UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

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

Commission File Number 001-08728

Florida East Coast Industries, Inc.

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

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

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

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

FLORIDA EAST COAST INDUSTRIES, INC.

PART I

FINANCIAL INFORMATION

INDEX

PART II

OTHER INFORMATION

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FLORIDA EAST COAST INDUSTRIES, INC.

See accompanying notes to consolidated financial statements (unaudited).

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FLORIDA EAST COAST INDUSTRIES, INC.

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

See accompanying notes to consolidated financial statements (unaudited).

4

FLORIDA EAST COAST INDUSTRIES, INC.

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

See accompanying notes to consolidated financial statements (unaudited).

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FLORIDA EAST COAST INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. General

In the opinion of management, the accompanying unaudited consolidated financial statements reflect all accruals and adjustments considered necessary to present fairly the Company’s financial position as of September 30, 2004 and December 31, 2003, and the results of operations and cash flows for the three-month and nine-month periods ended September 30, 2004 and 2003. Results for interim periods are not necessarily indicative of the results to be expected for the year. The consolidated balance sheet as of December 31, 2003 included herein has been derived from the Company’s audited consolidated financial statements for the year ended December 31, 2003. These interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission.

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

Note 2. Recapitalization

On February 27, 2003, FECI’s Board of Directors approved the submission of a proposal to shareholders to amend the Company’s Articles of Incorporation to eliminate the Company’s dual-class structure by reclassifying the Company’s Class A common stock and Class B common stock into a new single class of common stock on a one-for-one basis. The reclassification was subsequently approved at the Annual Meeting of Shareholders held on May 28, 2003. On September 10, 2003, FECI and The St. Joe Company received a favorable ruling from the U.S. Internal Revenue Service regarding FECI’s reclassification of its Class A and Class B common stock into a single class of common stock. The letter ruling confirmed that the proposed reclassification would not have an adverse affect on the tax-free status of the October 2000 spin-off of St. Joe’s equity interest in FECI to St. Joe’s shareholders. FECI filed an amendment to its Articles of Incorporation with the Secretary of State of Florida in order to effect the reclassification on September 22, 2003. The consolidated financial statements reflect the reclassification for all periods presented. The single class of common stock trades on the New York Stock Exchange under the ticker symbol “FLA.”

Note 3. Discontinued Operations

Real Estate

In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), 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 statement of income as discontinued operations, net of applicable income taxes.

Discontinued operations for 2004 include the gains on the sales and the related operations of an office building and an industrial building. Discontinued operations for 2003 include the operations of the above mentioned properties, as well as the operations of an industrial building sold during 2003 and the gain on the sale and related operations of Flagler’s 50% interest in three buildings held in partnership with Duke Realty.

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Telecommunications

FECI 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 during the fourth quarter of 2002. In accordance with SFAS 144, EPIK’s results from operations and the estimated disposition gain have been reported as discontinued operations for all years presented.

At the time of EPIK’s sale, the Company accrued certain liabilities (primarily employee severance) related to the sale. A roll-forward of the liabilities through September 30, 2004 is as follows:

**-Any additions and adjustments to the liabilities that resulted from changes in estimates or final determinations are accounted for as gain or loss on disposition of discontinued operations on the consolidated financial statements.

Also, FECI is a guarantor on certain leases (primarily office space) and could be contingently liable if EPIK were to default on certain lease obligations. Estimates for these guarantees were approximately $2.5 million at the time of the sale. These amounts could be subject to change in subsequent periods and are estimated to be $0.7 million at September 30, 2004.

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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. Wind-down activities were completed during the second quarter of 2003.

Accordingly, 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.

As a result of the discontinuance, certain liabilities were accrued related to this exit plan. A roll-forward of the liabilities through September 30, 2004 is as follows:

*-Any additions and adjustments to the liabilities that resulted from changes in estimates or final determinations are accounted for as gain or loss on disposition of discontinued operations on the consolidated financial statements.

