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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x                    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2013, or

 

o     Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from            to           

 

Commission file number 333-174112

 

Florida East Coast Holdings Corp.

(Exact name of registrant as specified in its charter)

 

Florida

 

27-4591805

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

7411 Fullerton Street, Suite 100, Jacksonville, Florida 32256

(Address of Principal Executive Offices) (Zip Code)

 

(800) 342-1131

(Registrant’s Telephone Number, Including Area Code)

 

(Former name, former address and former fiscal year, if changed since last report)

N/A

 

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 o   No o*

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o   No x

 

As of May 9, 2013 there were 252,654 shares of the Registrant’s common stock outstanding.

 


*  The registrant is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), but files reports with the Securities and Exchange Commission voluntarily, as required by the terms of its indentures. The registrant has filed all Exchange Act reports for the preceding 12 months.

 

 

 



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EXPLANATORY NOTE

 

Unless the context indicates otherwise, the words (i) “Company,” “we,” “our,” and “us” refer collectively to Florida East Coast Holdings Corp. and its consolidated subsidiaries (including FECR Corp.), (ii) “FECR Corp.” refers to Florida East Coast Railway Corp. and its consolidated subsidiaries and predecessor entity, and (iii) “Holdings Corp.” refers to Florida East Coast Holdings Corp. on a stand-alone basis.

 

Holdings Corp. was incorporated on January 10, 2011. In January 2011, all of the equity interests in FECR Corp. were transferred from FECR Rail LLC to Holdings Corp., whereby Holdings Corp. became the direct parent of FECR Corp. Holdings Corp. is a holding company and has no direct operations or material assets other than its wholly owned interest in FECR Corp. All of Holdings Corp.’s operations are conducted through its subsidiaries. The only material differences between Holdings Corp. and FECR Corp. are the Senior PIK Toggle Notes issued by Holdings Corp. and its related accounts, including deferred financing costs, amortization, payment of interest and payment of taxes. Reclassifications in common stock and additional-paid-in capital have been made to the consolidated financial statements included in this Quarterly Report to reflect the capital structure of Holdings Corp. for the three months ended March 31, 2013. Where information or an explanation is provided that is substantially the same for each company, such information or explanation has been combined. Where information or an explanation is not substantially the same for each company, we have provided separate information and explanation. Pursuant to the indenture governing FECR Corp.’s outstanding notes, FECR Corp. is permitted to satisfy its reporting obligations under the indenture with respect to financial information relating to FECR Corp. by furnishing financial information relating to any direct or indirect parent company of FECR Corp. which becomes a guarantor of the notes on the terms and conditions set forth in the indenture. Holdings Corp. became a guarantor of FECR Corp.’s outstanding notes on March 14, 2012.

 

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FLORIDA EAST COAST HOLDINGS CORP.

 

INDEX TO FORM 10-Q

 

QUARTER ENDED MARCH 31, 2013

 

 

 

 

Page

Part I.

Financial Information

 

 

Item 1.

Financial Statements and Notes to Consolidated Financial Statements

4

 

Item 2.

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

19

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

26

 

Item 4.

Controls and Procedures

27

 

 

 

 

Part II.

Other Information

 

 

 

Item 1.

Legal Proceedings

28

 

Item 1A.

Risk Factors

29

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

Item 3.

Defaults Upon Senior Securities

28

 

Item 4.

Mine Safety Disclosures

28

 

Item 5.

Other Information

31

 

Item 6.

Exhibits

32

EX-31.1

 

 

 

EX-31.2

 

 

 

EX-32.1

 

 

 

EX-32.2

 

 

 

 

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PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

FLORIDA EAST COAST HOLDINGS CORP.

CONSOLIDATED BALANCE SHEETS

(in thousands except for share amounts)

 

 

 

March 31,
 2013

 

December 31,
 2012

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

35,606

 

$

40,400

 

Restricted cash

 

126

 

126

 

Accounts receivable, net

 

39,285

 

34,380

 

Materials and supplies

 

4,460

 

3,574

 

Deferred income taxes

 

2,374

 

2,374

 

Prepaid and other current assets

 

4,655

 

2,477

 

Assets held for sale

 

915

 

1,839

 

Total current assets

 

87,421

 

85,170

 

Noncurrent assets:

 

 

 

 

 

Property, plant and equipment, less accumulated depreciation

 

771,384

 

772,429

 

Investments in non-affiliates

 

74

 

74

 

Intangible assets, less accumulated amortization

 

206

 

220

 

Other assets

 

14,177

 

15,104

 

Total noncurrent assets

 

785,841

 

787,827

 

Total assets

 

$

873,262

 

$

872,997

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

33,123

 

$

42,193

 

Taxes payable

 

1,963

 

326

 

Deferred revenue

 

1,185

 

906

 

Other current liabilities

 

1,082

 

1,035

 

Total current liabilities

 

37,353

 

44,460

 

Deferred income taxes

 

26,080

 

24,838

 

Long-term debt

 

634,635

 

625,969

 

Other long-term liabilities

 

6,536

 

12,534

 

Total liabilities

 

704,604

 

707,801

 

Stockholders’ equity:

 

 

 

 

 

Series A Perpetual Preferred Stock, $0.01 par value, 1,000,000 shares authorized, 24,151 shares issued and outstanding as of March 31, 2013 and as of December 31, 2012

 

 

 

Series B Perpetual Preferred Stock, $0.01 par value, 150,000 shares authorized and none outstanding as of March 31, 2013 and December 31, 2012

 

 

 

Common stock, $0.01 par value, 1,000,000 shares authorized; 252,654 shares issued and outstanding as of March 31, 2013 and 252,106 shares issued and outstanding as of December 31, 2012

 

3

 

3

 

Additional paid-in capital

 

286,470

 

286,085

 

Accumulated deficit

 

(116,713

)

(119,770

)

Accumulated other comprehensive loss

 

(1,102

)

(1,122

)

Total stockholders’ equity

 

168,658

 

165,196

 

Total liabilities and stockholders’ equity

 

$

873,262

 

$

872,997

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

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FLORIDA EAST COAST HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

 

 

 

Three Months
Ended March 31,

 

 

 

2013

 

2012

 

Operating revenue

 

$

68,766

 

$

57,345

 

Operating expenses:

 

 

 

 

 

Labor and benefits

 

13,039

 

12,231

 

Purchased services

 

12,738

 

9,037

 

Fuel

 

8,410

 

7,891

 

Depreciation and amortization

 

6,662

 

6,664

 

Equipment rents

 

4,018

 

3,147

 

Net gain on sale and impairment of assets

 

(69

)

(85

)

Other

 

3,626

 

6,374

 

Total operating expenses

 

48,424

 

45,259

 

Operating income

 

20,342

 

12,086

 

Interest expense, net of interest income

 

(14,965

)

(14,615

)

Other income

 

51

 

2

 

Income (loss) before income taxes

 

5,428

 

(2,527

)

Provision for income taxes

 

1,242

 

1,972

 

Net income (loss)

 

$

4,186

 

$

(4,499

)

 

 

 

 

 

 

Comprehensive income (loss)

 

$

4,207

 

$

(4,487

)

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

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FLORIDA EAST COAST HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2013

 

2012

 

CASH FLOW FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

4,186

 

$

(4,499

)

Adjustments to reconcile net income (loss) to cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

6,662

 

6,664

 

Amortization of debt financing fees

 

890

 

881

 

Share based compensation costs

 

383

 

502

 

Deferred taxes

 

1,242

 

1,972

 

Net gain on sale and impairment of assets

 

(69

)

(85

)

Interest paid in kind

 

8,592

 

7,701

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(4,407

)

(1,646

)

Prepaids and other current assets

 

(2,178

)

(709

)

Materials and supplies

 

(886

)

(2,159

)

Other assets and deferred charges

 

111

 

182

 

Accounts payable and accrued expenses

 

(9,070

)

(12,982

)

Taxes payable

 

1,637

 

(4,904

)

Deferred revenue

 

278

 

(551

)

Other current liabilities

 

47

 

172

 

Other long-term liabilities

 

(5,976

)

(3,716

)

Net cash provided by (used in) operating activities

 

1,442

 

(13,177

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of properties and equipment

 

(5,684

)

(5,430

)

Proceeds from disposition of assets

 

576

 

252

 

Net cash used in investing activities

 

(5,108

)

(5,178

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Purchase of common shares outstanding

 

(1,128

)

(535

)

Net cash used in financing activities

 

(1,128

)

(535

)

Net decrease in cash and cash equivalents

 

(4,794

)

(18,890

)

Cash and cash equivalents at beginning of period

 

40,400

 

30,905

 

Cash and cash equivalents at end of period

 

$

35,606

 

$

12,015

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

19,297

 

$

19,277

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

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FLORIDA EAST COAST HOLDINGS CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Description of the Business and Basis of Presentation

 

The accompanying Consolidated Financial Statements of Florida East Coast Holdings Corp. and its subsidiaries (the “Company” or “Holdings Corp.”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The Company’s rail transportation operations are conducted through its direct wholly owned subsidiary Florida East Coast Railway Corp. (“FECR Corp.”), and its indirect wholly owned subsidiaries, Florida East Coast Railway, L.L.C. and FEC Highway Services, L.L.C. (collectively, the “Railway”). The Railway operates a Class II railroad along 351 miles of mainline track between Jacksonville and Miami, Florida, serving some of the most densely populated areas of Florida. Additionally, the Railway owns and operates approximately 270 miles of branch, switching and other secondary track and 115 miles of yard track, all within Florida. The Railway has the only private coastal right-of-way between Jacksonville and Miami and is the exclusive rail-service provider to the Port of Palm Beach, Port Everglades (Fort Lauderdale), and the Port of Miami.

