, the Company had $53 million drawn on the revolving credit facility. Pursuant to the Credit Facility Agreement, the Company has agreed, among other things, to maintain certain financial ratios. The Company believes the most restrictive of such ratios has been the Global Debt/EBITDA ratio (as defined in the Credit Facility Agreement). The Credit Facility Agreement provides that at December 31, 2002, the Company’s Global Debt/EBITDA ratio shall be no greater than 3.75. At December 31, 2002, the Company’s actual Global Debt/EBITDA ratio was 0.47. The Global Debt/EBITDA covenant was eliminated as part of the February 7, 2003 amendment due to the sale of EPIK. Going forward, the Group Debt/EBITDA ratio (as defined in the Credit Facility Agreement) will be used. Pursuant to the Credit Facility Agreement, the required Group Debt/EBITDA ratio from March 22, 2001 to December 31, 2002 was 3.00, declines to 2.75 from January 1, 2003 to December 31, 2003, and 2.50 from January 1, 2004 to March 31, 2005, all as more particularly set forth in the Credit Facility Agreement. At December 31, 2002, the Company’s actual Group Debt/EBITDA ratio was 0.49. Although no assurances can be given as to the Company’s future compliance with the Group Debt/EBITDA ratio covenant or other financial covenants, the Company has complied with the terms of the Credit Facility Agreement in the past and expects to continue to comply with them in the future. The Company from time to time may seek to amend the Credit Facility Agreement to accommodate changes in circumstances not foreseen at the time the Credit Facility Agreement was made. Although no assurances can be given that the Company’s banks would agree to any amendment that may be proposed by the Company, or as to the terms of any such amendment, amendments to agreements such as the Credit Facility Agreement are common practice among banks and the Company believes its relationship with its banks is satisfactory.

Results of Operations for 2002 compared to 2001 and 2001 compared to 2000

Discussions are based on segment information – see Note 8 included in Item 8 of this Report.

Railway

FECR’s management team continued its focus on improving profitability during 2002 and 2001. Important investments in both operational and human capital were made during these periods to enhance customer service and safety while controlling costs. During the 2002 and 2001 period, FECR recruited and deployed more sales and marketing personnel to focus on identifying new customers, improving revenues from existing customers and serving customers better. Recent successes include significant business in shipments of foodstuff commodities, the introduction of an Atlanta-based intermodal service (the Hurricane Train), and a program in South Florida where FECR competes directly with barge companies on northbound container traffic. FECR also generated record levels of aggregate revenues during 2002 and 2001. During 2002 and 2001, the Company invested $29.8 million and $32.6 million, respectively, of capital in equipment, improved physical plant and new technologies at FECR.

Moderate revenue growth is expected primarily from FECR’s continued efforts to grow its intermodal business, continued increases in food and kindred traffic, and new business relationships that FECR is working to develop; such revenue growth is subject to a moderate improvement in the economy. Costs associated with insurance, fuel and labor agreements are subject to uncertainty. Capital spending is expected to range between $30 and $32 million in 2003.

18

Revenues – 2002 versus 2001

Railway segment’s operating revenues were up $6.1 million at $166.8 million for 2002 versus $160.7 million for 2001. Most of the increase resulted from additional aggregate rock traffic, new revenues from drayage operations formerly performed by the Company’s trucking subsidiary that were assumed by the Railway in November 2002, and the increase in foodstuff traffic. Freight revenues were $162.0 million for 2002, compared with $157.2 million for 2001. Revenues from aggregate rock/crushed stone traffic increased $4.5 million in 2002 due to the increase in construction demand throughout the state of Florida. Revenues from foodstuff traffic increased $2.0 million due to increased business from two major customers. Revenues from SCFE decreased $0.5 million from 2001 to $2.4 million primarily due to the bridge connecting FECR to SCFE being out of service for almost eight weeks. Intermodal revenues decreased $1.0 million to $60.9 million for 2002. The new “Hurricane Train” service from Atlanta resulted in additional revenues of $1.7 million, showing its success in the Atlanta marketplace, while local haulage and interline traffic decreased $2.0 million over 2001 primarily from reduced traffic with Norfolk Southern, decreased traffic from LTL carriers and decreased international business. The LTL carriers’ traffic was affected by the sluggish economy, while the international business was affected primarily by the consolidation of a major shipper that increased empty movements by water rather than rail.

