ITEM 1. BUSINESS
General
Florida East Coast Industries, Inc. (Registrant) was incorporated under the laws of the State of Florida on December 9, 1983, for purposes of (a) directly, or through the ownership of shares in any corporation, to acquire, hold, manage, improve, develop and dispose of real estate and property; (b) only through the ownership of shares in any corporation, to engage in the transportation industry; (c) directly, or through the ownership of shares in any corporation, to purchase or otherwise acquire, hold, own and dispose of shares or other securities in any corporation; and (d) to engage in any other lawful act or activity for which a corporation may be organized under the Florida General Corporation Act.
Segments
Registrant is segmented into areas of Transportation (principally by rail) and Realty (real estate ownership, development, leasing and management).
Transportation: Registrant owns 100% of the stock of Florida East Coast Railway Company (Railway) and 80% of the stock of International Transit, Inc. (ITI).
Railway owns 100% of the stock of seven subsidiary corporations, all of which are included in the consolidated Transportation segment and which, considered in the aggregate, do not constitute a significant subsidiary.
Principal commodities carried by Transportation include automotive vehicles, crushed stone, cement, trailers-on-flatcars, containers-on-flatcars and basic consumer goods such as foodstuffs. Movement is relatively stable throughout the year with heaviest traffic ordinarily occurring during the first and last quarters of the year.
Railway is the only railroad serving locations along the east coast of Florida between Jacksonville and West Palm Beach. From West Palm Beach to Miami, Railway is competitive with CSX Transportation (CSXT) for rail traffic, excluding that of trailer-on-flatcar/container-on-flatcar traffic which is handled exclusively by Railway under agreement with CSXT. Common motor carriers and owner-operators are competitive throughout the entire transportation system.
Railway is considered generally as a terminating railroad, meaning the majority of the traffic received from other carriers is destined for Jacksonville and points south. A significant portion of traffic handled is received from Jacksonville rail connections, CSXT and Norfolk Southern Railway, destined to points on Railway's line, whereas a less significant portion is forwarded to those connections for destinations outside Florida. In recent years, Railway has experienced continuing growth in traffic originating and terminating at points on its own line, and this local traffic is now generating in excess of 46% of rail traffic revenues.
ITI is a common motor carrier providing truckload service throughout most of the southeastern United States which was acquired at the beginning of the second quarter 1995. Since April 1, 1995, ITI's revenues and expenses have been consolidated into the Company's financials and this consolidation has affected period-to-period comparisons, but did not significantly impact the consolidated net income of the Company.
Realty: Registrant owns 100% of the stock of Gran Central Corporation (GCC).
GCC is engaged in the development, lease, management and sales of its property, and general management of all real property included in the consolidated financials. GCC is in competition with other developers and brokers throughout its operating area.
Employees: As of December 31, 1996, the Registrant employed approximately 1,046 employees, including 1,016 in Transportation; 25 in Realty and 5 in Corporate. Approximately 731 Transportation employees are covered by collective bargaining agreements.
Recent Events: As reported in the 1995 Annual Report to Shareholders, the Special Committee of the Board of Directors in 1995 recommended, and the Board has concurred with the recommendation, that FECI should pursue a disposition of its transportation subsidiary, Florida East Coast Railway Company ("FECRR"), but only in conjunction with a disposition of all of FECI's realty subsidiary, Gran Central Corporation ("GCC").
St. Joe Corporation indicated a willingness to consider exchanging shares of FECI stock it owns for all of the shares of GCC stock held by FECI and, in that regard, proposed acquiring all the issued and outstanding shares of common stock of GCC in a tax-free exchange of its shares in FECI in return for 100% ownership of GCC stock. St. Joe and FECI each hired an appraisal firm to assist in evaluating the property of GCC, and St. Joe and FECI have conducted negotiations on the possible terms of an exchange. The FECI Special Committee has conducted a process of discussions with prospective purchasers of FECRR and has selected a party with which to negotiate a transaction.
St. Joe has advised the FECI Special Committee that, before proceeding further with discussions concerning the acquisition of GCC or the disposition of FECRR, the Special Committee of St. Joe's Board of Directors is providing Peter J. Rummell, who was appointed Chairman and Chief Executive Officer of St. Joe in early January 1997, an opportunity to review the possible transactions and report his views to St. Joe's Special Committee.
President Clinton's Proposed Fiscal 1998 Budget (the "Proposed Budget") could have a substantial and adverse effect upon the tax treatment of a merger of FECI with another company subsequent to the acquisition of GCC common stock by St. Joe. The Proposed Budget contains a provision that would amend current laws such that a merger of FECI with another company within two years of the exchange of GCC common stock for FECI common stock, pursuant to which the FECI shareholders would own less than fifty percent of both the voting power and valaue of the stock of the surviving company, could cause FECI to recognize gain on the exchange of the GCC common stock. Under this provision of the Proposed Budget, FECI's taxable gain would be measured by the difference between the fair market value of the GCC common stock and FECI's adjusted tax basis in such stock. Under the Proposed Budget, this provision would be effective as to a transaction that occurs after the date of first Congressional Committee action to amend current law. It is uncertain whether such provision will be enacted by Congress, or, if such a provision is enacted, what form it will take (including its effective date).
There can be no assurance when, if or on what terms a transaction involving FECI and another corporation may occur or when, if or on what terms St. Joe may acquire GCC from FECI.
Registrant has no foreign operations.
Item 2.

Item 2. PROPERTIES
Transportation: Transportation owns approximately 12,000 acres of land property, all located along the east coast of the state of Florida and devoted to railroad operations. In addition to rail right-of-way between Jacksonville and Miami and between Ft. Pierce and Lake Harbor, operating property includes significant switching/classification yards, trailer/container loading/unloading facilities, automobile marshaling yard, maintenance facilities, etc., at major terminals throughout the system.
Transportation physical plant (i.e., track structure, shops and office buildings) is in excellent condition and includes 351 miles of main track, 91 miles of branch line track, 157 miles of yard switching track and 184 miles of other tracks, including second main and passing tracks. The main track is generally constructed of 132# rail and other track materials on concrete crossties providing a track structure meeting the needs of today's heavy traffic loads. Certain of the branch line and yard tracks, though in good physical condition, are constructed of materials lighter than the 112# and 115# rails deemed necessary for this trackage, and programs are currently under way to relay these tracks with heavier materials. These programs may be expected to extend several years into the future.
Transportation owns 82 diesel electric locomotives, approximately 2,635 freight cars, approximately 77 tractors, 1,359 trailers for highway revenue service, numerous pieces of rail-mounted and non-rail-mounted work equipment, and numerous automotive vehicles used in maintenance and transportation operations. All equipment owned is in good physical condition.
Realty - Realty owned and managed approximately 19,112 acres of land at year- end 1996, including approximately 346 acres developed with buildings; 1,158 acres developed with infrastructure ready to receive buildings, and approximately 16,493 acres of undeveloped properties including 1,115 acres owned by Transportation but not required for operations. These properties are held for lease, development and/or sale, and have a situs in fourteen counties of the state of Florida as follows:
Duval 1,526 acres St. Johns 3,385 " Putnam 87 " Flagler 3,464 " Volusia 3,823 " Brevard 2,555 " Orange 79 " Indian River 5 " St. Lucie 610 " Martin 662 " Palm Beach 217 " Broward 62 " Dade 1,740 " Manatee 897 " ---------- Total 19,112 "
At year-end 1996, Realty also owned fifty-five (55) buildings as detailed below:
No. of Rentable Year Location Bldgs. Type Square Ft. Built - -------- ------ ---- ---------- ----- duPont Center Jacksonville, FL 2 Offices 160,000 1987-88
Barnett Plaza Jacksonville, FL 1 Office 67,000 1982
Gran Park at Interstate South Jacksonville, FL 6 Office/Showroom/ Warehouses 260,000 1987-89
Gran Park at the 2 Office/Showroom/ Avenues Warehouses 101,000 1992 Jacksonville, FL 3 Offices 240,000 1992-95 2 Office/Warehouses 301,000 1994-96
Gran Park at Deerwood Jacksonville, FL 2 Offices 261,000 1995-96
Gran Park at Melbourne 1 Office/Showroom/ Melbourne, FL Warehouse 28,000 1989
Gran Park at 1 Office/Showroom/ Riviera Beach, FL Warehouse 62,000 1987 Lewis Terminals 2 Rail Warehouses 176,000 1982-87 4 Cross Docks 74,000 1987-91
Gran Park-McCahill Miami, FL 2 Rail Warehouses 468,000 1992-94 1 Front Load Ware- house 91,000 1996
Gran Park at Miami 5 Office/Showroom/ Miami, FL Warehouses 369,000 1988-94 5 Office/Warehouses 483,000 1990-96 4 Rail Warehouses 398,000 1989-94 7 Front Load Warehouses 790,000 1991-95 1 Double Front Load Warehouse 239,000 1993 1 Office/Service Center 39,000 1994
Hialeah, FL 1 Cross Dock 20,000 1987 1 Transit Warehouse 30,000 1975
Pompano Beach, FL 1 Rail Warehouse 54,000 1987 -- --------- TOTALS 55 4,711,000
Realty's holdings include lands adjacent to Railway's tracks which are suitable for development into office and industrial parks offering both rail and non- rail-served parcels. Certain other holdings are in urban or suburban locations offering opportunities for development of office building structures or business parks offering both office building sites and sites for flexible space structure such as office/showroom/warehouse buildings. Realty intends to develop infrastructure and construct buildings for lease and continued ownership wherever possible.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
During 1996, the Registrant filed legal action against the State of Florida and several counties of the State concerning overassessment of 1996 ad valorem taxes. As of March 14, 1997, the Company and the State of Florida have agreed on a settlement, and the necessary paperwork is being prepared to bring this issue to conclusion.