 

Fortress Acquisition

 

On July 26, 2007, private equity funds managed by affiliates of Fortress Investment Group LLC (collectively, “Fortress”) acquired all of the outstanding stock of Florida East Coast Industries, Inc. (“FECI”), a then publicly held company. As part of the acquisition of FECI (herein referred to as the “Fortress Acquisition”), Fortress assumed a portion of FECI’s long-term debt and repaid the remaining outstanding debt and took FECI private.

 

Formation of Florida East Coast Holdings Corp.

 

Florida East Coast Holdings Corp., was incorporated in Florida on January 10, 2011 to hold the investments of the Company.

 

On January 25, 2011, FECR Rail LLC contributed all of its holdings of FECR Corp.’s common and preferred shares in exchange for 250,555 newly issued common shares of Holdings Corp. As a result, FECR Rail LLC became the immediate parent of Holdings Corp., whereas Holdings Corp. became the immediate parent of FECR Corp.

 

The following is a summary of entities included in the Consolidated Financial Statements:

 

· Florida East Coast Holdings Corp. (a wholly owned subsidiary of FECR Rail LLC)

 

· Florida East Coast Railway Corp. (also known as “Railway”) (a wholly owned subsidiary of Florida East Coast Holdings Corp.):

 

· Florida East Coast Railway, L.L.C., and its subsidiaries;

 

· FEC Highway Services, L.L.C.

 

FEC PEVT L.L.C. and FEC PEVT Corporation

 

On September 26, 2012, the Company, through its wholly owned subsidiaries, FEC PEVT, L.L.C., as borrower, and Florida East Coast Railway, L.L.C., as guarantor, entered into a State Infrastructure Bank loan (the “SIB Loan”) with the Florida Department of Transportation (“FDOT”), as lender (see additional information in Note 6). In conjunction with the SIB Loan, the Company formed FEC PEVT Corporation and FEC PEVT L.L.C. FEC PEVT L.L.C. is owned by Florida East Coast Railway, L.L.C. (99%) and FEC PEVT Corporation (1%). FEC PEVT Corporation is a wholly owned subsidiary of Florida East Coast Railway Corp. The newly formed entities are included in the Consolidated Financial Statements as discussed above.

 

2. Summary of Significant Accounting Policies

 

Principles of Consolidated Financial Statements

 

The accompanying Consolidated Financial Statements of the Company include all wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.  The Consolidated Financial Statements include all adjustments which are necessary for a fair presentation of the results for interim periods.  All such adjustments are of a normal

 

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recurring nature.

 

Use of Estimates

 

The preparation of the Consolidated Financial Statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

Disclosures about Fair Value of Financial Instruments

 

ASC 825, Financial Instruments, requires disclosure of the fair value of certain financial instruments. Various inputs are considered when determining the fair values of financial instruments.  These inputs are summarized below:

 

·           Level 1 — observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets

·           Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.)

·           Level 3 — significant unobservable inputs (including the Company’s own assumptions in determining the fair value of financial instruments)

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments held by the Company:

 

·           Current assets: cash and cash equivalents, as reflected in the consolidated balance sheets, approximate fair value because of the short-term maturity of these instruments (Level 1 inputs).

 

·           Long-term debt: the fair value of the Company’s Senior Secured Notes and Senior PIK Toggle Notes is based on secondary market indicators (quoted market prices) at the date of measurement (Level 2 inputs).

 

The carrying amounts and estimated fair values of the Company’s financial instruments were as follows (in thousands):

 

 

 

March 31, 2013

 

 

 

Carrying Amount

 

Fair Value

 

Cash and cash equivalents

 

$

 35,606

 

$

 35,606

 

Senior Secured Notes

 

475,000

 

509,438

 

Senior PIK Toggle Notes

 

159,635

 

159,635

 

 

The Company had no Level 3 inputs as of March 31, 2013.

 

Accumulated Comprehensive Loss

 

Comprehensive loss is the changes in equity of an enterprise except those resulting from shareholder transactions. Accumulated other comprehensive loss consists of the following (in thousands):

 

 

 

March 31,

 

 

 

2013

 

Actuarial loss associated with pension plan

 

$

(1,098

)

Unrealized loss on marketable securities

 

(4

)

Accumulated other comprehensive loss

 

$

(1,102

)

 

3. Recent Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update to the Comprehensive Income Topic in the Accounting Standards Codifications (“ASC”). This update requires separate presentation of the components that are reclassified out of accumulated other comprehensive income either on the face of the financial statements or in the notes to the financial statements. This update also requires companies to disclose the income statement line items impacted by any significant reclassifications, such as the amortization of pension and other post-employment benefits adjustments. These items are required for both interim and annual reporting for public companies and became effective for the Company beginning with this

 

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Quarterly Report on Form 10-Q.

 

4. Related-Party Transactions

 

Management and facility and equipment rents

 

The Company incurred net charges of $0.4 million and $0.2 million for management services and facility rents to affiliates of FECI for the three months ended March 31, 2013 and 2012, respectively. The net charges include management services related to our right-of-way and rents for space leased from FECI for office space. As of March 31, 2013 and December 31, 2012, the Company did not have an outstanding net receivable or payable from or to FECI.

 

In addition, the Company allocated net proceeds of zero and $0.3 million for management services, and facility and equipment rents to affiliates of RailAmerica, Inc. (“RailAmerica”) for the three months ended March 31, 2013, and 2012, respectively. RailAmerica was an entity partially owned by investment funds managed by affiliates of Fortress. The net charges include expenses for (1) services provided from time to time for certain reciprocal administrative services, including finance, accounting, human resources, information technology, purchasing and legal, (2) fees received related to leased locomotives rented to RailAmerica’s affiliated companies and (3) office space sub-leased to RailAmerica.  Subsequent to October 1, 2012, RailAmerica is no longer considered a related party, due to a change in ownership.

 

Effective June 1, 2011, the Company entered into an agreement with RailAmerica’s wholly-owned subsidiary, Atlas Road Construction, L.L.C., to provide engineering and construction services for the Port Miami project (see Note 11).  The Company incurred net charges of zero and $2.0 million for the three months ended March 31, 2013 and 2012, respectively.

 

The Company rents chassis equipment for ordinary business operations from TRAC Intermodal, an entity indirectly owned by funds managed by affiliates of Fortress. These rents are based on current market rates for similar assets. During the three months ended March 31, 2013 and 2012, the Company incurred net charges of $0.3 million and $0.2 million, respectively.  As of March 31, 2013 and December 31, 2012, the Company had an outstanding payable of $0.2 million and $0.1 million, respectively.

 

Lease of FECI’s rail yard

 

On January 24, 2011, the Company entered into an amended and restated rail yard lease, which, among other things: extends the date to vacate to December 31, 2035 (unless the Company elects not to renew the lease); commencing on January 1, 2011, provides for an annual rental fee of $4.5 million a year (subject to a 2.5% annual increase); provides the Company the right to purchase certain land from FECI at a mutually determined fair market value; provides FECI with the right to relocate the Company (at its expense) from such land to comparable property with competitive rental rates. The lease is cancellable by the Company after five years with a two year notice requirement. The Railway paid $1.3 million and $1.2 million for the rail yard base rent for the three months ended March 31, 2013 and 2012, respectively.

 

5. Income Taxes

 

It is more likely than not that a portion of the net operating loss carryforwards will expire unused.  Accordingly, the Company has recognized tax expense based on the results of the three months ended March 31, 2013.  As such, the Company recorded an income tax expense of $1.2 million and $2.0 million, for the three months ended March 31, 2013 and 2012, respectively.

 

A valuation allowance against deferred tax assets is required if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company established a valuation allowance of $51.4 million and $52.5 million as of March 31, 2013 and December 31, 2012, respectively, to reduce deferred tax assets to their expected realizable value.

 

The Company has net operating loss carryforwards as of March 31, 2013, as follows:

 

· U. S.—$268.4 million (expiration periods: 2029—2035)

 

· Florida—$279.6 million (expiration periods: 2029—2035)

 

The Company recognizes interest and penalties related to uncertain tax positions in its provision for income taxes. As of March 31, 2013, the Company did not believe that it had any uncertain tax positions. As of December 31, 2012, the U.S. and Florida taxing jurisdiction remains open to examination for the years 2011, 2010, and 2009.

 

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6. Long-Term Debt

 

Debt consisted of the following:

 

 

 

March 31,
2013

 

December 31,
2012

 

 

 

(in thousands)

 

 

 

 

 

 

 

Senior Secured Notes

 

475,000

 

475,000

 

Senior PIK Toggle Notes (net of original discount of $1,702)

 

159,635

 

150,969

 

 

 

 

 

 

 

Total debt

 

634,635

 

625,969

 

Less: Current maturities

 

 

 

Long-term debt, less current maturities

 

$

634,635

 

$

625,969

 

 

Interest expense was $10.5 million on the 8 1/8% Senior Secured Notes (the “Senior Secured Notes” or “8 1/8% Notes”) and $4.4 million on the Senior PIK Toggle Notes for the three months ended March 31, 2013.  Interest expense was $10.5 million on the Senior Secured Notes and $4.1 million on the Senior PIK Toggle Notes for the three months ended March 31, 2012.