The Company reports certain non-GAAP measures in addition to GAAP measures. These measures are earnings before interest expense, income taxes, depreciation and amortization (EBITDA) from the Company’s Railway segment’s operations and from the FECR legal entity. The FECR legal entity’s EBITDA includes EBITDA from rental and sale of FECR real estate and other income, in addition to EBITDA from the Railway segment’s operations. The Company believes many investors use EBITDA measures in valuing railroads (e.g., through application of EBITDA valuation multiples) and in evaluating their ongoing performance. The Company uses its Railway segment’s EBITDA as a component of certain management incentive compensation arrangements.

The Railway segment’s EBITDA was $59.9 million in 2002, compared to $57.7 million in 2001, reflecting primarily the net effect of increased revenues in 2002. Railway segment operating profit was $42.1 million and $41.3 million in 2002 and 2001, respectively. The FECR legal entity’s EBITDA was $111.7 million in 2002, compared to $71.7 million in 2001, reflecting primarily $34.5 million from the sale of the former Buena Vista rail yard land parcel in 2002. Total FECR legal entity income before taxes was $93.8 million and $55.5 million in 2002 and 2001, respectively.

Expenses – 2002 versus 2001

Operating expenses increased $5.2 million to $124.6 million for 2002, compared with $119.4 million for 2001. Commencing in late 2002, FECR began to directly manage the dray operations for intermodal shipments to the Railway, increasing Railway expenses $1.8 million over 2001. Wages and benefits increased $1.6 million or 3.4% to $49.6 million for 2002 primarily because the Railway experienced an infrequent maximum medical coverage claim, employee separation costs and general wage increases. Casualty and insurance expenses increased $1.7 million to $5.5 million due to two major derailments in early 2002, increased personal injury costs and higher insurance premiums over 2001. Equipment rents increased $1.9 million primarily as the result of additional intermodal equipment rents. Depreciation expenses increased $1.4 million in 2002. Offsetting the increased expenses were decreases in fuel expense of $1.2 million, $0.5 million from lower consumption and $0.7 million from lower price, lower car hire of $2.3 million, and decreased general and administrative charges of $0.9 million.

Revenues – 2001 versus 2000

Railway segment’s operating revenues were down $4.1 million at $160.7 million for 2001 versus $164.8 million for 2000. Most of this decrease resulted from decreased ($2.0 million) accessorial charges (switching, demurrage, detention, flips, etc.) as customers utilized FECR’s equipment or other accessorial services more efficiently. Freight revenues were $157.2 million for 2001, compared with $157.7 million for 2000. Revenues from automobiles increased $0.5 million as manufacturers replenished dealer stocks depleted by favorable incentives and financing programs. Revenues from foodstuffs increased $0.6 million due to significant business from Tropicana Products, Inc. Revenues from various commodities increased by $1.0 million, most notably in the metals and ore commodities, as increased loads of northbound scrap metals moved to “mini-mills,” as well as other increased traffic from metals and ore customers. Offsetting these increases were decreases in aggregate revenues of $0.8 million because loads fell 4.9% to 106,473, close to 2000’s record levels of 111,921 loads, as

19

private construction and public projects continued to take place during 2001, but did not return to demand levels seen in 2000. Also, intermodal revenues decreased $0.9 million for the year as the overall economy slowed. However, FECR originated and interlined intermodal loads, and revenues increased (4,082 units and $0.4 million, respectively) primarily the result of greater marketing efforts by the Company.