**-These amounts are included in Railway’s liabilities.

Note 4. Commitments and Contingencies

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 Florida East Coast Railway, LLC (FECR or Railway). These lawsuits are related to alleged bodily injuries sustained by Railway employees or third parties, employment related matters such as alleged wrongful termination and commercial or contract disputes.

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

The Company is participating, together with several other potentially responsible parties (PRPs), in the remediation of a site in Jacksonville, Florida, pursuant to an agreement with the United States Environmental Protection Agency (USEPA). The site previously accepted waste oil from many businesses. The Company has accrued $250,000, which is its estimated share of the total estimated cleanup costs for

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the site. The cleanup is expected to take approximately five years. Based upon management’s evaluation of the PRPs, which include the City of Jacksonville, CSX Transportation, Inc. and the federal government, the Company does not expect to incur additional material amounts, even though the Company may have joint and several liability. It is possible that the remediation costs could be higher than anticipated, but the Company is not aware of any facts or circumstances, which indicate that the costs are expected to be materially higher than currently anticipated.

FECR is one of several PRPs alleged to have contributed to the environmental contamination at and near the Miami International Airport (MIA) in a lawsuit filed on or about April 11, 2001 by Miami-Dade County in the Miami-Dade County 11th Judicial Circuit Court. In regard to FECR, Miami-Dade County generally alleges that FECR is or was the owner of sites at or near MIA and that the past acts of an FECR lessee or others contaminated the soil and/or groundwater at those sites, which allegedly impacted MIA property. The County generally seeks damages for past and future remediation costs relating to MIA’s property. The lawsuit was not served on FECR; however, in January 2003 FECR in conjunction with a cooperating parties group made up of named PRPs filed a Notice of Appearance with the court. At the request of those in the cooperating parties group and Miami-Dade County, the court has issued successive orders staying all proceedings while the parties worked to resolve the matter without further litigation. In June 2004, FECR and Miami-Dade County entered into a Settlement Agreement, General Release and Covenant Not to Sue whereby FECR will be released from all claims that have been or could be asserted against FECR in the lawsuit by Miami-Dade County, upon payment to Miami-Dade County of approximately $100,000 and FECR’s release of Miami-Dade County from FECR related claims at MIA. The Settlement Agreement is subject to court approval after a hearing. Whether the court order will be entered as requested by FECR and Miami-Dade County cannot be predicted with certainty. If the Settlement Agreement is not consummated, the Company will defend the matter vigorously. 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 operations.

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

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

On February 24, 2004, the Broward County Commission approved the negotiated termination of a long-term ground lease between the County and the Company. This termination agreement was subsequently executed and the transaction closed on March 15, 2004.

The ground lease covered 97 acres owned in fee by Broward County at Port Everglades, which is located near Fort Lauderdale, Florida. The County and the Company have now terminated the entire lease. In consideration for the early termination, the Company (a) conveyed title to certain land improvements and a warehouse on the leased property and (b) paid to Broward County $5.4 million reduced by additional rental payments made by the Company from November 2003 until closing and some other minor adjustments, the net additional payment being $3.7 million. Additionally, the Company paid $1.8 million to resolve a dispute under a related agreement between the County, the City of Hollywood and the Company for payments in-lieu-of taxes for the lease term. The settlement terminates all agreements affecting the Company in respect to the leased premises.

During the third quarter of 2003, the Company recorded a charge of $16.4 million ($10.1 million after tax), reflecting management’s estimate of the cost of terminating the ground lease. Final costs of terminating the ground lease, including the settlement with the City, were $16.9 million. The additional costs of $0.5 million are included in the year-to-date 2004 operating results.

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FECR committed $1.5 million to jointly fund an overpass over the Medley branch tracks to give access to warehouse space without crossing the railway. The landowner and a customer are also funding this project with FECR’s portion to be paid half in 2004 and half in 2005. The construction of the overpass is contingent upon project costs not exceeding a stipulated total amount.