The Railway was named as a potentially responsible party (PRP) for the remediation of a designated Superfund site in Portsmouth, Virginia. The USEPA alleged that the Railway caused certain materials to be sent to the site over a period of years. These materials were utilized by the owner of the site in the course of its business which the Railway believes caused the site to become contaminated. The Railway vigorously opposed any attempt to impose liability upon the Railway. The owner of the site filed suit in the United States District Court for the Eastern District of Virginia, Norfolk Division, seeking to impose liability upon the defendants, including the Railway, for remediation of the site. A settlement between the owner of the site and the Railway was achieved in late 1996. The settlement of approximately $.2 million was approved by the Court and the USEPA. Unless additional contamination is discovered at the site, or it becomes necessary to remediate areas beyond the original cleanup, the Railway will have no further liability at the site.
The Railway has been named as a PRP for the remediation of two designated Superfund sites near Jacksonville, Florida. On the first site, the USEPA has alleged the Railway caused certain materials to be disposed at the site over a period of years. The USEPA has offered all named PRPs an opportunity to participate in a pilot allocation program. This program is similar to binding arbitration. If the Railway participates in this program, its share of the liability for the remediation will be fixed. The USEPA has also offered to negotiate a separate settlement with certain parties, including the Railway, whom we believe the USEPA considers to be de minimis parties. Railway believes that, whichever alternative is chosen, its liability for the remediation of the site will not be material. On the second site, the Railway was contacted by the USEPA during 1996, at which time the Railway was asked to provide certain information about the manner in which the Railway disposes of steel drums. The USEPA is attempting to determine whether or not the Railway should be a PRP at the steel drum site in Jacksonville, Florida. There is some evidence that the Railway may have sent a small number of steel drums to the site for disposal. The Railway believes its responsibility, if any, for the remediation of the site will not be material.
The Railway was contacted by the USEPA during 1996, seeking reimbursement of costs associated with the remediation of a site in Hialeah, Florida. An individual operated a business on this site for a number of years. The owner of the business slightly encroached upon the Railway's right-of-way. Upon discovering this, the Railway entered into a Lease Agreement with the business owner rather than require the building be removed. The individual has ceased doing business. The USEPA is seeking reimbursement of the approximate $2 million spent in remediation from the Railway on the grounds that the Railway was an "owner" of the site. Settlement negotiations are ongoing at this time and are not estimated to be material.
During April 1996, an individual, alleging that he is a shareholder of FECI, instituted a purported class action suite in Florida state court against FECI, St. Joe Industries, Inc., St. Joe Corporation and members of the FECI Board of Directors (Messrs. Thornton, Belin, Nedley, Zellers, Fairbanks, Foster, Harper, Mercer and Parrish). Certain of the individuals named in the action also are officers or directors of St. Joe Corporation. The action, which has purportedly been brought on behalf of all shareholders of FECI, other than the defendants and their affiliates, is styled Kahn v. St. Joe Industries, Inc., St. Joe Paper Co., Thornton, Belin, Nedley, Zellers, Fairbanks, Foster, Harper, Mercer, Parrish and Florida East Coast Industries, Inc., Case No. 96-01874 CA (Circuit Ccourt, Fourth Judicial Circuit, Duval County, Florida, Division CV-G).
The complaint alleges that the defendants breached their fiduciary duties to the minority shareholders of FECI in connection with the February 26, 1996 announcement by FECI that it was considering the sale of its real estate subsidiary, GCC, to St. Joe Corporation and the sale of its railroad subsidiary, FEC Railway, to a third party. According to the complaint, such transactions allegedly would constitute unfair dealing and benefit St. Joe Corporation, as FECI's majority and controlling shareholder, at the expense of FECI's minority shareholders. The action seeks, among other things, to certify the litigation as a class action, enjoin the sale of GCC to St. Joe Corporation and to require the defendant directors of FECI to sell GCC by conducting an auction or accepting competitive bids from third parties.
On May 29, 1996, the parties to the action entered into a stipulation whereby (i) defendants agreed to appear in the litigation and waive any challenge to sufficiency and service of process and (ii) plaintiff agreed that defendants' time to respond to the complaint would be extended such that defendants are not required to answer or respond to the complaint until plaint'ff's counsel provides written notice to defendants' counsel that a response is required (a response is then required to be filed within 20 days). On February 6, 1997, the Court entered an order approving the stipulation.
There are no other legal or regulatory proceedings pending or known to be contemplated which, in the opinion of the General Attorney of the Registrant, are other than normal and incidental to the kinds of businesses conducted by the Registrant.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
a. Principal market on which Florida East Coast Industries, Inc.'s common stock is traded: New York Stock Exchange. Symbol: FLA
b. The table below presents the high and low market prices and dividend information for Florida East Coast Industries, Inc.'s common shares:
---- Quarter Ended Dec. 31 Sept. 30 June 30 March 31 High $89 1/4 $85 7/8 $90 1/8 $89 Low $81 1/8 $77 $83 $67 3/8 Dividends $.10 $.10 $.10 $.10
---- Quarter Ended Dec. 31 Sept. 30 June 30 March 31 High $72 1/8 $76 1/2 $79 3/4 $80 3/4 Low $64 1/8 $67 1/2 $70 3/8 $65 7/8 Dividends $.10 $.10 $.10 $.10
c. The total number of holders of record of Florida East Coast Industries, Inc.'s common stock as of December 31, 1996 was 764.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands except per share amounts*) (Unaudited) Years Ended December 31 1996 1995 1994 ---- ---- ---- Revenues: Operating Revenues $208,031 $201,107 $199,544 Other Income 10,552 7,926 9,117 -------- -------- -------- Total Revenues and Other Income $218,583 $209,033 $208,661
Income before cumulative effect of change in accounting principle $ 30,455 $ 26,639 $ 34,605 Minority Interest (41) (2) 0 Cumulative effect of change in accounting principle for income taxes 0 0 0 -------- ------- ------- Net Income $ 30,414 $26,637 $34,605 ======== ======= ======= Per Share Data: Cash Dividend $ 0.40 $ 0.40 $ 0.40 ======== ======= ======= Income before cumulative effect of change in accounting principle $ 3.36 $ 2.95 $ 3.85 Cumulative effect of change in accounting principle for income taxes $ 0.00 $ 0.00 $ 0.00 -------- ------- ------- Net Income Per Common Share $ 3.36 $ 2.95 $ 3.85
At year-end: Total Assets $789,681 $756,210 $722,494 Working Capital $ 41,203 $ 38,010 $ 39,750 Shareholders' Equity $608,796 $581,860 $552,268
Average Number of Employees 1,035 994 1,319 *Average Wage per Employee $ 39,496 $ 42,215 $ 36,482
The Items Below Pertain to Railway Operations Only (Not Consolidated)
Revenue Ton-Miles (thousands) 4,098,000 4,122,000 4,388,000 *Freight Revenue Per Ton-Mile $ 0.0352 $ 0.0345 $ 0.0338
Miles of Road Operated at Year-End 442 442 442
Revenues: 1993 1992 ---- ---- Operating Revenues $181,096 $175,755 Other Income 5,103 8,253 -------- -------- Total Revenues and Other Income $186,199 $184,008 Income before cumulative effect of change in accounting principle $ 20,779 $ 24,045 Minority Interest 0 0 Cumulative effect of change in accounting principle for income taxes $ 1,504 $ 0 -------- -------- Net Income $ 22,283 $ 24,045 ======== ======== Per Share Data Cash Dividend $ 0.40 $ 0.40 Income before cumulative effect of change in accounting principle $ 2.31 $ 2.67 Cumulative effect of change in accounting principle for income taxes $ 0.17 $ 0.00 -------- -------- Net Income Per Common Share $ 2.48 $ 2.67
At year-end: Total Assets $688,445 $670,419 Working Capital $ 42,552 $ 39,407 Shareholders' Equity $523,038 $503,464
Average Number of Employees 1,463 1,448
*Average Wage per Employee $ 33,936 $ 33,414
The Items Below Pertain to Railway Operations Only (Not Consolidated)
Revenue Ton-Miles (thousands) 4,257,000 4,158,000
*Freight Revenue Per Ton-Mile $ 0.0342 $ 0.0340
Miles of Road Operated at Year-End 442 442
Quarterly Financial Data (Unaudited) (Dollars in thousands except per share amounts)
---- Dec. 31 Sept. 30 June 30 March 31
Operating Revenues $55,458 $51,123 $51,487 $49,963
Other Income $ (568) $ 4,541 $ 2,016 $ 4,563
Operating Expenses $41,256 $43,396 $43,152 $42,621
Net Income $ 8,866 $ 7,656 $ 6,469 $ 7,423
Net Income Per Common Share $ 0.98 $ 0.85 $ 0.71 $ 0.82
---- Dec. 31 Sept. 30 June 30 March 31
Operating Revenues $51,839 $51,710 $51,979 $45,579
Other Income $ 2,178 $ 1,807 $ 2,765 $ 1,176
Operating Expenses $42,668 $42,069 $43,826 $37,916
Net Income $ 7,171 $ 7,142 $ 6,800 $ 5,524
Net Income Per Common Share $ 0.79 $ 0.78 $ 0.76 $ .62
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT DISCUSSION AND ANALYSIS OF INCOME STATEMENTS
This statement summarizes the Company's consolidated income results for the three-year period ending December 31, 1996. The purpose of this discussion is to provide background information for the figures presented, including the significant events which contributed thereto.