 

In connection with the issuance of the Senior Secured Notes, FECR Corp. and certain of its subsidiaries also entered into the Asset-Based Lending (“ABL”) Facility that matures on January 25, 2015.  Availability on the ABL Facility as of March 31, 2013 was $30.0 million and was undrawn.

 

The Senior Secured Notes are secured by first-priority liens on substantially all of the tangible and intangible assets of FECR Corp. and its subsidiary guarantors’ (other than the ABL collateral securing the ABL Facility and other than the collateral securing the SIB Loan) and a second-priority lien on ABL collateral and SIB Loan collateral. The guarantors are defined primarily as existing and future wholly owned domestic restricted subsidiaries. FECR Corp. may redeem up to 10% of the aggregate principal amount of the Senior Secured Notes issued during any 12-month period commencing on the issue date and ending on the third anniversary thereof at a price equal to 103% of the principal amount thereof plus accrued and unpaid interest, if any. FECR Corp. may also redeem some or all of the Senior Secured Notes at any time before February, 2014 at a price equal to 100% of the aggregate principal amount thereof plus a make-whole premium. In addition, prior to February 1, 2014, FECR Corp. may redeem up to 35% of the Senior Secured Notes at a redemption price of 108.125% of the aggregate principal amount thereof with the proceeds from an equity offering. Subsequent to February 1, 2014, FECR Corp. may redeem the Senior Secured Notes at 104.063% of their principal amount. The premium then reduces to 102.031% commencing on February 1, 2015 and then 100% on February 1, 2016 and thereafter.

 

The ABL Facility and indenture governing the Senior Secured Notes contain various covenants and restrictions that limit FECR Corp. and its restricted subsidiaries’ ability to incur additional indebtedness, pay dividends, make certain investments, sell or transfer certain assets, create liens, designate subsidiaries as unrestricted subsidiaries, consolidate, merge or sell substantially all the assets, and enter into certain transactions with affiliates. It is anticipated that proceeds from any future borrowings will be used for general corporate purposes.

 

Shareholder Contribution of FECR Rail LLC

 

In January and February 2011, FECR Rail LLC contributed an aggregate $16.0 million to the Company.

 

The proceeds of the sale of the Series B Perpetual Preferred Stock and $15.0 million of the FECR Rail LLC contribution to the Company were further contributed to FECR Corp. This contribution of $140.0 million together with the proceeds of the issuance of the Senior Secured Notes were used to repay an amount outstanding of approximately $601.2 million under the former credit facility owed by FECR Corp., to pay certain fees and expenses incurred in connection with the offering of the 8 1/8% Notes, and for general corporate purposes.

 

Senior PIK Toggle Notes

 

On February 11, 2011, Holdings Corp. sold $130.0 million of 10 1/2 / 11 1/4% Senior Payment in Kind Toggle Notes due 2017 (the “Senior PIK Toggle Notes”) in a private offering, for net proceeds of $127.7 million. The Senior PIK Toggle Notes are senior unsecured obligations that are not guaranteed by any of Holdings Corp.’s subsidiaries.

 

Holdings Corp. may redeem the notes in whole or in part at a redemption price of 107.5%, 105%, 102.5%, and 100%, plus accrued and unpaid interest thereon for the subsequent periods after August 1, 2012 as follows: August 1, 2012 through January 31, 2013; February 1, 2013 through January 31, 2014; February 1, 2014 through January 31, 2015; and February 1, 2015 and thereafter, respectively.

 

The Senior PIK Toggle Notes will pay interest semi-annually in arrears on each February 1 and August 1, commencing on August 1, 2011. Thereafter and up to February 1, 2016, Holdings Corp. may elect to pay interest on the Senior PIK Toggle Notes (1) entirely in cash at a rate of 10.5% , (2) entirely by increasing the principal amount of the note or by issuing new notes for the entire

 

10



Table of Contents

 

amount of the interest payment, at a rate per annum equal to the cash interest rate of 10.5% plus 75 basis points (in each case, PIK interest), or (3) 50% as cash interest and 50% as PIK interest. After February 1, 2016, interest will be payable entirely in cash.

 

The Company could be subject to certain interest deduction limitations if the Senior PIK Toggle Notes were treated as “applicable high yield discount obligations” within the meaning of Section 163(i)(1) of the Internal Revenue Code, as amended. In order to avoid such treatment, the Company would be required to redeem for cash a portion of each Senior PIK Toggle Note then outstanding at the end of the accrual period ending August 1, 2016. The portion of a Senior PIK Toggle Note required to be redeemed is an amount equal to the excess of the accrued original issue discount as of the end of such accrual period, less the amount of interest paid in cash on or before such date, less the first-year yield (the issue price of the debt instrument multiplied by its yield to maturity). The redemption price for the portion of each Senior PIK Toggle Note so redeemed would be 100% of the principal amount of such portion plus any accrued interest on the date of redemption.

 

The net proceeds of the issuance of the Senior PIK Toggle Notes were used to redeem the Company’s Series B Perpetual Preferred Stock for the carrying value of $125.0 million and accrued interest of $1.1 million. As a result, none of the Series B Perpetual Preferred Stock remains issued and outstanding.

 

The Senior Secured Notes and Senior PIK Toggle Notes will mature in fiscal 2017.

 

SIB Loan

 

On September 26, 2012, FEC PEVT, L.L.C., as borrower, and Florida East Coast Railway, L.L.C., as guarantor, each a wholly owned subsidiary of the Company, entered into the SIB Loan with FDOT. The SIB Loan provides for a loan of $30 million to fund, in part, the costs associated with the construction of a new Florida East Coast Intermodal Container Transfer Facility (the “ICTF”) in Port Everglades, Florida, which will serve the Company’s domestic and international business segments. Proceeds from the SIB Loan will be advanced by FDOT as construction proceeds on the ICTF. There have been no borrowings under the SIB Loan. The total construction cost of the ICTF construction project is approximately $53 million, $30 million of which will be funded through the SIB Loan, $18 million of which will be from a FDOT grant (the “FDOT Grant”) and the balance of $5 million from the Company’s capital budget. The Company has been awarded the entire FDOT Grant of $18 million as of December 31, 2012.

 

Interest will accrue on the advanced principal amount of the SIB Loan at the rate of 3.50% per annum, compounded annually, using an actual-days-elapsed/365 day counting convention. Both principal and interest payments are payable in annual installments as follows: interest payments commence on the SIB Loan on October 1, 2013, and principal repayments commence on the SIB Loan on October 1, 2015. The SIB Loan will be amortized over 20 years.

 

The SIB Loan is fully and unconditionally guaranteed by the Florida East Coast Railway, L.L.C. In addition, as a condition to making the SIB Loan, FDOT required a first priority lien on certain fixtures (including rail trackage) and equipment included in the collateral securing the Senior Secured Notes. The SIB Loan specifically excludes land, rail equipment and motor vehicles from its lien. As a condition to FDOT making the first loan disbursement under the SIB Loan, FEC PEVT, L.L.C. was required to post as additional collateral through July 1, 2017, a standby letter of credit in the amount of $3.0 million payable to FDOT, as beneficiary (the “Standby Letter of Credit Collateral”). On February 1, 2013, the Company posted the Standby Letter of Credit Collateral by accessing the letter of credit line of the ABL Facility, reducing availability for cash withdrawal under the ABL Facility to $27.0 million. The SIB Loan permits FEC PEVT, L.L.C, in lieu of posting the Standby Letter of Credit Collateral, at any time upon prior notice, to either pay down the principal of the SIB Loan by $3 million or substitute cash collateral.

 

7. Preferred Stock

 

The Company has 24,151 shares of Series A Redeemable Preferred Stock (the “preferred shares”) issued and outstanding. These preferred shares are held by FECR Rail LLC.  Dividends accumulate at the rate of 15% per annum, subject to limitations on distributions by the Company imposed by the terms of any financing, swap, or other agreement. The Company was able to redeem in whole or in part the preferred shares at any time.

 

As of March 31, 2013 and December 31, 2012, the total unpaid preferred yield was $8.7 million and $7.5 million, respectively.

 

8. Share-Based Compensation

 

In February 2013, the Company granted 237 restricted share units (“RSUs”) with respect to shares of common stock, par value $0.01 to certain executive officers.  The fair value at grant date was $0.5 million and the shares vest over a three-year term.  The grant date fair value of the restricted shares is based upon the market value of the Company’s common stock as of the quarterly evaluation.  Each restricted stock unit represents the right to receive one share of common stock.

 

The Company issued 548 shares of common stock for the three months ended March 31, 2013 resulting from the vesting of RSU awards granted in previous fiscal years.

 

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Table of Contents

 

Exemption from the registration requirements of the Securities Act of 1933, as amended (the “Act”), for the foregoing issuances is claimed under Section 4(2) of the Act and Regulation D promulgated thereunder. The foregoing issuances were compensatory in nature and were made without cost to the recipients, other than the provision of services.

 

Share-based compensation expenses for the three months ended March 31, 2013 and 2012 were $0.4 million and $0.5 million, respectively.