The Railway segment’s EBITDA was $57.7 million for 2001, comparable to $58.5 million in 2000. Railway segment operating profit was $41.3 million and $43.7 million in 2001 and 2000, respectively. The FECR legal entity’s EBITDA was $71.7 million, compared to $74.4 million for 2000, reflecting primarily a special TTX dividend of $2.4 million received during 2000. Total FECR legal entity income before taxes was $55.5 million and $59.0 million in 2001 and 2000, respectively.

Expenses – 2001 versus 2000

Operating expenses decreased $1.8 million to $119.4 million, compared with $121.2 million in 2000. Primary contributors to the decrease are: fuel cost decrease of $0.9 million as prices dropped in 2001 and overall consumption improved (2.0% on gallons used); car hire net cost decrease of $0.7 million as continued emphasis on car utilization improved FECR’s net position; repairs billed to/by others net decrease of $1.6 million attributable to the improved condition of the equipment fleet, and improved systems and processes for identifying contractually recoverable costs of outside party arrangements; and a decrease of $1.6 million in general and administrative costs as overall information technology and administrative costs have been reduced. Partially offsetting these decreased expenses were increases in depreciation ($1.5 million), reflecting recent years’ capital programs and increased compensation costs as FECR added personnel to improve sales and marketing efforts and other operational opportunities.

Trucking

During the third quarter of 2002, the Company adopted a plan to discontinue and ceased operations of its regional long-haul trucking operations. The Company largely completed its operational shut down and disposition activities for the trucking operation during the fourth quarter of 2002. At December 31, 2002, the Company was working to wind down the remaining assets and liabilities of FLX and estimates the completion of such during the first quarter of 2003. Based on the latest information available, which could be subject to change during the wind down, management believes these assets and liabilities to be stated at their net realizable value.

Accordingly, the Company reported the results of the trucking operations and the estimated disposition loss as discontinued operations under the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and all periods have been restated.

20

Real Estate

During 2002, Flagler added one building to its portfolio of income-producing projects and jointly developed another building with Duke Realty Corporation. During January 2003, the Company purchased Duke Realty’s 50% interest in three buildings in Beacon Station. During 2002, Flagler addressed the softness in the real estate market by deferring construction of speculative buildings and focusing on build-to-suit projects. Because of Flagler’s deferral of speculative development, revenue growth is expected to be moderate in the near term. The Company may sell certain developed properties if it determines market conditions support a sale rather than continued holding. Flagler’s land holdings, with entitlements for construction of 14.7 million sq. ft. of office and industrial space, offer opportunities for further investment, particularly when market demand increases. In 2003, the Company expects to accelerate Flagler’s office and industrial space investment program if market demand increases. The Company intends to continue its program to realize the value of its extensive land holdings at Flagler and the Railway by developing or monetizing them.

Flagler’s future rate of growth, profitability, capital investment and sales of land depends, in part, on the extent of future demand in Florida’s commercial real estate markets, costs for insurance and real estate taxes, and renewal rates for leases, which are subject to uncertainty.

Revenues from Continuing Operations – 2002 versus 2001

Realty rental, services and sales revenues from both Flagler and other realty operations were $134.9 million for 2002, compared to $86.8 million for 2001. The increase from the prior year relates primarily to increased land dispositions of $48.1 million. Combined real estate sales generated revenue of $70.6 million. Flagler’s rental and services operations generated 2002 revenues of $60.9, a slight increase of $0.1 million over 2001 rental and services revenue of $60.8 million. Included in Flagler’s 2002 and 2001 rental and services revenues were net lease termination fees of $1.9 million and $1.5 million, respectively. Other rental revenue was $3.4 million in 2002, compared to $3.5 million in 2001.

At December 31, 2002, Flagler held 55 buildings with 5.9 million rentable sq. ft. at 83% occupancy. Flagler’s “same store” properties, including 51 buildings with 5.4 million rentable sq. ft., were 85% occupied at December 31, 2002, compared to 93% occupied at December 31, 2001. “Same store” rental revenues decreased $3.1 million to $54.3 million in 2002, compared to 2001 revenue of $57.4 million. The decrease is primarily associated with decreased occupancy rates compared to the prior year.