Operating revenues increased throughout the three-year period, with increases of $6.9 million or 3.4% from year-end 1995 to year-end 1996, and $1.6 million or .8% from year-end 1994 to year-end 1995.
The 1996 increase of $6.9 million in operating revenues consisted of increases of $1.9 million in transportation revenues and $6.8 million in realty rental income, with a decrease of $1.8 million in land sales. The 1995 increase of $1.6 million in operating revenues included an increase of $10.3 million in transportation revenues and $4.5 million in realty revenues, with a decrease of $13.2 million in land sales. The decrease of $13.2 million in land sales from 1994 to 1995 is primarily the result of a single land sale of $11.3 million to the State of Florida in 1994.
As reported since the second quarter of 1995, the composition of revenues and expenses of the Transportation segment of the Company has changed. The change is related primarily to the consolidation of International Transit, Inc.'s (ITI) revenues and expenses into the financials as of April 1, 1995. However, the contribution to net income by ITI did not significantly impact the Company's consolidated net income. Also contributing to the change was the implementation on April 1, 1995 of a Haulage Agreement with a connecting rail carrier whereby the connecting rail carrier's intermodal shipments were handled in wholesale fashion to and from the Company's South Florida intermodal terminals. The inclusion of ITI's revenues and expenses into the consolidated financials increased the Company's revenues and expenses, whereas the Haulage Agreement reduced revenues and expenses in the consolidated financials.
The increase of $1.9 million in transportation revenues from 1995 to 1996 is primarily attributable to the inclusion of ITI's revenues of $25.2 million into the Company's financials. Revenues in 1996 from the rail segment of the Company remained approximately the same as in 1995. The increase in transportation revenues of $10.3 million from 1994 to 1995 was primarily attributable to the inclusion of ITI's revenues of $19.1 million into the Company's financials offset by the decline in revenues due to the Haulage Agreement previously discussed.
Transportation rail revenues are derived from four major classifications of traffic: shipments of rock, intermodal (containers and trailers), automotive and all other commodity type shipments. Brief discussions of the volumes shipped in 1996 and the conditions impacting those volumes are presented below.
Comparing 1996 with 1995, rock shipments increased 1.4% representing the continued growth in construction along the east coast of Florida and in the Greater Orlando area relating to commercial, residential and highway improvement development. Rock shipments in 1995 were approximately the same as 1994.
Intermodal shipments in 1996 decreased by approximately 1.7% when compared to 1995. This decrease was primarily related to a somewhat slow market for intermodal business in the first three quarters of 1996. At the end of the third quarter 1996, intermodal shipments had declined by approximately 3.9% when compared to the same periods in 1995. A strong 1996 fourth quarter, with an increase of approximately 5.0% over fourth quarter 1995, resulted in a modest decline for the year 1996 of 1.7%. Intermodal shipments in 1995 declined by approximately 1.4% when compared to 1994.
Automotive shipments in 1996 improved by approximately 9.3% over 1995 which was brought about by growth in new vehicle sales. Automotive shipments during 1994 and 1995 remained relatively unchanged.
All other carload shipments in 1996 decreased by approximately 1.2% when compared to 1995. This decline was primarily related to sizable gains realized in 1995 of shipments of raw sugar and a one-time shipment of military equipment. All other carload shipments in 1995 increased by 5% when compared to 1994.
Realty land sales decreased by $1.8 million in 1996 when compared to 1995. When comparing 1995 with 1994, land sales decreased by $13.2 million, which was primarily attributable to a single sale of realty property for approximately $11.3 million to the State of Florida in the first quarter of 1994.
Realty rental income increased by $6.8 million in 1996 compared to 1995 and $4.5 million in 1995 compared to 1994. These increases resulted primarily from the construction of new buildings which added additional leasable space to inventory and the normal increases associated with tenant billings.
As of year-end 1996, Gran Central Corporation owned fifty-five (55) buildings with approximately 4.7 million square feet of leasable space. In 1996, approximately .6 million square feet were added to the inventory of leasable space. Approximately 93% of the 4.7 million square feet of leasable space was under lease at year-end 1996 as compared to 95% in 1995 and 90% in 1994. The Company expects rental revenue to continue to increase as new space is constructed and added to inventory.
At year end, there were seven new buildings under construction which, upon completion, will add approximately .9 million square feet of leasable space. The Company is primarily involved in ongoing development of land for construction of buildings for lease, with only occasional realty sales anticipated.
Operating expenses increased $3.9 million or 2.4% in 1996 from 1995 and $13.5 million or 8.8% in 1995 from 1994. The increases of $3.9 million in 1996 and $13.5 million in 1995 were primarily related to the inclusion of ITI's operating expenses of $24.7 million in 1996 and $18.9 million in 1995 into the Company's consolidated financials.
Discounting ITI's operating expenses of $24.7 million, operating expenses decreased by $7.3 million or 4.7% when comparing 1996 with 1995. The operating expense changes were primarily attributable to the outsourcing of services previously performed by Railway's subsidiaries and the implementation of a Haulage Agreement in the second quarter of 1995. The 1995 operating expenses increased by $13.5 million over 1994 which was attributed to the inclusion of ITI's expenses into the Company's consolidated financials. Discounting ITI's operating expenses of $18.9 million from the consolidated operating expenses, operating expenses decreased $5.4 million or 3.5% when comparing 1995 with 1994. This net decrease was also the result of the outsourcing of services and the Haulage Agreement mentioned above.
Other income increased by $2.6 million in 1996 compared to 1995. The increase was primarily attributable to increases of $1.6 million in gains on sales and other disposition of properties, and $1.5 million in other income offset by a reduction of approximately $.5 million in interest income. The increase of $1.6 million in gains on sale and other disposal of properties resulted from a sale of fiber optic conduit for $8.7 million. The $1.5 million increase in other income is primarily attributable to capital gains from the sale of securities. Comparing 1995 with 1994, other income decreased by $1.2 million.