 

9. Commitments and Contingencies

 

The Company is the defendant and plaintiff in various lawsuits resulting from its operations. In the opinion of management, appropriate provisions have been made in the Consolidated Financial Statements for the estimated liability that is probable 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.

 

In September 2006, the Florida Department of Environmental Protection (“FDEP”) notified the Company and an adjacent property owner that they had been identified as potentially responsible parties (“PRPs”) as a result of an investigation into contaminated groundwater in Fort Pierce, Florida. As of March 31, 2013, and December 31, 2012, the Company had accrued $1.5 million and $1.5 million, respectively, related to the alleged contamination. Of the $1.5 million accrued at March 31, 2013, $0.2 million is expected to be paid over the next year.  FDEP and the Company agreed in April 2012 that the Company’s scope of testing is complete and the Company can initiate a pilot remediation of the property. The Company has completed a competitive review of remediation proposals and selected a contractor to begin the pilot in early 2013.

 

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

 

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.

 

In addition, the Company had accrued approximately $0.2 million and $0.6 million related to various other environmental incidents as of March 31, 2013, and December 31, 2012, respectively.

 

10. Track Maintenance Agreement

 

The Company entered into a Track Maintenance Agreement with an unrelated third-party customer (the “Shipper”). Under the agreement, the Shipper paid for qualified railroad track maintenance expenditures during the fiscal year in exchange for the assignment of railroad track miles, which permits the Shipper to claim certain tax credits pursuant to Section 45G of the Internal Revenue Code. The track maintenance tax credit was not renewed until January 2013; however, the extension did include retroactive tax credit reimbursement for 2012 and 2013. Therefore, no 45G maintenance reimbursement was reflected in the 2012 financial statements.  For the three months ended March 31, 2013 and 2012, the Company has recorded $3.0 million and zero, respectively, of maintenance expenditures. This amount is included in other expenses as a reduction to expense in the Consolidated Statements of Operations and Comprehensive Income (Loss).  As of March 31, 2013, the Company has a net outstanding receivable of $0.6 million.

 

11. Port Activity

 

In October 2010, Miami-Dade County, owner of the Port of Miami, was awarded a $22.8 million federal grant under the U.S. Department of Transportation’s Transportation Investment Generating Economic Recovery II (“TIGER”) program to rehabilitate the port’s rail bridge and construct new rail facilities on port property (“on-port project”). In addition to the $22.8 million TIGER grant, an additional $2.3 million will be funded by Port Miami. These projects will enable cargo to be moved directly from the port’s facility to an inland distribution center and alleviate traffic congestion in and around the port. On September 20, 2011, Miami-Dade County entered into a Rail Bridge Construction Agreement with the Company. Under this agreement, the Company is responsible for the administration of the construction work for the Bascule Bridge over Biscayne Bay which connects the Company’s Port Lead to the Port of Miami. The Company is reimbursed for all of the costs incurred. For the three months ended March 31, 2013 and 2012, the Company incurred costs of $1.7 million and $0.5 million, respectively. As of March 31, 2013 and December 31, 2012, the Company had an outstanding receivable of $2.2 million and $2.7 million, respectively.

 

The Company plans to establish intermodal container rail service on its own rail line leading into the port at an estimated total cost of $18.3 million (“off-port project”). The Company signed an agreement with FDOT on January 24, 2011, in which FDOT will participate in funding of the “off-port project” and will reimburse the Company an estimated $9.1 million of the total cost. As of December 31, 2012, the Company had incurred approximately $18.3 million of capital expenditures related to the Port Miami off-port project. Of this amount, the Company has reduced this capital expenditure by $9.1 million with grant proceeds.

 

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Table of Contents

 

On January 31, 2012, the Company entered into a Port Everglades Intermodal Container Transfer Facility Lease and Operating Agreement with Broward County. The agreement was ratified by Broward County on March 20, 2012. The term of the agreement is 30 years with two 10-year options. The Agreement was subject to the closing of the SIB Loan with FDOT. The SIB Loan closed on September 26, 2012. The Agreement provides the Company the land needed for the Company to construct an intermodal facility to serve its domestic and international business segments. The total construction cost is approximately $53 million, $30 million of which will be funded through the SIB Loan, $18 million of which will be from a FDOT grant and the balance of $5 million from the Company’s capital budget. The Company has been awarded the entire $18 million FDOT grant as of December 31, 2012. Upon project commencement, the Company will be reimbursed for half of the corresponding expenditures, not to exceed the $18 million FDOT grant.  For the three months ended March 31, 2013 and 2012, the Company has incurred costs of $0.9 million and zero, respectively.  As of March 31, 2013 and December 31, 2012, the Company had an outstanding receivable of $0.4 million and zero, respectively.

 

12. Impairment of Assets

 

During the fourth quarter of 2012, the Company reviewed the serviceable status of the hopper car fleet. As a result of the review, the Company identified 227 hoppers that will no longer be used. As a result, the Company recorded an impairment charge of $3.5 million to adjust their carrying value to their fair value (Level 2 fair value measurement) based on current scrap value obtained from third-party price quotations.  As a result, the Company classified these hopper cars as held for sale at December 31, 2012.  The Company sold 114 hoppers during the first quarter of 2013 for $1.0 million.  As of March 31, 2013, the Company has an outstanding receivable of $0.5 million related to the sale of the hoppers.  The remaining hoppers are classified as held for sale as of March 31, 2013.

 

13. Guarantor Condensed Consolidated Financial Statements

 

Holdings Corp. was incorporated on January 10, 2011. In January 2011, all of the equity interests in FECR Corp. were transferred from FECR Rail LLC to Holdings Corp., whereby Holdings Corp. became the direct parent of FECR Corp. Holdings Corp. is a holding company and has no direct operations or material assets other than its wholly owned interest in FECR Corp. All of Holdings Corp.’s operations are conducted through its subsidiaries. The only material differences between Holdings Corp. and FECR Corp. are the separate Senior PIK Toggle Notes issued by Holdings Corp. and its related accounts, including deferred financing costs, amortization, payment of interest and payment of taxes. Where information or an explanation is provided that is substantially the same for each company, such information or explanation has been combined. Where information or an explanation is not substantially the same for each company, we have provided separate information and explanation.

 

The Consolidating Financial Statements herein present consolidating financial data for Holdings Corp. (on a parent only basis), FECR Corp. (on an issuer only basis), an elimination column for adjustments to arrive at the information for the parent company and subsidiaries on a consolidated basis as of March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and 2012.

 

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Table of Contents

 

Consolidating balance sheets as of March 31, 2013.

 

 

 

Holdings Corp.
 (Parent)

 

FECR Corp.
 (Issuer)

 

Eliminations
 for
 Consolidation

 

Consolidation

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34

 

$

35,572

 

$

 

$

35,606

 

Restricted cash

 

 

126

 

 

126

 

Accounts receivable, net

 

 

39,285

 

 

39,285

 

Materials and supplies

 

 

4,460

 

 

4,460

 

Deferred income taxes

 

(271

)

2,645

 

 

2,374

 

Prepaid and other current assets

 

3

 

4,652

 

 

4,655

 

Assets held for sale

 

 

915

 

 

915

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

(234

)

87,655

 

 

87,421

 

Noncurrent assets:

 

 

 

 

 

 

 

 

 

Property, plant and equipment, less accumulated depreciation

 

 

771,384

 

 

771,384

 

Investments in affiliates

 

415,598

 

 

(415,598

)

 

Investments in non-affiliates

 

 

74

 

 

74

 

Intangible assets, less accumulated amortization

 

 

206

 

 

206

 

Other assets

 

1,517

 

16,432

 

(3,772

)

14,177

 

 

 

 

 

 

 

 

 

 

 

Total noncurrent assets

 

417,115

 

788,096

 

(419,370

)

785,841

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

416,881

 

$

875,751

 

$

(419,370

)

$

873,262

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

2,823

 

$

30,300

 

$

 

$

33,123

 

Taxes payable

 

 

1,963

 

 

1,963

 

Deferred revenue

 

 

1,185

 

 

1,185

 

Other current liabilities

 

 

1,082

 

 

1,082

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

2,823

 

34,530

 

 

37,353

 

Deferred income taxes

 

(271

)

26,351

 

 

26,080

 

Long-term debt

 

159,635

 

475,000

 

 

634,635

 

Other long-term liabilities

 

3,773

 

6,535

 

(3,772

)

6,536

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

165,960

 

542,416

 

(3,772

)

704,604

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ (deficit) equity

 

250,921

 

333,335

 

(415,598

)

168,658

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

416,881

 

$

875,751

 

$

(419,370

)

$

873,262

 

 

14



Table of Contents

 

Consolidating balance sheets as of December 31, 2012.