Note 5. Earnings Per Share

The diluted weighted-average number of shares includes the net shares that would be issued upon the exercise of “in-the-money” stock options using the treasury stock method. Applying the treasury stock method, the “in-the-money” stock options resulted in the dilution of 697,735 shares and 309,737 shares at September 30, 2004 and 2003, respectively. “Out-of-the-money” shares were 994,338 shares and 2,147,569 shares at September 30, 2004 and 2003, respectively.

Note 6. Dividends and Stock Repurchase

On August 26, 2004, the Company declared a dividend of $.05 per share on all issued and outstanding common stock, payable September 23, 2004 to shareholders of record as of September 9, 2004. The determination of the amount of future cash dividends, if any, to be declared and paid by the Company will depend upon, among other things, the Company’s financial condition, funds from operations, level of capital expenditures, future business prospects and other factors deemed relevant by the Board of Directors.

On August 13, 2004, the Company purchased 5.5 million shares of common stock from The Alfred I. duPont Testamentary Trust and The Nemours Foundation for $34.50 per share or approximately $190 million. These repurchased shares are now shown on the Consolidated Balance Sheets as Treasury Stock. This transaction exhausted the remaining $72 million that existed under the previous $75 million stock repurchase authorization. As a result, on August 4, 2004, the Board of Directors authorized the expenditure of $40 million to repurchase common stock from time to time through a program of open market purchases and/or privately negotiated transactions.

Note 7. Other Income

FECR generates income from the grant of licenses and leases to use railroad property and rights-of-way for outdoor advertising, parking lots and lateral crossings of wires and pipes by municipalities and utility and telecommunications companies. This income is recorded in other income as “pipe and wire crossings/signboards” as it is earned. FECR generates other income from leases to telecommunications companies for the installation of fiber optic and other facilities on the railroad right-of-way. This income is recorded in other income as “fiber lease income” as it is earned.

Note 8. Debt

At September 30, 2004, the Company had a $200 million revolving credit agreement with certain financial institutions, for which the Company presently pays (quarterly) commitment fees, as applicable under the agreement, at a range of 20-50 basis points. The Company’s revolving credit agreement contains various covenants which, among other things, require the maintenance of certain financial ratios related to fixed charge coverage and maximum leverage; establish minimum levels of net worth; establish limitations on indebtedness, certain types of payments, including dividends, liens and investments; and limit the use of

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proceeds of asset sales. Some of the above covenants provide specific exclusion of certain financing and investing activities at Flagler. The Company believes the most restrictive of such ratios is the Group Debt/EBITDA ratio (as defined in the Credit Facility Agreement). The Credit Facility Agreement provides that at September 30, 2004, the Company’s Group Debt/EBITDA ratio shall be no greater than 2.50. At September 30, 2004, the Company’s actual Group Debt/EBITDA ratio was 0.00. Pursuant to the Credit Facility Agreement, the required Group Debt/EBITDA ratio is 2.50 for the remainder of the agreement, which expires on March 31, 2005. 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 plans on maintaining a revolving credit facility in support of its general corporate needs. The Company’s current intent is to extend or renew the existing credit agreement before it matures on March 31, 2005.

Borrowings under the credit agreement bear interest at variable rates linked to the LIBOR Index. Interest on borrowings is due and payable on the “rollover date” for each draw. Outstanding borrowings can be paid at any time by the borrower, or at the conclusion of the facility’s term. On February 7, 2003, the Company extended its revolving bank credit facility for an additional year to March 31, 2005. In tandem with the extension, the Company and its banks made amendments to the facility that included a reduction in the aggregate amount of the commitments from $300 million to $200 million, the elimination of the Global Debt to EBITDA covenant, which included the results of EPIK, an increase in the stock repurchase and special dividend limit to $150 million (which also, allowed and subsequently was increased in 2004 to $200 million if certain financial ratio tests were met), an increase in the non-recourse mortgage financing limit from $250 million to $325 million, and other miscellaneous modifications. At September 30, 2004, there were no borrowings outstanding under the facility.