Income taxes increased by $1.8 million in 1996 from 1995 and decreased by $5.2 million in 1995 from 1994 primarily due to changes in income before income taxes for those comparative periods.
MANAGEMENT DISCUSSION AND ANALYSIS OF BALANCE SHEETS
The Consolidated Balance Sheets provide information about the nature and amounts of the Company's investments, its obligations to creditors, and its shareholders' equity at the end of the year. This information complements data found in the Consolidated Statements of Income and Retained Earnings and is designed to contribute to the shareholders' understanding of the Company.
Total current assets for 1996 increased by $10.7 million when compared to 1995. This change is represented primarily by increases of $5.5 million in cash, cash equivalents and short-term investments, $1.0 million in materials and supplies, $3.6 million in accounts receivable, and $.6 million in other current assets. Large liquid reserves are maintained to meet the Company's commitment to realty construction and development.
Other investments decreased by $4.6 million in 1996 from 1995 to a total of $64.7 million. This decrease was attributed primarily to realty development and construction in 1996. Other investments include approximately $46.3 million of a portfolio managed in diversified investment funds and the balance being invested in U.S. Treasury Bills and similar highly liquid investments. These investments are classified as long-term because of management's intent to use them to finance major realty construction projects.
At year-end 1996 and currently, the Company has four major realty development projects in progress: Gran Park at Jacksonville, Gran Park at the Avenues, Gran Park at Deerwood (all in Jacksonville), and Gran Park at Miami.
Construction activities in these parks contributed significantly to the $27.4 million increase in properties from 1995 to 1996. The additions in 1996 amounted to approximately .6 million square feet of leasable space represented by five new buildings placed in service.
Total current liabilities in 1996 increased approximately $7.5 million when compared to 1995. This change was primarily attributable to increases of $2.4 million in accounts payable, $4.1 million in income taxes, and $.6 million each in accrued property taxes and other liabilities offset by a decrease of $.2 million in casualty and other reserves.
The Company is subject to proceedings arising out of environmental laws and regulations, which primarily relate to the disposal and use of fuel and oil used in the transportation business. It is the Company's policy to accrue and charge against earnings environmental cleanup costs when it is probable that a liability has been incurred and an amount can be reasonably estimated. As assessments and cleanups proceed, these accruals are reviewed and adjusted.
The only time environmental recoverables are recorded in the books of the Company is at the time a claim is filed with the State and is expected to be recovered. Such amounts are not material to the consolidated financial statements.
Compliance with the federal, state, and local laws and regulations relating to the protection of the environment has not affected the Company's capital additions, earnings or competitive position, nor does management anticipate any future problems will adversely affect the Company's financial situation based upon the information available today.
Environmental expenditures for capital improvements and infrequent expenditures for ongoing operations and maintenance have historically been in- significant to the operations of the Company. Management does not anticipate any changes in these expenditures.
The Company's financial position continues to be strong as indicated by the current ratios of 2.19 in 1995 and 2.04 in 1996. The Company has no long- term debt or open lines of credit, nor does the Company anticipate that any will be negotiated in the foreseeable future. The Company is not obligated under any significant capital or operating-type leases, except for the short- term leasing of locomotives, freight cars, trailers and data processing equipment.
As of December 31, 1996, the Company had authorized approximately $31.2 million for capital expenditures, of which 77% represented realty development and construction. These expenditures are expected to be funded from current operations supplemented, as necessary, by cash and investments currently on hand.
MANAGEMENT DISCUSSION AND ANALYSIS OF STATEMENTS OF CASH FLOWS
The Statements of Cash Flows detail the Company's cash flow from operating, investing and financing activities during the year. Since the Company does not use debt to finance its operations, the sources of funds throughout the year are exclusively generated by operating and investing activities. To date, these sources have been sufficient to fund the purchases and construction of properties and pay dividends.
Net income for 1996 increased approximately $3.8 million when compared to 1995, and 1995 decreased approximately $8.0 million when compared to 1994.
The changes in net cash generated by operating activities from 1995 to 1996 and from 1994 to 1995 were primarily attributable to changes in net incomes and the associated timing differences of remitted cash receipts and payments for those comparative periods.
The composition of gains on disposition of assets largely includes gains on non-realty land sales of $2.9, $1.3 and $4.0 million for the years 1996, 1995 and 1994, respectively.
The purchases of properties for 1996, 1995 and 1994 amounted to $55.6 million, $70.6 million and $49.3 million, respectively. Purchases of properties for the past three years have been financed primarily from cash generated by operating activities with the balance of the funding being applied from investments.
The Company is a capital intensive company and has approximately $876 million invested in such assets. Generally accepted accounting principles require the use of historical costs in preparing financial statements. This approach disregards the effect of inflation on the replacement cost of property and equipment. Therefore, the replacement costs of these assets, as well as the related depreciation expense, would be substantially greater than the amounts reported on the basis of historical costs. The acquisition of new assets will also result in higher depreciation charges and, in the case of realty, higher taxes and operating costs.
Cash flows from financing activities for the past three years represent dividend payments.
Cash dividends of $.40 per share were paid in each of the three years, reflecting the Company's philosophy that shareholders receive a current benefit at the same time that the Company is reinvesting most earnings in a debt-free asset growth program.
The Company continues to believe that asset growth should be internally funded by operating and investing activities rather than through the use of debt. However, the Company is confident that if a need to access the market for funds were to arise, such access would be readily available.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Board of Directors and Shareholders Florida East Coast Industries, Inc.:
We have audited the consolidated financial statements of Florida East Coast Industries, Inc. and subsidiaries as listed in the accompanying Index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying Index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and signficiant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Florida East Coast Industries, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
s/s KPMG Peat Marwick LLP
Jacksonville, Florida January 31, 1997
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS Years ended December 31, 1996, 1995 and 1994 (Dollars in thousands except per share amounts) Years ended December 31 1996 1995 1994 Operating Revenues: Transportation $172,958 $171,016 $160,731 Realty - Land Sales 982 2,830 16,100 - Rents & Other 34,091 27,261 22,713 -------- -------- -------- Total Revenues 208,031 201,107 199,544 -------- -------- -------- Operating Expenses: Transportation 129,289 129,618 120,147 Realty 19,792 17,025 16,796 General and Administrative 21,344 19,836 16,046 -------- -------- -------- Total Expenses 170,425 166,479 152,989 -------- -------- -------- Operating Profit 37,606 34,628 46,555 Other Income (Expense): Dividends 399 440 320 Interest Income 4,800 5,359 4,614 Interest Expense (600) (639) (48) Gains on sales and other disposition of prop 2,926 1,280 4,038 Other (net) 3,027 1,486 193 -------- -------- -------- Total Other Income 10,552 7,926 9,117 -------- -------- -------- Income before income taxes 48,158 42,554 55,672 Income Taxes: (Note 8) Current 17,551 13,028 13,990 Deferred 152 2,887 7,077 -------- -------- -------- Total Income Taxes 17,703 15,915 21,067 -------- -------- -------- Income before minority interest 30,455 26,639 34,605 Less: minority interest (41) (2) 0 -------- -------- -------- Net Income 30,414 26,637 34,605 -------- -------- -------- Retained earnings: Balance at beginning of year $530,834 $507,813 $476,808 Cash dividends (3,627) (3,616) (3,600) -------- -------- -------- Balance at Year-end $557,621 $530,834 $507,813 ======== ======== ======== Per share data: Cash dividends $ 0.40 $ 0.40 $ 0.40 -------- -------- -------- Earnings per common share $ 3.36 $ 2.95 $ 3.85 ======== ======== ======== See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 (Dollars in thousands except per share amounts) 1996 1995 Assets Current Assets: Cash and cash equivalents $ 23,602 $ 11,050 Short-term investments (Note 6) 5,973 12,999 Accounts receivable, net 32,203 28,589 Materials and supplies 11,237 10,223 Other current assets (Note 8) 7,803 7,218 -------- -------- Total current assets 80,818 70,079