Four Flagler operating properties, totaling 561,413 rentable sq. ft., were delivered and began operations in 2001. These combined properties contributed $3.8 million in revenues during 2002, as compared to $0.4 million in 2001.

The Company reports certain non-GAAP measures in addition to GAAP measures. One such measure is earnings before interest expense, income taxes, depreciation and amortization (EBITDA) from Flagler’s operating rental properties. The Company believes many investors use EBITDA measures in valuing Flagler’s rental properties, e.g., through application of EBITDA valuation multiples or capitalization rates, and in evaluating their ongoing performance. The Company uses Flagler’s EBITDA as a component of certain management incentive compensation arrangements.

EBITDA from Flagler’s operating properties decreased to $38.5 million in 2002 from $40.1 million in 2001, a decrease of $1.6 million or 4.1%. Operating profit from operating properties’ rents was $17.4 million in 2002, reduced from $19.8 million in 2001. Flagler’s operating properties’ EBITDA decreased $1.6 million due primarily to a $3.8 million decrease in “same store” offset by an increase of $2.5 million in “new store.”

21

Expenses from Continuing Operations – 2002 versus 2001

Realty operating expenses (including depreciation and amortization) for both Flagler and other realty operations increased $13.4 million to $75.8 million in 2002 from $62.4 million in 2001. This increase reflects increased costs of property dispositions, as well as increased rental operations’ expenses at both Flagler and other realty operations. Real estate sales expenses were $19.6 million in 2002, an increase of $10.4 million over 2001 sales expenses of $9.2 million. Realty rental operating expenses (including depreciation and amortization) increased $3.0 million to $56.2 million in 2002, compared to $53.2 million in 2001. The increased operating expenses reflect a $3.4 million increase in Flagler’s operating expenses primarily related to increased operating property expenses of $1.7 million, increased land holding costs of $0.5 million, and increased depreciation and amortization of $0.8 million in 2002, offset partially by decreased corporate overhead of $1.1 million. Other realty operating expenses increased $1.1 million in 2002 to $5.0 million, compared to $3.9 million in 2001, related to increased rent expenses at the Port Everglades property.

Results from Discontinued Operations – 2002 versus 2001

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

During 2002 and 2001, discontinued operations include the gain on the sale of an industrial warehouse disposed of during 2002, as well as the operations of this property and an office building, which meets the criteria as a held-for-sale property at December 31, 2002. The gain recorded on the 2002 sale of the industrial warehouse was $5.5 million, or $3.4 million, net of applicable taxes of $2.1 million. Discontinued operations contributed revenues of $3.1 million and $2.3 million in 2002 and 2001, respectively, and incurred operating expenses of $1.3 million and $1.0 million in 2002 and 2001, respectively. Net operating income for the discontinued operations was $1.8 million in 2002, an increase of $0.5 million over $1.3 million contributed in 2001.

Revenues from Continuing Operations – 2001 versus 2000

Combined revenues from Flagler and other realty operations were $86.8 million for 2001, compared to $74.1 million for 2000. The increase over prior year is associated with increased rental revenues and real estate sales in 2001. Combined real estate sales generated revenues of $22.5 million in 2001, an increase of $5.0 million over 2000 real estate sales of $17.5 million. Flagler continued to focus on strategic dispositions of surplus land holdings during 2001, resulting in increased revenues. Flagler’s rental and services operations generated $60.8 million in 2001 rental revenues, compared to $53.4 million in 2000. Included in Flagler’s 2001 rental and services revenues were a $1.5 million lease termination fee, and a $0.8 million development fee. Other rental revenues increased $0.3 million or 8.3% to $3.5 million in 2001.

Flagler held 52 operating buildings with 5.6 million rentable sq. ft., which were 92% occupied at year-end 2001. Flagler’s “same store” properties, including 49 buildings with 5.1 million rentable sq. ft., were 94% occupied at December 31, 2001, compared to 93% occupied at December 31, 2000. “Same store” rental revenues increased by $3.1 million or 5.9% to $53.9 in 2001, compared to $50.8 million in 2000.