During 2001, Flagler issued $247 million of mortgage notes with $160 million due July 1, 2011 and $87 million due October 1, 2008. At September 30, 2004, $239 million was outstanding on these notes. Certain buildings and properties of Flagler collateralize these notes. Interest and principal repayments on the notes are payable monthly based on a fixed 7.39% and 6.95% weighted-average interest rate, respectively, for each note offering, on the outstanding principal amount of the mortgage notes assuming a thirty-year amortization period. The net proceeds in 2001 were used to repay existing indebtedness under the Company’s revolving credit facility.

On August 10, 2004, Flagler issued $105 million of seven-year mortgage notes. Certain buildings and properties of Flagler collateralize these notes. The mortgage notes consist of a $60 million note with a fixed rate of interest of 5.27% and a $45 million note with a floating rate of interest based on the 90-day LIBOR Index plus 1.00% (2.71% at September 30, 2004). Repayments of principal and interest are payable monthly based upon a thirty-year amortization schedule. At September 30, 2004, the Company considers the estimated fair market value of the mortgage notes to be $374.3 million.

On July 15, 2004, the Company and its banks made amendments to the facility to accommodate upcoming anticipated transactions. The Company increased the non-recourse mortgage financing limit from $325 million to $350 million to allow for the issuance of the $105 million of seven-year notes mentioned in the previous paragraph and increased the stock repurchase and special dividend limit to $300 million (eliminating the financial ratio test needed to exceed $150 million) to allow for the $190 million repurchase from the Trust and Foundation and $40 million stock repurchase program. At September 30, 2004, the Company had $46 million remaining under the $300 million stock repurchase and special dividend limit.

Note 9. Stock-Based Compensation

The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB Opinion No. 25), and related interpretations in accounting for stock options. As such, compensation expenses would be recorded on the date of the grant only if the current market price of the underlying stock exceeded the exercise price. Compensation expenses for grants of restricted stock are recognized over the applicable vesting period.

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In a transaction (the “Transaction”) initiated at the request of the Board of Directors, the Company cancelled vested, in-the-money stock options (the “Options”) to acquire 144,000 shares of the Company’s common stock held by the Company’s Chief Executive Officer (“CEO”). The embedded value of the Options (fair market value less strike price) was $2 million. The embedded value, less applicable tax withholding, was paid in common stock. The CEO was issued 36,407 shares (valued at $35.06, which was the closing price on February 27, 2004). The stock, together with applicable withholdings, represents the pre-tax embedded value. Because the original stock option award was cancelled and the Company replaced this award with FECI common stock, in accordance with FASB Interpretation No. 44, the Company was required to recognize compensation expense in the amount of $2 million with respect to the Transaction. The Board recognized the need for the CEO to address the near-term maturity of the Options and preferred that he do so without the current market sale of 144,000 shares and that he also increase his outright ownership in the Company. As a part of this arrangement, the CEO has agreed, by the conclusion of 2005, to accumulate and maintain a position of outright ownership in the Company’s stock of at least 75,000 shares.

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

Note 10. Realty Land Sales and Associated Cost

In accordance with Statement of Financial Accounting Standard No. 66, “Accounting for Sale of Real Estate,” revenue for realty land sales is recognized upon the closing of sales contracts and when collection of the sales proceeds is reasonably assured. During the current period, all sales proceeds were received in cash at closing.

The net book value of buildings and land is presented separately in the Consolidated Balance Sheets when assets meet the criteria for classification as “assets held for sale” in accordance with SFAS 144 (i.e., a sales contract is executed and significant non-refundable monies are provided by the buyer.) Not all building and land sales, particularly less significant dispositions, meet the criteria described above. At September 30, 2004, a large land parcel under contract for sale is included in this category.