Other Investments (Note 6) 64,654 69,226
Properties, Less Accumulated Depreciation and Amortization (Note 5) 636,019 608,640
Other Assets and Deferred Charges 8,190 8,265 -------- -------- Total Assets $789,681 $756,210 ======== ======== Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $ 22,705 $ 20,317 Income taxes 4,652 593 Accrued property taxes 3,981 3,353 Accrued casualty and other reserves (Note 10) 5,038 5,226 Other accrued liabilities 3,239 2,580 -------- -------- Total current liabilities 39,615 32,069
Deferred Income Taxes (Note 8) 132,909 132,968
Reserves and Other Long-Term Liabilities (Note 10) 8,361 9,313
Commitments and Contingencies (Note 10)
Shareholders' Equity: Common stock, $6.25 par value; 9,360,000 shares authorized; 9,271,361 shares issued and 9,051,987 shares outstanding 57,946 57,946 Capital surplus 1,598 1,598 Retained earnings 557,621 530,834 Net unrealized gain on investments available- for-sale (Note 6) 1,904 1,755 Treasury stock at cost (219,374 shares) (10,273) (10,273) -------- -------- Total shareholders' equity 608,796 581,860 -------- -------- Total Liabilities and Shareholders' Equity $789,681 $756,210 ======== ======== See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1996, 1995 and 1994 (Dollars in thousands) Years ended December 31 1996 1995 1994 Cash Flows from Operating Activities: Net Income $30,414 $26,637 $34,605 Adjustments to reconcile net income to cash generated Depreciation and amortization 23,506 22,292 21,747 Minority interest in income 41 2 0 Gain on disposition of assets (2,926) (1,280) (4,038) Deferred taxes 152 2,887 7,077 Changes in operating assets and liabilities: Accounts receivable, net (3,614) (1,541) 2,210 Other current assets (1,599) 308 713 Other assets and deferred charges 75 4,137 (1,311) Accounts payable 2,388 (2,729) 54 Accrued property taxes 628 179 (1,491) Other current liabilities 4,250 141 (1,932) Reserves and other long-term liabilities (952) (1,251) 2,471 ------- ------- ------- Net cash generated by operating activities 52,363 49,782 60,105 ------- ------- ------- Cash Flows from Investing Activities: Purchases of properties (55,633) (70,602) (49,274) Purchases of investments: Available-for-sale (21,928) (35,800) (58,349) Held-to-maturity (12,386) (31,247) (17,364) Maturities and redemption of investments: Available-for-sale 18,291 27,968 12,799 Held-to-maturity 27,798 54,839 49,847 Proceeds from disposition of assets 7,674 4,491 6,633 ------- ------- ------- Net cash used in investing activities (36,184) (50,351) (55,708) ------- ------- ------- Cash Flows from Financing Activities: Payment of dividends (3,627) (3,616) (3,600) ------- ------- ------- Net cash used in financing activities (3,627) (3,616) (3,600) ------- ------- ------- Net Increase (Decrease) in Cash and Cash Equivalents 12,552 (4,185) 797 Cash and Cash Equivalents at Beginning of Year 11,050 15,235 14,438 ------- ------- ------- Cash and Cash Equivalents at End of Year $23,602 $11,050 $15,235 ======= ======= ======= Supplemental Disclosure of Cash Flow Information: Cash paid for income taxes $13,450 $13,810 $14,312 ======= ======= ======= Cash paid for interest $ 600 $ 639 $ 0 ======= ======= ======= Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994
1. Nature of Business The principal operations of Florida East Coast Industries, Inc. (the "Company") and its subsidiaries primarily relate to the transportation of goods by rail and to the development, leasing, management and sale of real estate. Both the Transportation and Realty operations are located within the state of Florida.
2. Majority Stockholder The Nemours Foundation, which is funded by the Alfred I. duPont Testamentary Trust, owns approximately 5% of the Company's common stock. The Trust owns approximately 69% of St. Joe Corporation's common stock which owns, through a subsidiary, approximately 54% of the Company's common stock. The Company's payment of dividends was the only significant transaction with St. Joe Corporation or its affiliates in 1996, 1995 or 1994.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries, all but one of which are wholly- owned. All significant intercompany transactions and balances have been eliminated in consolidation.
Revenue Recognition
Transportation Revenues: Revenues are substantially recognized upon completion of transportation services at destination.
Realty Land Sales: Revenue is recognized upon closing of sales contracts for sale of land or upon settlement of legal proceedings such as condemnations.
Rental Income: Revenue is recognized upon completion of rental and lease contracts. The Company uses the straight-line basis for recording the revenues over the life of the lease contract.
Transportation Properties
Transportation properties are stated at historical cost and are depreciated and amortized on the straight-line method at rates established by the Surface Transportation Board (STB). Gains and losses on normal retirements of these items are credited or charged to accumulated depreciation. Miscellaneous physical property consists principally of non-depreciable real property.
Real Estate Properties
Real estate properties are stated at historical cost. Depreciation is computed using the straight-line method over estimated asset lives of 15 years for land improvements and 18 to 40 years for buildings.
Materials and Supplies
New materials and supplies are stated principally at average cost which is not in excess of replacement cost. Used materials are stated at an amount which does not exceed estimated realizable value.
Earnings Per Share
Earnings per common share are based on the weighted average number of shares of common stock outstanding during the year (9,051,987 in 1996, 9,039,279 in 1995, and 9,000,000 in 1994).
Cash and Cash Equivalents
For purposes of cash flows, cash and cash equivalents include cash on hand, bank demand accounts, money market accounts, and overnight repurchase agreements having original maturities of less than three months.
Income Taxes
The Company follows the asset and liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Investments
Investments consist principally of municipal bonds, common stocks, redeemable prefered stocks and U.S. Government obligations. The Company classifies its debt and marketable equity securities in one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near-term. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, which represents the adjustment for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effect on available-for-sale securities, are excluded from earnings and are reported as a separate component of shareholders' equity until realized.
A decline in the market value of any available-for-sale or held-to- maturity security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security.
Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the asset's carrying amount. This Standard also addresses the accounting for long-lived assets that are expected to be disposed of. The Company has historically reserved for losses related to the impairment of long-term assets. The adoption of this Standard in 1996 had no material effect on the Company's financial statements.
Reclassification
Certain prior year amounts have been reclassified to conform with the current year's presentation.
4. Acquisitions
On March 30, 1995, the Company purchased 80% of the outstanding stock of International Transit, Inc. (ITI), a regional truckload carrier, through the issuance of treasury stock. This non-cash transaction has been excluded from the Statements of Cash Flows. ITI's gross revenues for 1996 and 1995 were $25.2 million and $19.1 million, respectively. ITI's income is not material to the consolidated financial statements. ITI's operations have been included in the consolidated financial statements since the date of purchase.
5. Properties
Properties consist of (in thousands):
1996 1995 Transportation Properties: Road $321,294 $311,593 Equipment 198,544 197,777 Miscellaneous Physical Property 2,269 5,435 Construction in Progress 2,465 5,673 -------- -------- 524,572 520,478 Less Accumulated Depreciation & Amortization 205,979 196,244 -------- -------- $318,593 $324,234 ======== ======== Real Estate Properties: Land and Land Improvements $164,558 $125,582 Buildings 169,272 141,091 Construction in Progress 17,103 43,655 -------- -------- 350,933 310,328 Less Accumulated Depreciation & Amortization 33,507 25,922 -------- -------- $317,426 $284,406 ======== ========
Real estate properties having a net book value of $196.7 million at December 31, 1996 are leased under non-cancelable operating leases with expected aggregate rentals of $106.2 million which are due in years 1997-2001 in the amounts of $32.1, $26.5, $20.9, $15.8 and $10.9 million, respectively.
6. Investments
Other investments, including certain held-to-maturity investments which mature within one year, are held as a development fund created to accumulate capital expected to be required for future improvement of the Company's real estate properties.