 

 

 

Holdings Corp.
 (Parent)

 

FECR Corp.
 (Issuer)

 

Eliminations
 for
 Consolidation

 

Consolidation

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34

 

$

40,366

 

$

 

$

40,400

 

Restricted cash

 

 

126

 

 

126

 

Accounts receivable, net

 

 

34,380

 

 

34,380

 

Materials and supplies

 

 

3,574

 

 

3,574

 

Deferred income taxes

 

(271

)

2,645

 

 

2,374

 

Prepaid and other current assets

 

1

 

2,476

 

 

2,477

 

Assets held for sale

 

 

1,839

 

 

1,839

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

(236

)

85,406

 

 

85,170

 

Noncurrent assets:

 

 

 

 

 

 

 

 

 

Property, plant and equipment, less accumulated depreciation

 

 

772,429

 

 

772,429

 

Investments in affiliates

 

415,597

 

 

(415,597

)

 

Investments in non-affiliates

 

 

74

 

 

74

 

Intangible assets, less accumulated amortization

 

 

220

 

 

220

 

Other assets

 

1,606

 

16,139

 

(2,641

)

15,104

 

 

 

 

 

 

 

 

 

 

 

Total noncurrent assets

 

417,203

 

788,862

 

(418,238

)

787,827

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

416,967

 

$

874,268

 

$

(418,238

)

$

872,997

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

 

$

42,193

 

$

 

$

42,193

 

Taxes payable

 

 

326

 

 

326

 

Deferred revenue

 

 

906

 

 

906

 

Other current liabilities

 

 

1,035

 

 

1,035

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

44,460

 

 

44,460

 

Deferred income taxes

 

(271

)

25,109

 

 

24,838

 

Long-term debt

 

150,969

 

475,000

 

 

625,969

 

Other long-term liabilities

 

9,802

 

5,373

 

(2,641

)

12,534

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

160,500

 

549,942

 

(2,641

)

707,801

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ (deficit) equity

 

256,467

 

324,326

 

(415,597

)

165,196

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

416,967

 

$

874,268

 

$

(418,238

)

$

872,997

 

 

15



Table of Contents

 

Consolidating statement of operations for the three months ended March 31, 2013.

 

 

 

Holdings Corp.
 (Parent)

 

FECR Corp.
 (Issuer)

 

Eliminations
 for
 Consolidation

 

Consolidation

 

Operating revenue

 

$

 

$

68,766

 

$

 

$

68,766

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Labor and benefits

 

 

13,039

 

 

13,039

 

Purchased services

 

 

12,738

 

 

12,738

 

Fuel

 

 

8,410

 

 

8,410

 

Depreciation and amortization

 

 

6,662

 

 

6,662

 

Equipment rents

 

 

4,018

 

 

4,018

 

Net gain on sale and impairment of assets

 

 

(69

)

 

(69

)

Other

 

 

3,626

 

 

3,626

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

48,424

 

 

48,424

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

20,342

 

 

20,342

 

 

 

 

 

 

 

 

 

 

 

Interest expense (net of interest income)

 

(4,419

)

(10,546

)

 

(14,965

)

Other income

 

 

51

 

 

51

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) before income taxes

 

(4,419

)

9,847

 

 

5,428

 

Provision for income taxes

 

 

1,242

 

 

1,242

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(4,419

)

$

8,605

 

$

 

$

4,186

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(4,419

)

$

8,626

 

$

 

$

4,207

 

 

Consolidating statement of operations for the three months ended March 31, 2012.

 

 

 

Holdings Corp.
 (Parent)

 

FECR Corp.
 (Issuer)

 

Eliminations
 for
 Consolidation

 

Consolidation

 

Operating revenue

 

$

 

$

57,345

 

$

 

$

57,345

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Labor and benefits

 

 

12,231

 

 

12,231

 

Purchased services

 

6

 

9,031

 

 

9,037

 

Fuel

 

 

7,891

 

 

7,891

 

Depreciation and amortization

 

 

6,664

 

 

6,664

 

Equipment rents

 

 

3,147

 

 

3,147

 

Net gain on sale and impairment of assets

 

 

(85

)

 

(85

)

Other

 

 

6,374

 

 

6,374

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

6

 

45,253

 

 

45,259

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

(6

)

12,092

 

 

12,086

 

 

 

 

 

 

 

 

 

 

 

Interest expense (net of interest income)

 

(4,150

)

(10,465

)

 

(14,615

)

Other expense

 

 

2

 

 

2

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) before income taxes

 

(4,156

)

1,629

 

 

(2,527

)

Provision for income taxes

 

 

1,972

 

 

1,972

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(4,156

)

$

(343

)

$

 

$

(4,499

)

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(4,176

)

$

(311

)

$

 

$

(4,487

)

 

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Table of Contents

 

Consolidating statement of cash flows for the three months ended March 31, 2013.

 

 

 

Holdings Corp.
 (Parent)

 

FECR Corp.
 (Issuer)

 

Eliminations
 for
 Consolidation

 

Consolidation

 

CASH FLOW FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(4,419

)

$

8,605

 

$

 

$

4,186

 

Adjustments to reconcile net loss to cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,662

 

 

6,662

 

Amortization of debt financing fees

 

162

 

728

 

 

890

 

Share-based compensation costs

 

 

383

 

 

383

 

Deferred taxes

 

 

1,242

 

 

1,242

 

Gain on sale and impairment of assets

 

 

(69

)

 

(69

)

Interest paid in kind

 

8,592

 

 

 

8,592

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,407

)

 

(4,407

)

Prepaid and other current assets

 

(3

)

(2,175

)

 

(2,178

)

Materials and supplies

 

 

(886

)

 

(886

)

Other assets and deferred charges

 

 

(1,021

)

1,132

 

111

 

Accounts payable and accrued expenses

 

2,823

 

(11,893

)

 

(9,070

)

Taxes payable

 

 

1,637

 

 

1,637

 

Deferred revenue

 

 

278

 

 

278

 

Other current liabilities

 

 

47

 

 

47

 

Other long-term liabilities

 

(6,027

)

1,183

 

(1,132

)

(5,976

)

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

1,128

 

314

 

 

1,442

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Purchases of properties and equipment

 

 

(5,684

)

 

(5,684

)

Proceeds from disposition of assets

 

 

576

 

 

576

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(5,108

)

 

(5,108

)

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Purchase of common stock outstanding

 

(1,128

)

 

 

(1,128

)

 

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

(1,128

)

 

 

(1,128

)

 

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(4,794

)

 

(4,794

)

Cash and cash equivalents at beginning of period

 

34

 

40,366

 

 

40,400

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

34

 

$

35,572

 

$

 

$

35,606

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

$

19,297

 

$

 

$

19,297

 

 

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Table of Contents

 

Consolidating statement of cash flows for the three months ended March 31, 2012.

 

 

 

Holdings Corp.
 (Parent)

 

FECR Corp.
 (Issuer)

 

Eliminations
 for
 Consolidation

 

Consolidation

 

CASH FLOW FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(4,156

)

$

(343

)

$

 

$

(4,499

)

Adjustments to reconcile net loss to cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,664

 

 

6,664

 

Amortization of debt financing fees

 

155

 

726

 

 

881

 

Share-based compensation costs

 

 

502

 

 

502

 

Deferred taxes

 

 

1,972

 

 

1,972

 

Gain on sale and impairment of assets

 

 

(85

)

 

(85

)

Interest paid in kind

 

7,701

 

 

 

7,701

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,646

)

 

(1,646

)

Prepaid and other current assets

 

(4

)

(705

)

 

(709

)

Materials and supplies

 

 

(2,159

)

 

(2,159

)

Other assets and deferred charges

 

 

(353

)

535

 

182

 

Accounts payable and accrued expenses

 

 

(12,982

)

 

(12,982

)

Taxes payable

 

 

(4,904

)

 

(4,904

)

Deferred revenue

 

 

(551

)

 

(551

)

Other current liabilities

 

 

172

 

 

172

 

Other long-term liabilities

 

(3,171

)

(10

)

(535

)

(3,716

)

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

525

 

(13,702

)

 

(13,177

)

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Purchases of properties and equipment

 

 

(5,430

)

 

(5,430

)

Proceeds from disposition of assets

 

 

252

 

 

252

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(5,178

)

 

(5,178

)

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Purchase of common stock outstanding

 

(535

)

 

 

(535

)

 

 

 

 

 

 

 

 

 

 

Net cash used in by financing activities

 

(535

)

 

 

(535

)

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(10

)

(18,880

)

 

(18,890

)

Cash and cash equivalents at beginning of period

 

44

 

30,861

 

 

30,905

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

34

 

$

11,981

 

$

 

$

12,015

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

$

19,277

 

$

 

$

19,277

 

 

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Table of Contents

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

 

This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and our annual consolidated financial statements and notes thereto included in our annual report on Form 10-K filed with the SEC on March 13, 2013. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under “Risk Factors.”

 

Overview

 

We own and operate a premier 351-mile freight railroad along the east coast of Florida from Jacksonville to Miami. Our railroad is one of only two major freight railroads serving Florida. We operate at a high level of density, which means that we carry a high number of units per track mile. In 2012, we carried approximately 1,304 units per mainline track mile, which we believe is more than any of the Class I railroads in the United States.

 

In 2012, we transported over 457,000 units on our railroad comprising various types of freight for over 500 customers. We transport products such as intermodal containers and trailers, crushed rock (aggregate), automobiles, food, and other industrial products. We are a major hauler of aggregate in the State of Florida and a key conduit for the transportation of automobiles into South Florida.

 

We provide a direct route through some of the most highly congested regions of the State of Florida, and we believe that we are able to haul freight often more quickly and more cost effectively than other modes of transportation, such as trucking, as one train can haul the equivalent of up to 280 trucks.