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

Note 11. Segment Information

The Company follows Statement of Financial Accounting Standards No. 131, “Disclosure about Segments of an Enterprise and Related Information” (SFAS 131). SFAS 131 provides guidance for reporting information about operating segments and other geographic information based on a

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management approach. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies. Under the provisions of SFAS 131, the Company has two reportable operating segments, both within the same geographic area. These are the railway and realty segments.

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

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

FECR generates other income from leases to telecommunications companies for the installation of fiber optic and other facilities on the railroad right-of-way. In addition, FECR generates revenues from the grant of licenses and leases to use railroad property and rights-of-way for outdoor advertising, parking lots and lateral crossings of wires and pipes by municipalities and utility and telecommunications companies. These miscellaneous rents are included in other income.

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

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

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Information by industry segment:

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

*-For the periods presented, there are no intersegment revenues and expenses.

Note 12. The St. Joe Company

St. Joe Company and affiliates provided certain real estate services to the Company under service agreements, which expired in October 2003. These services included property management, development management and construction coordination and leasing services. Flagler now has operational responsibility for these services. However, Codina, a St. Joe affiliate, continues to provide development and leasing services at Flagler’s South Florida properties. Amounts paid to St. Joe and affiliates for these services for the third quarter of 2004 and 2003, respectively, were as follows: property management

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services of $0 million and $0.5 million, development fees of $0.1 million and $0.1 million, construction coordination fees of $0 million and $0.1 million and leasing commissions of $0.6 million and $0.4 million.

Note 13. Taxes Payable

Note 14. Cash Deposits and §1031 Escrow Funds

At September 30, 2004, the Company had $17.7 million of cash deposits and §1031 escrow funds held by qualifying intermediaries. These funds represent $9.9 million currently anticipated to be used in §1031 exchanges to buy qualifying property and $7.8 million of non-refundable deposits associated with the Company’s anticipated land sales.

Note 15. Engineering Study

During 2003, FECR commenced an engineering- and economics-based study of its principal right-of-way and equipment assets to develop a multi-year maintenance and replacement plan and associated estimates of the assets’ remaining lives. The engineering studies segregated the equipment and right-of-way assets into the following major groupings: locomotives, rolling stock (e.g. hoppers, flatcars, etc.), bridges and track structure (rail, ties, ballast, and other track material). During the third quarter of 2004 the engineering study (including associated estimated accounting lives) for locomotives was completed. Additionally, the engineering studies for rolling stock and bridges were substantially completed, however, finalization of these studies is not expected until late in the fourth quarter of 2004. The right-of-way asset engineering study is currently under way with a completion date during the first half of 2005.

The locomotive study indicated no substantive change in the annual maintenance or capital replacement programs. FECR will continue its general practice of maintaining locomotives for the entirety of their useful operating life. From this engineering study FECR identified three major sub-components of its locomotive assets: Hulk/Chassis, Locomotive engine and Combos (i.e. wheel assemblies, electric motors, etc.) The replacement and resulting depreciable lives for each of these sub-components is 50 years, 7 years and 3 years, respectively. Annual depreciation is expected to increase approximately 8% or $0.2 million as a result of the study. These depreciable lives will be implemented in the fourth quarter of 2004.

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

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Item 2.

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

Forward-Looking Statements

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

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

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

Results of Operations

Consolidated Results

Third Quarter and Nine Months

The Company reported consolidated revenues of $76.8 million for the third quarter 2004, compared to $86.8 million in the third quarter 2003. The decrease in consolidated revenues is due to two large land sales that took place during the third quarter of 2003 (Citicorp - $14.4 million and Stuart Commerce Bank - $2.2 million) partially offset by increased 2004 Railway revenues and Flagler rental and services revenue. The Company reported income (loss) from continuing operations of $10.4 million and ($0.2) million for the quarters ended September 30, 2004 and 2003, respectively. The Company reported net income of $10.5 million, or $0.31 per diluted share in the third quarter, 2004, compared with net income of $1.0 million, or $0.03 per diluted share in the third quarter of 2003. The increase in income from continuing operations and net income results primarily from a 2003 charge of $16.4 million ($10.1 million after tax) for reserves associated with the termination of the Port Everglades lease. Additionally, improved operating profit from Flagler rental and services revenue was offset by decreased operating profit at FECR which resulted from the negative impact of hurricane related lost revenues and costs.