Investments at December 31, 1996 consist of (in thousands):
Unrealized Unrealized Carrying Fair Holding Holding Cost Value Value Gain (Loss) ----------------------------------------------- Short-term investments
Held-to-maturity U.S. Government securities $ 4,969 $ 4,969 $ 4,961 $ 0 $ (8) Tax exempt municipals 1,004 1,004 1,005 1 0 ----------------------------------------------- $ 5,973 $ 5,973 $ 5,966 $ 1 $ (8) ----------------------------------------------- Other Investments
Available-for-sale U.S. Government securities Maturing in 1 to 5 years $ 293 $ 290 $ 290 $ 0 $ (3) Tax exempt municipals Maturing in 1 to 5 years 10,499 10,820 10,820 321 0 Maturing in 5 to 10 years 19,726 20,336 20,336 610 0 Maturing in more than 10 years 4,281 4,265 4,265 0 (16) Equity securities 11,866 14,053 14,053 2,187 0 ----------------------------------------------- $46,665 $49,764 $49,764 $ 3,118 $ (19)
Held-to-maturity U.S. Government securities Maturing in 1 to 5 years $ 7,023 $ 7,023 $ 7,092 $ 69 $ 0 Tax exempt municipals Maturing in 1 to 5 years 7,079 7,079 7,121 42 0 Mortgage-backed securities Maturing in 1 to 5 years 0 0 400 400 0 Other corporate debt securities Maturing in 5 to 10 years 788 788 1,290 502 0 ----------------------------------------------- $14,890 $14,890 $15,903 $ 1,013 $ 0 ----------------------------------------------- $61,555 $64,654 $65,667 $ 4,131 $ (19) -----------------------------------------------
Investments at December 31, 1995 consist of (in thousands): Unrealized Unrealized Carrying Fair Holding Holding Cost Value Value Gain (Loss) ----------------------------------------------- Short-term investments
Held-to-maturity U.S. Government securities $10,864 $10,864 $10,995 $ 131 $ 0 Tax exempt municipals 2,135 2,135 2,106 0 (29) ----------------------------------------------- $12,999 $12,999 $13,101 $ 131 $ (29) ----------------------------------------------- Other Investments
Available-for-sale U.S. Government securities Maturing in 1 to 5 years $ 303 $ 306 $ 306 $ 3 $ 0 Tax exempt municipals Maturing in 1 to 5 years 6,968 7,181 7,181 213 0 Maturing in 5 to 10 years 20,093 20,953 20,953 860 0 Maturing in more than 10 years 5,610 5,820 5,820 210 0 Equity securities 10,114 11,685 11,685 1,831 (260) ----------------------------------------------- $43,088 $45,945 $45,945 $ 3,117 $ (260) ----------------------------------------------- Held-to-maturity U.S. Government securities Maturing within 1 year to 5 years $16,923 $16,923 $17,067 $ 144 $ 0 Tax exempt municipals Maturing in 1 to 5 years 5,556 5,556 5,688 132 0 Mortgage-backed securities Maturing in 1 to 5 years 14 14 554 540 0 Other corporate debt securities Maturing in 5 to 10 years 788 788 1,239 451 0 ----------------------------------------------- $23,281 $23,281 $24,548 $ 1,267 $ 0 ----------------------------------------------- $66,369 $69,226 $70,493 $ 4,384 $ (260) -----------------------------------------------
7. Collateral Trust 5% Bonds
There are outstanding at December 31, 1996 and 1995, $12,414,500 and $12,646,550, respectively, of the Company's Collateral Trust 5% Bonds (the "Bonds") due in 2001. Direct obligations of the U.S. Government, the cash flows from which approximately coincide as to timing and amount with the scheduled interest and principal payments on the Bonds, are held in trust for the purpose of making such payments. Accordingly, the Bonds are considered to be extinguished.
8. Income Taxes
Total income tax expense for the years ended December 31, 1996, 1995 and 1994 was allocated as follows (in thousands):
1996 1995 1994 ------------------------- Income from continuing operations $17,703 $15,915 $21,067 Shareholders' equity, for recognition of unrealized holding gain (loss) on investments available-for-sale 93 1,657 (1,115) ------------------------- $17,796 $17,572 $19,952 =========================
Income tax expense attributable to income from continuing operations differed from the amounts computed by applying the statutory federal income tax rate to pretax income as a result of the following:
1996 1995 1994 ------------------------- Amount computed at statutory federal rate $16,855 $14,894 $19,485 Effect of dividends received exclusion and tax free interest (908) (835) (700) State taxes (net of federal benefit) 1,688 1,513 1,979 Other (net) 68 343 303 ------------------------- $17,703 $15,915 $21,067 =========================
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994 --------------------------- Deferred tax assets: Accrued casualty and other reserves $ 5,200 $ 5,458 $ 5,395 Amortization of fiber optic income 367 490 612 Unrealized holding loss on investments available-for-sale 0 0 555 Other 277 637 285 ---------------------------- Total deferred tax asset $ 5,844 $ 6,585 $ 6,847 ---------------------------- Deferred tax liabilities: Properties, principally due to differences in depreciation $101,462 $102,730 $ 99,361 Deferred gain on land sales 29,030 29,114 29,183 Deferred profit on bonds extinguished 1,430 1,642 1,846 Unrealized holding gain on investments available-for-sale 1,195 1,102 0 Other 2,158 1,183 1,099 ---------------------------- Total deferred tax liabilities $135,275 $135,771 $131,489 ---------------------------- Net deferred tax liabilities $129,431 $129,186 $124,642 ============================
There was no valuation allowance provided for deferred tax assets as of December 31, 1996 and 1995 as the Company believes the results of future operations will generate sufficient taxable income to realize the deferred tax assets.
Included in other current assets are deferred tax assets of $3,478 and $3,782 at December 31, 1996 and 1995, respectively.
9. Segment Information
The Company operates principally in two industries: Transportation and Realty. Transportation operations consist primarily of railroad-related activities and some trucking operations. Realty operations are involved in real estate development, rentals and related management and operations of properties. Operating revenues represent sales to unaffiliated customers, as reported in the Company's Consolidated Statements of Income and Retained Earnings. Operating profit is operating revenue less directly traceable costs and expenses.
Identifiable assets by industry are those assets that are used in the Company's operations in each industry.
Information by industry segment follows (in thousands):
1996 1995 1994 -------------------------------- Operating Revenue: Transportation $172,958 $171,016 $160,731 Realty 35,073 30,091 38,813 -------------------------------- $208,031 $201,107 $199,544 ================================ Operating Profit: Transportation $ 25,304 $ 23,663 $ 26,139 Realty 12,302 10,965 20,416 -------------------------------- $ 37,606 $ 34,628 $ 46,555 ================================ Identifiable Assets: Transportation $367,989 $361,862 $357,670 Realty 406,487 289,727 251,348 Corporate 15,205 104,621 113,476 -------------------------------- $789,681 $756,210 $722,494 ================================ Capital Expenditures: Transportation $ 14,597 $ 26,572 $ 21,259 Realty 41,036 44,030 28,015 -------------------------------- $ 55,633 $ 70,602 $ 49,274 ================================ Depreciation: Transportation $ 15,853 $ 16,644 $ 16,740 Realty 7,653 5,648 5,007 -------------------------------- $ 23,506 $ 22,292 $ 21,747 ================================
10. Commitments and Contingencies
The Company has retained certain self-insurance risks with respect to losses for third-party liability, property damage and group health insurance coverage provided employees. The Company is the defendant and plaintiff in various lawsuits resulting from its operations. In the opinion of management, adequate provision has been made in the financial statements for the estimated liability which may result from disposition of such lawsuits.
The Company is subject to proceedings arising out of environmental laws and regulations, which primarily relate to the disposal and use of fuel and oil used in the transportation business. It is the Company's policy to accrue and charge against earnings environmental cleanup costs when it is probable that a liability has been incurred and an amount can be reasonably estimated. As assessments and cleanups proceed, these accruals are reviewed and adjusted.
The Company is currently a party to, or involved in, legal proceedings directed at the cleanup of four Superfund sites. The Company has accrued its allocated share of the total estimated cleanup costs for these sites. Based upon management's evaluation of the other potentially responsible parties, the Company does not expect to incur additional amounts even though the Company has joint and several liability. Other proceedings involving environmental matters, such as alleged discharge of oil or waste material into water or soil, are pending against the Company.
It is difficult to quantify future environmental costs because many issues relate to actions by third parties or changes in environmental regulation. However, based on information presently available, management believes that the ultimate disposition of currently known matters will not have a material effect on the financial position, liquidity, or results of operations of the Company. Environmental liabilities of $2.0 million and $2.5 million for 1996 and 1995, respectively, will be paid over an extended period and the timing of such payments cannot be predicted with any confidence.
Gran Central Corporation, a wholly-owned subsidiary of the Company, entered into an agreement with the State of Florida Department of Transportation to furnish all land necessary for the construction of the N.W. 106th Street Interchange on the Homestead Extension of the Florida Turnpike and to subsidize any annual operating deficit of the Department for 15 years related to the interchange which is not covered by toll revenues. The maximum assessment amount over the 15 years would be approximately $9.3 million with no annual assessment to exceed approximately $1.1 million.
11. Retirement Plans
The Company sponsors two 401(k) plans for its salaried and hourly wage employees. Contributions are at the employees' discretion with upper limits of 6% of compensation before taxes and 10% after taxes.