 

We have direct access to the major south Florida ports of Miami, Everglades (Fort Lauderdale) and Palm Beach through which we transport intermodal containers. We believe that our unique positioning to these ports will help us continue our intermodal volume growth.

 

Our Business

 

We generate rail-operating revenues primarily from both the movement of freight in conventional freight cars and intermodal shipments of containers and trailers on flatcars. We count each move of a freight car, container or trailer on our line as one unit. We also generate revenue from dray moves (drayage is the movement of containers or trailers by truck to and from the rail yard). Non-freight operating revenues are derived from car hire and demurrage (allowing our customers and other railroads to use our railcars for storage or transportation in exchange for a daily fee), real estate and equipment lease income, ancillary dray charges, switching (managing and positioning railcars within a customer’s facility), and other transportation services.

 

Our operating expenses consist of salaries (approximately 70% of our work force is covered by collective bargaining agreements), related payroll taxes and employee benefits, depreciation (primarily reflecting our capital requirements for maintaining current operations), insurance and casualty claim expenses, diesel fuel, repairs billed to/from others (generally, a net credit received from repairs of foreign cars on our line less repairs paid by us for our cars on a foreign line), property taxes, material and supplies, purchased services (contract labor and professional services), and other expenses.

 

Managing Business Performance

 

We manage our business performance by attempting to (i) grow our freight and non-freight revenue, (ii) drive financial improvements through a variety of cost-savings initiatives, (iii) strive to utilize assets to maximum capacity will still supporting future growth, and (iv) continued focus on safety to lower the risks and costs associated with operating our business.

 

Changes in units and revenue per unit (“RPU”) have a direct impact on freight revenue.  Because we believe there is significant value in the premier, niche railroad that we operate with high efficiency, we will continue to focus on yield management efforts that reflect the value of our freight network.  This focus may allow us to improve our freight RPU. As a consequence, our operating ratio, which we define as total operating expenses divided by total operating revenues, continues to be a key metric which we evaluate. We deem operating ratio as an important metric to measure our operational performance, however, operating ratio is not a measure as defined under U.S. GAAP.

 

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First Quarter 2013 Highlights

 

·                   Operating revenue increased $11.4 million driven by higher volume.

 

·                   Expenses increased $3.2 million mostly driven by purchased services.

 

·                   Operating income increased $8.3 million, or 68.3%, to $20.3 million.

 

·                   Operating ratio was a first quarter record of 70.4%.

 

 

 

Three Months ended March 31,

 

 

 

2013

 

2012

 

Volume

 

127,786

 

111,448

 

 

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

Revenue

 

$

68,766

 

$

57,345

 

Expenses

 

48,424

 

45,259

 

Operating income

 

$

20,342

 

$

12,086

 

Operating Ratio

 

70.4

%

78.9

%

 

Financial Results of Operations

 

Comparison of Operating Results for the Three Months Ended March 31, 2013 and 2012

 

Operating Revenue

 

The following table compares freight revenues, units, and average freight RPU for the periods indicated (in thousands, except units and RPU):

 

 

 

Three Months ended March 31,

 

 

 

Units*

 

Revenue

 

RPU

 

 

 

2013

 

2012

 

% Var

 

2013

 

2012

 

% Var

 

2013

 

2012

 

% Var

 

Intermodal

 

93,567

 

89,438

 

5%

 

$

40,706

 

$

33,677

 

21%

 

$

435

 

$

377

 

15%

 

Crushed Stone (Aggregate)

 

22,592

 

11,803

 

91%

 

12,025

 

7,778

 

55%

 

532

 

659

 

(19)%

 

Food Products

 

2,984

 

2,608

 

14%

 

3,318

 

2,991

 

11%

 

1,112

 

1,147

 

(3)%

 

Motor Vehicles & Equipment

 

2,817

 

2,408

 

17%

 

3,837

 

3,161

 

21%

 

1,362

 

1,313

 

4%

 

Chemicals

 

1,255

 

1,076

 

17%

 

1,993

 

1,839

 

8%

 

1,588

 

1,709

 

(7)%

 

Other

 

4,571

 

4,115

 

11%

 

3,519

 

3,385

 

4%

 

770

 

823

 

(6)%

 

Carload Subtotal

 

34,219

 

22,010

 

55%

 

24,692

 

19,154

 

29%

 

722

 

870

 

(17)%

 

Total Freight Revenue

 

127,786

 

111,448

 

15%

 

65,398

 

52,831

 

24%

 

512

 

474

 

8%

 

Non-Freight

 

 

 

 

 

 

 

3,368

 

4,514

 

(25)%

 

 

 

 

 

 

 

Total Revenue

 

 

 

 

 

 

 

$

68,766

 

$

57,345

 

20%

 

 

 

 

 

 

 

 


* The units for 2012 have been restated to conform to the 2013 presentation. In June 2012, the Company made a policy change and began including certain Intermodal revenue empties in the unit count.  Excluding the volumes, Intermodal revenue per unit would have been $394.

 

Intermodal revenues were up due to both additional volume from new customers and increased business from current customers.   The increase in RPU was due to both mix of traffic and improved yield management.

 

Carload revenues were up driven mostly by volume.  This increase was primarily due to the net effect of the following:

 

·                   Crushed Stone (Aggregate) revenues increased primarily due the expansion of the Fort Lauderdale airport.

 

·                      Food Products revenues increased driven by additional volumes at one of our customer’s manufacturing facilities due to retooling at a separate facility not served by the Company.

 

·                   Motor Vehicles & Equipment revenues increased primarily due to a new multi-year contract that began in the fourth

 

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quarter of 2012.

 

·                   Chemicals revenues increased primarily due additional ethanol and liquid petroleum shipments.

 

·                   Other revenues increased due to additional coal shipments.

 

Non-freight revenues decreased due to the expiration of an administration fee that ended December 31, 2012.

 

Operating Expenses

 

The following table sets forth the operating revenue and expenses for our consolidated operations for the periods indicated (dollars in thousands):

 

 

 

Three Months ended March 31,

 

 

 

2013

 

2012

 

$ Variance

 

Operating revenue

 

$

68,766

 

$

57,345

 

$

11,421

 

Operating expenses:

 

 

 

 

 

 

 

Labor and benefits

 

13,039

 

12,231

 

(808

)

Purchased services

 

12,738

 

9,037

 

(3,701

)

Diesel fuel

 

8,410

 

7,891

 

(519

)

Depreciation and amortization

 

6,662

 

6,664

 

2

 

Equipment rents

 

4,018

 

3,147

 

(871

)

Net gain on sale and impairment of assets

 

(69

)

(85

)

(16

)

Other expenses

 

3,626

 

6,374

 

2,748

 

Total operating expenses

 

$

48,424

 

$

45,259

 

$

(3,165

)

Operating income

 

$

20,342

 

$

12,086

 

$

8,256

 

 

Operating expenses increased to $48.4 million for the three months ended March 31, 2013, from $45.3 million for the three months ended March 31, 2012, an increase of $3.2 million, or 7%. Set forth below is additional detail regarding changes in our operating expenses:

 

·                   Labor and benefits increased due to higher incentive compensation earned as a result of increased company performance for the three months ended March 31, 2013, compared to the three months ended March 31, 2012.

 

·                   Purchased services increased mainly due to an amendment in contract terms with a major customer, coupled with an increase in lift costs due to increased volumes.

 

·                   Diesel fuel increased for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. The increase in diesel fuel was primarily due to an increase in the average price of fuel.  The increase in the average price of fuel was offset by fuel efficiencies gained for the comparable periods.  The average price of fuel was $3.49 per gallon for the three months ended March 31, 2013 compared to the average price per gallon of $3.46 for the three months ended March 31, 2012.

 

·                   Depreciation and amortization remained relatively consistent for the comparable periods.

 

·                   Equipment rents increased mainly due to increased car hire expense, as well as increased rental expense associated with volumes.

 

·                   Net gain on sale and impairment of assets remained relatively consistent for the comparable periods.

 

·                   Other expenses decreased primarily due to the reinstatement of the track maintenance agreement reimbursement program (Internal Revenue Code Section 45G Tax Credit) of $3.0 million for the three months ended March 31, 2013, which was not in place for the three months ended March 31, 2012; this reduction was offset by increases in various expenses for the comparable periods.

 

Other Income (Expense)

 

Interest Expense (net of interest income). Interest expense increased $0.4 million, or 2.4%, to $15.0 million for the three

 

21



Table of Contents

 

months ended March 31, 2013 from $14.6 million for the three months ended March 31, 2012.  The increase in interest expense is due to the increase in the principal amount of the Senior PIK Toggle notes as a result of the interest payments that were paid in kind during 2012.

 

Other Income (Loss). Other income (loss) remained relatively consistent for the comparable periods.

 

Provision for Income Taxes. For the three months ended March 31, 2013, we believe that it is more likely than not that some of our net operating loss carryforwards will expire unused. Accordingly, we recognized tax expense based on the results of the three months ended March 31, 2013.  As such, the Company recorded an income tax expense of $1.2 million and $2.0 million, for the three months ended March 31, 2013 and 2012, respectively.

 

Liquidity and Capital Resources

 

The discussion of liquidity and capital resources that follows reflects our consolidated results and includes all of our subsidiaries. We have historically met our liquidity requirements primarily from cash generated from operations and borrowings under our credit agreements which are used to fund capital expenditures and debt service requirements. For the three months ended March 31, 2013, there was a net cash inflow from operations of $1.4 million, whereas for the three months ended March 31, 2012, there was a net cash outflow of $13.2 million.