For the nine months ended September 30, 2004, FECI reported consolidated revenues of $218.7 million, compared to $234.8 million for the same period in 2003. Consolidated revenues decreased for the nine months ended September 30, 2004 due to decreased land sales activity at Flagler. The nine months ended September 30, 2003 contained several large land sales at Flagler including Citicorp ($14.4 million), Baptist Hospital ($9.5 million), Ft. Pierce ($5.6 million), Stuart Commerce Park ($2.2 million) and Weston Office Park ($2.2 million) as well as other small parcels. This was partially offset by revenue increases at FECR and higher Flagler realty and rental services revenue. The Company reported income from continuing operations of $24.6 million and $16.2 million for the nine months ended September 30, 2004 and 2003, respectively. The Company reported net income of $27.2 million, or $0.75 per diluted share, for the nine months ended September 30, 2004, compared to net income of $17.2 million, or $0.47 per diluted share, for the prior year period. The increase in income from continuing operations and net income is primarily effected by the 2003 charge of $16.4 million ($10.1 million after tax) for reserves associated with the termination of the Port Everglades lease offset by the above mentioned 2004 land sale activity decrease plus an increase in corporate general and administrative expenses (primarily costs associated with grants of restricted stock). Additionally, other income increased in 2004 due to new utility wire-crossing agreements ($2.6 million) with a single customer.

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Railway
Third Quarter

FECR’s traffic volume and revenues for the three months ended September 30, 2004 and 2003, respectively, are shown below. Also, FECR’s quarterly operating expenses are presented below.

TRAFFIC
Three Months Ended September 30
(dollars and units in thousands)

(Prior year’s results have been reclassified to conform to current year’s presentation. Previously, drayage revenues were shown separately but are now classified for all periods in intermodal revenues, given their integrated relationship.)

RAILWAY OPERATING EXPENSES

(Prior year’s results have been reclassified to conform to current year’s presentation. Previously, drayage expenses were shown separately but are now classified for all periods in their related natural category expense item.)

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Railway segment revenues increased $1.6 million to $46.3 million in third quarter 2004 from $44.7 million in third quarter 2003. FECR had five days in early September and four days in late September with no traffic movements due to Hurricanes Frances and Jeanne reducing 2004 third quarter revenues. Carload revenues decreased $1.5 million in the third quarter 2004 over 2003. This decrease in carload revenue was primarily a decline in third quarter 2004 aggregate revenues of $1.2 million due to lost revenue days associated with Hurricanes Frances and Jeanne. However, offsetting FECR’s decline in carload revenues was an increase in intermodal revenue. After several years of decline in intermodal revenue, the third quarter of 2004 marked its fifth consecutive quarter of year-to-year growth despite the effects of the hurricanes, ending the quarter with $20.8 million in revenue, for an increase of $2.8 million over third quarter 2003. The “hurricane” train from Atlanta to South Florida increased revenues over 2003 with a record volume month during the quarter. Additionally, intermodal haulage revenue and the international business segment experienced strong growth in third quarter 2004. Partially offsetting these intermodal increases were declines in intermodal traffic received from one of FECR’s connecting carrier.

Operating expenses increased $4.5 million in third quarter 2004 over 2003. Third quarter 2004 expenses increased $3.0 million due to a main line derailment ($0.8 million), and Hurricanes Frances and Jeanne (estimated at $2.2 million combined), which are included in “other” expenses. The hurricane expenses included tree clearing, property damage to signals, buildings and bridges, and costs to operate and flag crossings during the power outages. Compensation expenses increased $0.3 million due to general wage increases. Outside contracted delivery service expenses to move product from the customers to the rail ramp increased $1.1 million in third quarter 2004 over 2003. Fuel expense increased $0.6 million due to increases in price per gallon and additional volume.