401(k) Plan for Salaried Employees
The amounts of matching contributions by the Company for this plan covering the years 1996, 1995 and 1994 were approximately $351,000, $350,000 and $350,000, respectively. The expenses associated with this plan were approximately $12,000, $13,000 and $11,000 in 1996, 1995, and 1994, respectively. In 1996, the Company matched the employees' contributions $1 for $1 up to the first $1,200 and then $.25 for each $1 contributed up to 6% of employees' contributions.
401(k) Plan for Hourly Wage Employees and/or Employees Covered by Collective Bargaining Agreement
This is a non-contributory plan and was instituted in April 1995. The expenses associated with this plan were approximately $4,200 in 1996.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
With respect to each Executive Officer of the Registrant, there are set forth below as of December 31, 1996, (1) his name; (2) his age; (3) his positions and offices with the Registrant; (4) the date on which he first held office; and (5) a brief account of his business experience during the last five years. Each Executive Officer has been elected to hold such positions and offices until the next annual election of Directors and Officers of the Registrant, which is to be held on May 21, 1997. To the best knowledge of the Registrant, none of the persons named had any arrangement or understanding with any other person pursuant to his election, and none of the persons named have any family relationship with any other such person.
Name, Age, Positions, and Date First Held Such Positions and Offices and Offices Business Experience for the Past Five Years _________________________ ______________________________________________
Winfred L. Thornton (68) Chairman and CEO of Registrant. Prior to May Chairman, Chief Executive 1995, Chairman, CEO and President of Registrant Officer and Director for more than five years.
Carl F. Zellers, Jr. (64) President and COO of the Registrant since President, Chief Operating May 1995. President of Gran Central Officer and Director Corporation for more than five years. President of Florida East Coast Railway Company since June 10, 1992.
T. Neal Smith (56) May 15, 1992 elected Vice President and Vice President & Secretary Secretary. Formerly Treasurer and Assistant Secretary for more than five years.
J. Richard Yastrzemski (53) Comptroller of Registrant for more than five Comptroller years.
Gregory P. West (37) May 15, 1992 elected Treasurer and Assistant Treasurer & Assistant Secretary Secretary. Formerly Material Inventory and Accounting Manager for the Registrant.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in the Registrant's 1997 Proxy Statement which is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Information required under this item is contained in the Registrant's 1997 Proxy Statement which is incorporated herein by reference.
(b) SECURITY OWNERSHIP OF MANAGEMENT
Information required under this item is contained in the Registrant's 1997 Proxy Statement which is incorporated herein by reference.
(c) CHANGES IN CONTROL
The Company knows of no contractual arrangements which may, at a subsequent date, result in a change of control of the Company.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements and schedules listed in the accompanying Index to Financial Statements and Financial Statement Schedules are filed as part of this Annual Report.
2. EXHIBITS
The Exhibits listed on the accompanying Index to Exhibits are filed as part of this Annual Report.
(b) REPORTS ON FORM 8-K
None.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES [ITEM 14(a)]
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Income and Retained Earnings for each of the three years in the period ended December 31, 1996
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
Supplementary Information: Quarterly Financial Data (Unaudited)
Financial Statement Schedules: II-Valuation and Qualifying Accounts III-Real Estate and Accumulated Depreciation
All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.
Financial statements and schedules of Florida East Coast Industries, Inc. (not consolidated) are omitted since it is primarily a holding company and all subsidiaries included in the consolidated financial statements being filed, in the aggregate, do not have minority equity interests and/or indebtedness to any person other than the Company or its consolidated subsidiaries in amounts which together exceed five percent of the total assets as shown by the consolidated balance sheet at the end of any year covered by this Report.
INDEX TO EXHIBITS
(ITEM 13[a] 3.) S-K Item 601 Documents - -------- ------------ (3) (a) Articles of Incorporation*
(3) (b) By-Laws*
(21) Subsidiaries of Florida East Coast Industries, Inc.
(24) Power of Attorney
(10) Change of Control Severance Plan
*Incorporated herein by reference to Exhibits filed in connection with Florida East Coast Industries, Inc.'s Registration Statement on Form S-14 as filed with the Securities and Exchange Commission on February 17, 1984 (File No. 2-89530).
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized on February 19, 1997.
FLORIDA EAST COAST INDUSTRIES, INC. (Registrant)
By: s/s T.N. Smith, Vice President and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:
s/s W.L. Thornton* Chairman, Chief Executive Officer, and Director - 3/15/97
s/s C.F. Zellers, Jr.* President, Chief Operating Officer, and Director - 3/15/97
s/s J. Nelson Fairbanks* Director - 3/15/97
s/s J.C. Belin* Director - 3/15/97
s/s D.M. Foster* Director - 3/15/97
s/s R.E. Nedley* Director - 3/15/97
s/s J.H. Mercer, Jr.* Director - 3/15/97
s/s A.C. Harper* Director - 3/15/97
s/s J. J. Parrish, III* Director - 3/15/97
s/s G. P. West* Treasurer - 3/15/97
s/s J.R. Yastrzemski* Comptroller - 3/15/97
BY: s/s T. Neal Smith* Attorney-in-Fact
*Such signature has been affixed pursuant to Power of Attorney.
FLORIDA EAST COAST INDUSTRIES, INC. SCHEDULE II (CONSOLIDATED) - VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Dollars in thousands)
Balance at Additions Beginning Charged Balance at of Year to Expense Payments End of Year ---------- ---------- -------- -----------
RESERVES INCLUDED IN LIABILITIES
Casualty & other reserves $11,221 $6,205 $6,650 $10,776[a]
Casualty & other reserves $11,605 $4,742 $5,126 $11,221[a]
Casualty & other reserves $14,143 $2,584 $5,122 $11,605[a]
[a] Includes $5,038, $5,226 and $5,400 in current liabilities at December 31, 1996, December 31, 1995 and December 31, 1994, respectively. The remainder is included in "Reserves and Other Long-Term Liabilities."