Three additional properties, totaling 408,000 sq. ft. of rental space, received certificates of occupancy during 2000 and during 2001 were in the lease-up phase of operations. Together, these properties generated 2001 rental revenues of $3.5 million. Additionally, Flagler completed development of a 200,000 sq. ft. build-to-suit for sale, generating development services revenue of $0.8 million in 2001.

22

At the end of 2001, Flagler had ten projects, representing 1.2 million sq. ft., in various stages of development (approximately 559,978 sq. ft. in lease-up, 97,000 sq. ft. in construction, and 590,550 sq. ft. in pre-development).

Flagler’s EBITDA from operating properties increased to $40.1 million in 2001 from $35.1 million in 2000, an increase of $5.0 million. Operating profit from operating properties’ rents increased to $19.8 million in 2001 from $18.3 million in 2000 related to Flagler’s increased leasing activity. Flagler’s operating properties’ EBITDA increased $5.0 million due primarily to a $2.7 million increase in “same store” and a $2.8 million increase in “new store.”

Expenses from Continuing Operations – 2001 versus 2000

Realty segment rental and sales operating expenses (including depreciation and amortization) increased $8.8 million or 16.3% to $62.4 million in 2001, compared to $53.6 million in 2000. Increases in operating expenses were primarily depreciation costs ($3.2 million) as new product (primarily buildings) delivered in 2000 and 2001 came on line. Directly related to this delivery of new product were increased “recoverable expenses” of $1.2 million. Selling, general and administrative non-recoverable expenses increased $3.9 million, reflecting increased other realty expenses associated with increased rent expense on property leased in South Florida commencing in 2000. Also, Flagler’s corporate staff and related costs increased as additional functions were transitioned from The St. Joe Company, which entails some partially temporary increases in expenses. Realty sales expenses increased $1.2 million, reflecting the increased sales activity during 2001.

Results from Discontinued Operations – 2001 versus 2000

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

During 2001 and 2000, discontinued operations include the operations of an office building, which meets the criteria as a held-for-sale property at December 31, 2002. Discontinued operations contributed revenues of $2.3 million and $0.8 million in 2001 and 2000, respectively, and incurred operating expenses of $1.0 million and $0.4 million in 2001 and 2000, respectively. Net operating income for the discontinued operations was $1.3 million in 2001, an increase of $0.9 million over $0.4 million contributed in 2000.

Telecommunications

FECI completed the sale of its wholly owned telecommunications subsidiary, EPIK, to Odyssey, a privately held holding company specializing in telecom network assets during the fourth quarter of 2002. FECI had previously announced its decision to exit the telecommunications business.

The consideration included a cash payment of $500,000, a potential earnout payment of up to $30 million based on EPIK’s future performance, and a warrant to acquire 15% of the outstanding stock of Odyssey. In addition, FECI provided Odyssey with up to $17 million for Odyssey’s use in connection with EPIK, which FECI recorded as a transaction expense. In addition, FECI is obligated to make a further deposit into the escrow account for the amount of the shortfall between $3 million and the proceeds of certain specified real estate and asset sales. Any shortfall has been estimated and accounted for as a transaction expense. FECI has accounted for the sale of EPIK and its operations as a discontinued operation. FECI wrote down the entire book value of EPIK’s long-lived assets at September 30, 2002, resulting in a carrying value for EPIK of negative $39.1 million. Consequently, FECI recorded a modest accounting gain ($10.0 million after tax) on the sale.

23

Included in the gain on sale of EPIK are estimates of certain contingencies (primarily employee severance related) FECI could incur in periods subsequent to 2002. These amounts could be subject to change in subsequent periods. Also, FECI is a guarantor on certain leases (primarily office space) and could be contingently liable if EPIK were to default on the lease obligations. Estimates for these contingencies and guarantees are approximately $5.3 million.