 

We meet our liquidity requirements primarily from the following sources:

 

·                   Operating revenues generated from freight and non-freight revenues. Freight revenues include revenues derived from intermodal transports and carload shipments of a variety of goods such as aggregates (crushed stones), motor vehicles and food products. Non-freight revenues include car hire and demurrage, real estate and equipment lease income, ancillary dray charges, switching, administration fees and other transportation services.

 

·                   Borrowings and lines of credits, under which $475.0 million, principal amount of Senior Secured Notes, was outstanding, $159.6 million, principal amount of the Senior PIK Toggle Notes, and $27.0 million was available for borrowing under the ABL Facility as of March 31, 2013.  As of December 31, 2012, $626.0 million was outstanding and there were no funds drawn on the ABL Facility for the period then ended.

 

We expect that our cash flows from operations and existing credit facilities will be sufficient to meet our ongoing operating requirements, to fund capital expenditures for property, plant and equipment, and to satisfy our debt requirements. In addition, we closed the $30 million State Infrastructure Bank loan (the “SIB Loan”) on September 26, 2012. The purpose of the SIB Loan is to fund, in part, the costs associated with the Company’s construction of a new Florida East Coast Intermodal Transfer Facility (the “ICTF”) at Port Everglades which will serve the Company’s domestic and international segments. The ICTF is expected to cost $53 million to complete. Proceeds of the SIB Loan will be advanced by the Florida Department of Transportation (“FDOT”) as construction proceeds on the ICTF. The total construction costs of the ICTF are expected to be $53 million, $30 million of which will be funded by the SIB Loan, $18 million of which will be funded by a grant from FDOT, and the balance of $5 million from the Company’s capital budget. Our current projections of cash flows from operations and the availability of funds under our ABL Facility (as further described below) are expected to be sufficient to fund our maturing debt and contractual obligations in the next several years. No assurance, however, can be made that we will be able to meet our financing and liquidity needs as currently contemplated. See “Risk Factors—Risks Related to Our Indebtedness” in the Company’s most recent Annual Report on Form 10-K.

 

Holdings Corp. is a holding company and, therefore, depends upon the performance of and distributions from our subsidiaries to meet its debt service obligations (including interest payments) under the Senior PIK Toggle Notes. Legal and contractual restrictions in agreements governing current and future indebtedness, as well as the financial condition and operating requirements of our direct subsidiary, FECR Corp., may limit Holdings Corp.’s ability to obtain cash from FECR Corp. The indenture governing the 8 1/8% Notes and the ABL Facility contain covenants that restrict FECR Corp.’s ability to pay cash dividends and make other distributions or loans to Holdings Corp. The earnings from, or other available assets of, FECR Corp. may not be sufficient to pay dividends or make distributions or loans to enable Holdings Corp. to make payments in respect of the notes when such payments are due. In addition, even if such earnings were sufficient, we cannot assure you that the agreements governing the current and future indebtedness of FECR Corp. will permit FECR Corp. to provide us with sufficient dividends, distributions or loans to fund interest and principal payments on the notes when due. Holdings Corp. will be forced to accrue interest on a “paid-in-kind” basis, to the extent that distributions from FECR Corp. are not sufficient to fulfill the interest obligations under the Senior PIK Toggle Notes. Any interest accrued on a “paid-in-kind” basis will increase the overall cost of Holdings Corp.’s borrowings, as well as the cash ultimately required to fully satisfy Holdings Corp.’s obligations, under the Senior PIK Toggle Notes.

 

We have implemented capital spending programs designed to assure the ability to provide safe, efficient and reliable transportation services. For 2013, we anticipate that over half of the remaining estimated capital investments will be used to sustain core infrastructure. We will fund these capital investments through cash generated from operations.

 

The remaining capital investments are for locomotives, freight cars, technology and high return growth or productivity

 

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Table of Contents

 

investments such as the new construction of the ICTF in Port Everglades which will serve the Company’s intermodal line of business.

 

We are continually evaluating market and regulatory conditions that could affect our ability to generate sufficient returns on capital investments. We may revise our future estimates for capital spending as a result of changes in business conditions, tax legislation or the enactment of new laws or regulations. Although new legislation or regulations could have a material adverse effect on our operations and financial performance in the future, we cannot predict the manner or severity of such impact. However, we continue to take steps and explore opportunities to reduce the impact of our operations on the environment, including investments in new technologies, reducing fuel consumption and increasing fuel efficiency and lowering emissions.

 

Cash Flow Information for the Three Months ended March 31, 2013 and 2012

 

Operating Activities

 

Cash provided by operating activities was $1.4 million for the three months ended March 31, 2013 compared to cash used in operating activities of $13.2 million for the three months ended March 31, 2012. In 2012, a property tax payment was made that was not repeated in the first quarter of 2013 thereby showing an increase in cash provided by operating activities.  This increase was slightly offset by changes in working capital.

 

Financing Activities

 

Cash used in financing activities was $1.1 million for the three months ended March 31, 2013 compared to cash used in financing activities of $0.5 million for the three months ended March 31, 2012.  The increase in cash used in financing activities was primarily due to the purchase of common shares outstanding for the comparable periods.

 

Long-term Debt

 

On January 25, 2011, FECR Corp. sold $475.0 million of 8 1/8% Senior Secured Notes due 2017 (the “Senior Secured Notes” or “8 1/8% Notes”) in a private offering, for gross proceeds of $475.0 million.

 

In connection with the issuance of the Senior Secured Notes, FECR Corp. and certain of its subsidiaries also entered into the Asset-Based Lending (“ABL”) Facility. The ABL Facility matures on January 25, 2015 and bears interest at FECR Corp.’s option of: (a) a base rate determined in the greater of (1) the prime rate of the administrative agent, (2) federal funds effective rate plus 1 / 2 of 1%, or (b) a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits in London interbank market for the interest period relevant to such borrowing. The applicable margin with respect to (a) base rate borrowings will be 2.25%, and (b) LIBOR borrowings will be 3.25%. Obligations under the ABL Facility are secured by a first-priority lien on the ABL Collateral.

 

The Senior Secured Notes are secured by first-priority liens on substantially all of the tangible and intangible assets of FECR Corp. and its subsidiary guarantors’ (other than the ABL collateral securing the ABL Facility and other than the collateral securing the SIB Loan) and a second-priority lien on ABL collateral and SIB Loan collateral. The guarantors are defined primarily as existing and future wholly owned domestic restricted subsidiaries. FECR Corp. may redeem up to 10% of the aggregate principal amount of the Senior Secured Notes issued during any 12-month period commencing on the issue date and ending on the third anniversary thereof at a price equal to 103% of the principal amount thereof plus accrued and unpaid interest, if any. FECR Corp. may also redeem some or all of the Senior Secured Notes at any time before February 2014 at a price equal to 100% of the aggregate principal amount thereof plus a make-whole premium. In addition, prior to February 1, 2014, FECR Corp. may redeem up to 35% of the Senior Secured Notes at a redemption price of 108.125% of the aggregate principal amount thereof with the proceeds from an equity offering. Subsequent to February 1, 2014, FECR Corp. may redeem the Senior Secured Notes at 104.063% of their principal amount. The premium then reduces to 102.031% commencing on February 1, 2015 and then 100% on February 1, 2016 and thereafter.

 

The ABL Facility and indenture governing the Senior Secured Notes contain various covenants and restrictions that limit FECR Corp. and its restricted subsidiaries’ ability to incur additional indebtedness, pay dividends, make certain investments, sell or transfer certain assets, create liens, designate subsidiaries as unrestricted subsidiaries, consolidate, merge or sell substantially all the assets, and enter into certain transactions with affiliates. It is anticipated that proceeds from any future borrowings will be used for general corporate purposes.

 

State Infrastructure Bank Loan

 

On September 26, 2012, FEC PEVT, L.L.C., as borrower, and Florida East Coast Railway, L.L.C., as guarantor, each a wholly owned subsidiary of the Company, entered into a SIB Loan with FDOT. The SIB Loan provides for a loan of $30 million to fund, in part, the costs associated with the construction of a new Florida East Coast ICTF in Port Everglades which will serve the Company’s domestic and international business segments. Proceeds of the SIB Loan will be advanced by FDOT as construction proceeds on the ICTF. There have been no borrowings under the SIB Loan.  The total cost of the ICTF construction project is approximately $53 million, $30 million of which will be funded through the SIB Loan, $18 million of which will be from a FDOT grant (the “FDOT

 

23



Table of Contents

 

Grant”) and the balance of $5 million from the Company’s capital budget. The Company has been awarded the entire $18 million of the FDOT Grant as of December 31, 2012.

 

Interest will accrue on the advanced principal amount of the SIB Loan at the rate of 3.50% per annum, compounded annually, using an actual-days-elapsed/365 day counting convention. Both principal and interest payments are payable in annual installments as follows: interest payments commence on the SIB Loan on October 1, 2013, and principal repayments commence on the SIB Loan on October 1, 2015. The SIB Loan will be amortized over 20 years.