The Railway forward purchases fuel to manage the risk of fuel price increases. As of September 30, 2004, the Railway had forward purchase contracts of 4.9 million gallons for delivery from October 2004 to September 2005 for an average purchase price of $0.9793 per gallon before taxes and freight. This represents 54% of the estimated consumption for three months ended December 31, 2004 for an average purchase price of $0.9776 and represents 27% of the estimated consumption for the nine months ending September 30, 2005 for an average purchase price of $0.9805.

During 2003, FECR commenced an engineering- and economics-based study of its principal right-of-way and equipment assets to develop a multi-year maintenance and replacement plan and associated estimates of the assets’ remaining lives. The engineering studies segregated the equipment and right-of-way assets into the following major groupings: Locomotives, rolling stock (e.g. hoppers, flatcars, etc.), bridges and track structure (rail, ties, ballast, and other track material). During the third quarter of 2004 the engineering study (including associated estimated accounting lives) for locomotives was completed. Additionally, the engineering studies for rolling stock and bridges were substantially completed, however, finalization of these studies is not expected until late in the fourth quarter of 2004. The right-of-way asset engineering study is currently under way with a completion date during the first half of 2005.

The locomotive study indicated no substantive change in the annual maintenance or capital replacement programs. FECR will continue its general practice of maintaining locomotives for the entirety of their useful operating life. From this engineering study FECR identified three major sub-components of its locomotive assets: Hulk/Chassis, Locomotive engine and Combos (i.e. wheel assemblies, electric motors, etc.)The replacement and resulting depreciable lives for each of these sub-components is 50 years, 7 years and 3 years, respectively. Annual depreciation is expected to increase approximately 8% or $0.2 million as a result of the study. These depreciable lives will be implemented in the fourth quarter of 2004.

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

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Nine Months

FECR’s traffic volume and revenues for the nine months ended September 30, 2004 and 2003, respectively, are shown below. Also, FECR’s nine month operating expenses are presented below.

TRAFFIC
Nine Months Ended September 30
(dollars and units in thousands)

(Prior year’s results have been reclassified to conform to current year’s presentation. Previously, drayage revenues were shown separately but are now classified for all periods in intermodal revenues, given their integrated relationship.)

RAILWAY OPERATING EXPENSES

(Prior year’s results have been reclassified to conform to current year’s presentation. Previously, drayage expenses were shown separately but are now classified for all periods in their related natural category expense item.)

Railway segment revenues increased $10.7 million to $144.9 million through September 2004 from $134.2 million through September 2003. Carload revenues increased $1.8 million over 2003 levels which is driven by record levels of aggregate business increasing revenue $3.1 million in 2004 over 2003. Food and kindred increased $0.4 million due to new capacity from an existing customer. Paper and lumber decreased $0.9 million due to lower first half 2004 lumber shipments and the loss of a coal contract in third quarter 2003 that was recently recaptured. Vehicle revenues decreased $0.8 million in 2004 over

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2003 primarily due to the rental buyback program shifted to later in 2004 and loss of the National Guard move from the Iraq war in 2003.

Intermodal revenues increased $8.6 million for the first nine months in 2004 over the same period 2003. Leading the way was a resurgence in the parcel/LTL, domestic truckload segments and International loads, as well as continued strength in our Integrated Product. Intermodal haulage revenue experienced strong growth in 2004 as well as the retail service, which includes door-to-door deliveries. Partially offsetting these increases were declines in intermodal traffic received from one of FECR’s connecting carriers.