FLORIDA EAST COAST INDUSTRIES, INC. SCHEDULE III (CONSOLIDATED) - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996, 1995 AND 1994 (in thousands)
Initial Cost to Company
Description Encumbrances Land - ----------- ------------ ---- Duval County Office Buildings (8) -0- $ 1,153 Office/Showroom/Warehouses (8) -0- 1,502 Office/Warehouses (2) -0- 0 Land w/Infrastructure -0- 6,593 Unimproved Land & Misc. Assets -0- 915
St. Johns County Unimproved Land -0- 2,631
Flagler County Unimproved Land -0- 3,218
Volusia County Unimproved Land -0- 3,651
Brevard County Office/Showroom/Warehouse (1) -0- 73 Land w/Infrastructure -0- 3,633 Unimproved Land -0- 4,846
Indian River County Unimproved Land -0- 1
St. Lucie County Unimproved Land -0- 593
Martin County Land w/Infrastructure -0- 1,734 Unimproved Land -0- 2,704
Putnam County Unimproved Land -0- 2
Palm Beach County Office/Showroom/Warehouse (1) -0- 113 Rail Warehouses (2) -0- 449 Cross Docks (4) -0- 117 Land w/Infrastructure -0- 1,251 Unimproved Land -0- 1,501
Broward County Rail Warehouse (1) -0- 85 Land w/Infrastructure -0- 999 Unimproved Land -0- 1,193
Manatee County Unimproved Land -0- 14
Dade County Cross Dock (1) -0- 137 Double Front Load Warehouse (1) -0- 768 Rail Warehouses (6) -0- 808 Office/Showroom/Warehouses (5) -0- 1,003 Office/Warehouses (5) -0- 1,462 Front Load Warehouses (8) -0- 1,943 Office/Service Center (1) -0- 285 Transit Warehouse (1) -0- 3 Land w/Infrastructure -0- 7,970 Unimproved Land & Misc. Assets -0- 10,326
Orange County Land w/Infrastructure -0- 0 ------- TOTALS $63,676
Initial Cost to Company
Costs Capitalized Buildings & Subsequent to Description Improvements Acquisition - ----------- ------------ ------------- Duval County Office Buildings (8) $6,200 $ 55,732 Office/Showroom/Warehouses (8) 0 20,393 Office/Warehouses (2) 0 11,708 Land w/Infrastructure 0 8,201 Unimproved Land & Misc. Assets 0 673
St. Johns County Unimproved Land 0 406
Flagler County Unimproved Land 0 1,183
Volusia County Unimproved Land 0 403
Brevard County Office/Showroom/Warehouse (1) 0 2,198 Land w/Infrastructure 0 0 Unimproved Land 0 190
Indian River County Unimproved Land 0 0
St. Lucie County Unimproved Land 0 0
Martin County Land w/Infrastructure 0 2,416 Unimproved Land 0 231
Putnam County Unimproved Land 0 (2)
Palm Beach County Office/Showroom/Warehouse (1) 0 2,984 Rail Warehouses (2) 0 4,253 Cross Docks (4) 0 3,786 Land w/Infrastructure 0 0 Unimproved Land 0 0
Broward County Rail Warehouse (1) 0 1,708 Land w/Infrastructure 0 122 Unimproved Land 0 68
Manatee County Unimproved Land 0 87
Dade County Cross Dock (1) 0 1,018 Double Front Load Warehouse (1) 0 6,275 Rail Warehouses (6) 0 28,252 Office/Showroom/Warehouses (5) 0 18,474 Office/Warehouses (5) 0 18,604 Front Load Warehouses (8) 0 28,751 Office/Service Center (1) 0 2,589 Transit Warehouse (1) 0 286 Land w/Infrastructure 0 29,843 Unimproved Land & Misc. Assets 0 5,496
Orange County Land w/Infrastructure 0 7,626 ------ --------- TOTALS $6,200 $263,954
Carried at Close of Period
Land & Bldgs. & Description Land Improv. Improv. Total - ----------- ------------ -------- ----- Duval County Office Buildings (8) $ 10,386 $ 52,699 $ 63,085 Office/Showroom/Warehouses (8) 4,515 17,380 21,895 Office/Warehouses (2) 3,834 7,874 11,708 Land w/Infrastructure 14,794 0 14,794 Unimproved Land & Misc. Assets 1,412 176 1,588
St. Johns County Unimproved Land 3,037 0 3,037
Flagler County Unimproved Land 4,401 0 4,401
Volusia County Unimproved Land 4,054 0 4,054
Brevard County Office/Showroom/Warehouse (1) 438 1,833 2,271 Land w/Infrastructure 3,633 0 3,633 Unimproved Land 5,036 0 5,036
Indian River County Unimproved Land 1 0 1
St. Lucie County Unimproved Land 593 0 593
Martin County Land w/Infrastructure 4,150 0 4,150 Unimproved Land 2,935 0 2,935
Putnam County Unimproved Land 0 0 0
Palm Beach County Office/Showroom/Warehouse (1) 599 2,498 3,097 Rail Warehouses (2) 557 4,145 4,702 Cross Docks (4) 1,261 2,642 3,903 Land w/Infrastructure 1,251 0 1,251 Unimproved Land 1,501 0 1,501
Broward County Rail Warehouse (1) 405 1,388 1,793 Land w/Infrastructure 1,121 0 1,121 Unimproved Land 1,261 0 1,261
Manatee County Unimproved Land 101 0 101
Dade County Cross Dock (1) 137 1,018 1,155 Double Front Load Warehouse (1) 1,985 5,058 7,043 Rail Warehouses (6) 8,119 20,941 29,060 Office/Showroom/Warehouses (5) 5,765 13,712 19,477 Office/Warehouses (5) 5,410 14,656 20,066 Front Load Warehouses (8) 9,901 20,793 30,694 Office/Service Center (1) 757 2,117 2,874 Transit Warehouse (1) 3 286 289 Land w/Infrastructure 37,813 0 37,813 Unimproved Land & Misc. Assets 15,766 56 15,822
Orange County Land w/Infrastructure 7,626 0 7,626 -------- -------- --------- TOTALS $164,558 $169,272 $333,830
Life on Which Depreciation in Date First Latest Income Accumulated Started or Statement is Description Depreciation Acquired Computed - ----------- ------------ ---------- --------------- Duval County Office Buildings (8) $ 7,992 1985 3 to 40 years Office/Showroom/Warehouses (8) 4,797 1987 3 to 40 years Office/Warehouses (2) 605 1994 3 to 40 years Land w/Infrastructure 355 Unimproved Land & Misc. Assets 152
St. Johns County Unimproved Land 0 Various
Flagler County Unimproved Land 0 Various
Volusia County Unimproved Land 0 Various
Brevard County Office/Showroom/Warehouse (1) 509 1983 3 to 40 years Land w/Infrastructure 0 Various Unimproved Land 0 Various
Indian River County Unimproved Land 0 Various
St. Lucie County Unimproved Land 0 Various
Martin County Land w/Infrastructure 84 Various Unimproved Land 0 Various
Putnam County Unimproved Land 0 Various
Palm Beach County Office/Showroom/Warehouse (1) 865 Rail Warehouses (2) 1,257 Cross Docks (4) 1,034 Land w/Infrastructure 0 Unimproved Land 0
Broward County Rail Warehouse (1) 621 1986 3 to 40 years Land w/Infrastructure 0 Various Unimproved Land 0 Various
Manatee County Unimproved Land 0 Various
Dade County Cross Dock (1) 262 1987 3 to 40 years Double Front Load Warehouse (1) 977 1993 3 to 40 years Rail Warehouses (6) 3,614 1988 3 to 40 years Office/Showroom/Warehouses (5) 3,465 1988 3 to 40 years Office/Warehouses (5) 2,884 1990 3 to 40 years Front Load Warehouses (8) 3,241 1991 3 to 40 years Office/Service Center (1) 228 1994 3 to 40 years Transit Shed (1) 54 Various 3 to 40 years Land w/Infrastructure 455 Various 3 to 40 years Unimproved Land & Misc. Assets 56 Various 3 to 40 years
Orange County Land w/Infrastructure 0 1995 ------- TOTALS $33,507
Notes:
(A) The aggregate cost of real estate owned at December 31, 1996 for federal income tax purposes is approximately $258,360,000.
(B) Reconciliation of real estate owned (in thousands of dollars):
1996 1995 1994 ---- ---- ---- Balance at Beginning of Year $266,673 $241,674 $214,747 Amounts Capitalized 67,589 25,523 28,015 Amounts Retired or Adjusted (432) (524) (1,088) -------------------------------- Balance at Close of Period $333,830 $266,673 $241,674
(C) Reconciliation of accumulated depreciation (in thousands of dollars):
1996 1995 1994 ---- ---- ---- Balance at Beginning of Year $ 25,922 $ 20,274 $ 15,291 Depreciation Expense 7,653 5,648 5,007 Amounts Retired or Adjusted (68) 0 (24) -------------------------------- Balance at Close of Period $ 33,507 $ 25,922 $ 20,274
21. Listing of parent and subsidiaries
Parent - Florida East Coast Industries, Inc.
Subsidiaries - Florida East Coast Railway Company
Florida East Coast Highway Dispatch Company
Florida East Coast Inspections, Inc.
Florida East Coast Deliveries, Inc.
Railroad Concrete Crosstie Corporation
Railroad Track Construction Company
Operations Unlimited, Inc.
Florida Express Carrier, Inc.
Gran Central Corporation
Dade County Land Holding Company, Inc.
International Transit, Inc.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each of the undersigned Directors of Florida East Coast Industries, Inc., a Florida corporation ("Corporation"), which is about to file with the Securities and Exchange Commission, Washington, DC 20549, under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1996, hereby constitutes and appoints Winfred L. Thornton and T.N. Smith as his true and lawful attorneys-in-fact and agent, and each of them with full power to act, without the other in his stead, in any and all capacities, to sign the 1996 Annual Report of Florida East Coast Industries, Inc., on Form 10-K and to file on behalf of the Corporation such Annual Report and amendments with all exhibits thereto, and any and all other information and documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agent, and each of them, full power and authority to do and perform any and all acts and things requisite and ratifying and confirming all that each said attorneys-in-fact and agent or any one of them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands on the date indicated below:
s/s Winfred L. Thornton, Chairman, s/s T.N. Smith, Vice President CEO, and Director and Secretary
s/s J. Nelson Fairbanks, Director s/s J.C. Belin, Director
s/s A.C. Harper, Director s/s D.M. Foster, Director
s/s J.H. Mercer, Jr., Director s/s J.J. Parrish, III, Director
s/s R.E. Nedley, Director s/s C.F. Zellers, Jr., President, COO, and Director
Dated: March 15, 1997