 

The SIB Loan is fully and unconditionally guaranteed by the Florida East Coast Railway, L.L.C. In addition, as a condition to making the SIB Loan, FDOT required a first priority lien on certain fixtures (including rail trackage) and equipment included in the collateral securing the Senior Secured Notes. The SIB Loan specifically excludes land, rail equipment and motor vehicles from its lien. As a condition to FDOT making the first loan disbursement under the SIB Loan, FEC PEVT, L.L.C. was required to post as additional collateral through July 1, 2017, a standby letter of credit in the amount of $3.0 million payable to FDOT, as beneficiary (the “Standby Letter of Credit Collateral”). On February 1, 2013, the Company posted the Standby Letter of Credit Collateral by accessing the letter of credit line of the ABL Facility, reducing availability under the ABL Facility to $27.0 million. The SIB Loan permits FEC PEVT, L.L.C, in lieu of posting the Standby Letter of Credit Collateral, at any time upon prior notice, to either pay down the principal of the SIB Loan by $3 million or substitute cash collateral.

 

Senior PIK Toggle Notes

 

On February 11, 2011, Holdings Corp. sold $130.0 million of 10 1/2% / 11 1/4% Senior Payment in Kind Toggle Notes due 2017 (the “Senior PIK Toggle Notes”) in a private offering, for net proceeds of $127.7 million. The Senior PIK Toggle Notes are senior unsecured obligations that are not guaranteed by any of Holdings Corp.’s subsidiaries.

 

Holdings Corp. may redeem the notes in whole or in part at a redemption price of 107.5%, 105%, 102.5%, and 100%, plus accrued and unpaid interest thereon for the subsequent periods after August 1, 2012 as follows: August 1, 2012 through January 31, 2013; February 1, 2013 through January 31, 2014; February 1, 2014 through January 31, 2015; and February 1, 2015 and thereafter, respectively.

 

The Senior PIK Toggle Notes will pay interest semi-annually in arrears on each February 1 and August 1, commencing on August 1, 2011. Thereafter and up to February 1, 2016, Holdings Corp. may elect to pay interest on the Senior PIK Toggle Notes (1) entirely in cash at a rate of 10.5% , (2) entirely by increasing the principal amount of the note or by issuing new notes for the entire amount of the interest payment, at a rate per annum equal to the cash interest rate of 10.5% plus 75 basis points (in each case, PIK interest), or (3) 50% as cash interest and 50% as PIK interest. After February 1, 2016, interest will be payable entirely in cash.

 

The Company could be subject to certain interest deduction limitations if the Senior PIK Toggle Notes were treated as “applicable high yield discount obligations” within the meaning of Section 163(i)(1) of the Internal Revenue Code, as amended. In order to avoid such treatment, the Company would be required to redeem for cash a portion of each Senior PIK Toggle Note then outstanding at the end of the accrual period ending August 1, 2016. The portion of a Senior PIK Toggle Note required to be redeemed is an amount equal to the excess of the accrued original issue discount as of the end of such accrual period, less the amount of interest paid in cash on or before such date, less the first-year yield (the issue price of the debt instrument multiplied by its yield to maturity). The redemption price for the portion of each Senior PIK Toggle Note so redeemed would be 100% of the principal amount of such portion plus any accrued interest on the date of redemption.

 

The net proceeds of the issuance of the Senior PIK Toggle Notes were used to redeem the Company’s Series B Perpetual Preferred Stock for the carrying value of $125.0 million and accrued interest of $1.1 million. As a result, none of the Series B Perpetual Preferred Stock remains issued and outstanding.

 

Covenants

 

The indentures governing the Senior PIK Toggle Notes, the 8 1/8% Notes and our ABL Facility contain certain covenants that limit and restrict us, and our restricted subsidiaries’ ability to, among other things, incur additional indebtedness; issue preferred and disqualified stock; purchase or redeem capital stock; make certain investments; pay dividends or make other payments on loans or transfer property; sell assets; enter into certain types of transactions with affiliates involving consideration in excess of $5.0 million; create liens on certain assets; and sell all, or substantially all, of our assets or merge with or into another company. In addition, if availability under the ABL Facility is below $7.5 million during any future period, FECR Corp. will be subject to a minimum fixed charge coverage ratio (as defined in the ABL Facility) of 1.1 to 1.0. As of March 31, 2013, the Company was in compliance with all debt covenants.

 

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Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United Stated requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and certain revenues and expenses during the reporting period. Actual results may differ from those estimates. Consistent with the prior year, significant estimates using management judgment are made for the following areas:

 

·                  casualty, environmental and legal reserves;

 

·                  depreciation policies for assets under the group-life method; and

 

·                  income taxes.

 

For further discussion of the Company’s critical accounting policies and estimates, see the Company’s most recent Annual Report on Form 10-K.  There were no material changes in the first fiscal quarter of 2013 regarding the Company’s critical accounting policies and estimates.

 

Forward-Looking Statements

 

This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and our annual consolidated financial statements and notes thereto included in our annual report on Form 10-K filed with the SEC on March 13, 2013. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under “Risk Factors.”

 

Certain statements in this Quarterly Report on Form 10-Q and other information we provide from time to time may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, but not necessarily limited to, statements relating to future events and financial performance. Words such as “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “appears,” “may,” “will,” “would,” “could,” “should,” “seeks,” “estimates” and variations on these words and similar expressions are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements. We can give no assurance that its expectations will be attained. Accordingly, you should not place undue reliance on any forward-looking statements contained in this report. Factors that could have a material adverse effect on our operations and future prospects or that could cause actual results to differ materially from our expectations include, but are not limited to, number of external variables over which management has little or no control, including: domestic and international economic conditions; the business environment in industries that produce and consume rail freight; rising fuel costs; competition and consolidation within the transportation industry; the operations of carriers with which the Company interchanges traffic; our transportation of hazardous materials by rail; fluctuation in prices or availability of key materials, in particular diesel fuel; labor difficulties, including strikes and work stoppages; legislative and regulatory developments including rulings by the Surface Transportation Board or the Railroad Retirement Board; disruptions to our technology infrastructure, including computer systems; natural events such as severe weather, hurricanes and floods; and other risks detailed in our filings with the SEC. In addition, new risks and uncertainties emerge from time to time, and it is not possible for us to predict or assess the impact of every factor that may cause actual results to differ from those contained in any forward-looking statements. Such forward-looking statements speak only as of the date of this report. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes in market risk from the information provided under Part II, Item 7A (Quantitative and Qualitative Disclosures about Market Risk) of the Company’s most recent Annual Report on Form 10-K.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

As of March 31, 2013, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO concluded that, as of March 31, 2013, the Company’s disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information required to be included in the Company’s periodic SEC reports. There were no changes in the Company’s internal controls over financial reporting during the first quarter of 2013 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Items 3 and 4 are not applicable and have been omitted.

 

ITEM 1.                LEGAL PROCEEDINGS

 

We have been, and may from time to time, be involved in litigation and claims incidental to the conduct of our business in the ordinary course. Our industry is also subject to scrutiny by governmental regulators, which could result in enforcement proceedings or litigation related to regulatory compliance matters. We maintain insurance policies in amounts and with the coverage and deductibles we believe are adequate, based on the nature and risks of our business, historical experience and industry standards. As of the date of this Quarterly Report on Form 10-Q, we are not a party to any material legal or adverse regulatory proceedings.

 

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ITEM 1A.             RISK FACTORS

 

In addition to the other information contained in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our most recent Annual Report on Form 10-K in evaluating our business, financial position, future results, and prospects. Although there have been no material changes to the risk factors described in the Annual Report on Form 10-K, the risks described therein are not the only risks facing our Company. Additional risks that we do not presently know or that we currently believe are not material could also materially adversely affect our business, financial position, future results and prospects.

 

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ITEM 2.                UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

For information regarding unregistered sales of equity securities and the use of proceeds, see Note 8 in the Consolidated Financial Statements herein.

 

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ITEM 5. OTHER INFORMATION

 

On April 2, 2013, the Board of Directors of Florida East Coast Holdings Corp. (the “Company”) elected Melissa Westerman as Vice President and Controller of the Company. Ms. Westerman succeeds Kim Cooper as Vice President and Controller. Ms. Cooper resigned effective December 31, 2012.

 

Ms. Westerman, age 38, was the Assistant Vice President Capital Planning and Enterprise Risk Management and Assistant Controller at CSX Corporation, which is one of the nation’s leading rail-based transportation suppliers, from September 2004 through March 2013.  Additionally, she served in various corporate accounting roles at CSX Corporation from June 2001 to August 2004.  Prior to that, Ms. Westerman was with Arthur Andersen.  Ms. Westerman graduated from the University of Florida with both BS and Master’s degrees in Accounting and is a Certified Public Accountant.

 

There is no arrangement or understanding with any person pursuant to which Ms. Westerman was elected as Vice President and Controller. There are no family relationships between Ms. Westerman and any director or executive officer of the Company, and she is not a party to any transaction requiring disclosure under Item 404(a) of Regulation S-K. Ms. Westerman does not have a written employment agreement. She will receive an annual base salary commensurate with her duties and, as a participant in the Company’s annual incentive plan, is eligible for an annual bonus based on individual and Company performance.

 

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ITEM 6.                EXHIBITS

 

Exhibits

 

 

 

 

 

31.1

 

Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer

 

 

 

31.2

 

Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer

 

 

 

32.1

 

Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

 

 

 

32.2