Operating expenses increased $9.9 million to $113.3 million for nine months ended September 2004, compared with $103.4 million for same period 2003. Overall, expenses (included in “Other”) increased $3.2 million due to a main line derailment ($0.8 million), Hurricane Charley ($0.2 million), and Hurricanes Frances and Jeanne (estimated at $2.2 million combined) in the third quarter 2004. The hurricane expenses were for tree clearing, property damage to signals, buildings and bridges, and costs to operate and flag crossings during the power outages. Compensation and benefits increased $1.8 million due to general wage increase, volume for new business and variable compensation. Outside contracted delivery expenses increased $2.5 million to deliver the additional door-to-door intermodal business. Materials increased $0.6 million due to additional repairs to the locomotives and freight cars. Fuel expense increased $1.2 million due to volume and increased price for diesel fuel. Purchased services increased $0.4 million over 2003 due to additional rail inspection services. Depreciation increased $0.3 million in 2004 over 2003. Equipment rents and per diem increased $0.4 million due to additional trailers and hopper cars being used for additional business. Property taxes increased $0.5 million for 2004 due to an increase in the property assessment for 2003. Offsetting these increases is a reduction of information technology costs of $0.9 million.

Realty Third Quarter

Flagler’s quarterly revenues and operating expenses for the three months ended September 30, 2004 and 2003, respectively, are presented below.

REALTY SEGMENT REVENUES

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

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REALTY SEGMENT EXPENSES

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

Results from Continuing Operations

Flagler rental and services revenues increased $1.5 million or 9.0% from $15.9 million in 2003 to $17.4 million in 2004. Revenues from operating properties increased $1.4 million. Same store occupancy increased to 94% at September 30, 2004 compared to September 30, 2003 occupancy of 85%. Same store properties generated revenues of $15.6 million during the three months ended September 30, 2004, an increase of $1.0 million over the quarter ended September 30, 2003 revenues of $14.6 million. Properties acquired in 2003 contributed revenues of $1.2 million, consistent with the prior year. Deerwood North 300 (new in 2004) contributed revenues of $0.4 million during the quarter ended September 30, 2004. Income from land rents decreased $0.1 million due to the continued disposition of non-core land holdings. Services fee revenues contributed $0.1 million in 2004.

Flagler held 58 finished buildings with 6.4 million square feet and occupancy of 94% at September 30, 2004. “Same store” properties include 5.8 million square feet at 94% occupancy at September 30, 2004 compared to 85% at September 30, 2003.

Flagler sales revenue decreased to $11.2 million in 2004 from $19.0 million in 2003, which included the sale of 78 acres to Citicorp for $14.4 million.

Flagler’s operating expenses increased $2.0 million or 15.4% to $15.1 million for the three months ended September 30, 2004 compared to $13.1 million during the three months ended September 30, 2003. Real estate taxes increased $0.9 million ($0.2 million recoverable; $0.7 million non-recoverable) primarily related to increased assessed land values at Flagler Station in South Florida. Also, depreciation and amortization increased $0.8 million (new in 2004 — $0.2 million; office park infrastructure/corporate — $0.6 million), recoverable expenses increased $0.3 million related to increased repairs and maintenance of $0.1 million and increased owners’ association expenses of $0.1 million related to Flagler Center maintenance costs, as well as increased management fee expenses of $0.1 million. Non-recoverable administrative costs increased by $0.1 million over the prior year primarily related to additional overhead costs such as deal chase costs, marketing and bad debt expense.

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Flagler’s cost of land sales decreased $14.4 million, from $16.3 million in 2003 to $1.9 million in 2004. Land sales in 2003 included property within developed parks, which carry a higher cost per square foot.

Operating profit from operating properties increased $0.9 million to $5.9 million in the third quarter of 2004 compared to $5.0 million in the third quarter of 2003. Same store properties operating profit increased $0.9 million during the third quarter of 2004 while operating profit from properties acquired in 2003 decreased $0.1 million compared to the third quarter of 2003. New in 2004 properties contributed $0.1 million of operating profit during the third quarter of 2004.

Nine Months

Flagler’s revenues and operating expenses for the nine months ended September 30, 2004 and 2003, respectively, are presented below.

REALTY SEGMENT REVENUES

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

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REALTY SEGMENT EXPENSES