FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2005 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-17554 PATRIOT TRANSPORTATION HOLDING, INC. (Exact name of registrant as specified in its charter) Florida 59-2924957 (State or other jurisdiction of (I.R.S. Employer) incorporation or organization) Identification No.) 1801 Art Museum Drive, Jacksonville, Florida 32207 (Address of principal executive offices) (Zip Code) 904/396-5733 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES___ NO X Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of April 25, 2005: 2,955,975 shares of $.10 par value common stock. PATRIOT TRANSPORTATION HOLDING, INC. FORM 10-Q QUARTER ENDED March 31, 2005 CONTENTS Page No. Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets 1 Consolidated Statements of Income 2 Consolidated Statements of Cash Flows 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risks 16 Item 4. Controls and Procedures 16 Part II. Other Information Item 1. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits 17 Signatures 19 Exhibit 31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 24 Exhibit 32 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 27 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PATRIOT TRANSPORTATION HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except shares and per share amounts) (Unaudited) March 31, September 30, 2005 2004 ASSETS Current assets: Cash and cash equivalents $ 268 199 Cash held in escrow - 16,553 Accounts receivable (including related party of $453 and $344) 9,382 9,761 Less allowance for doubtful accounts (507) (638) Inventory 659 642 Prepaid tires on equipment 2,180 1,930 Prepaid insurance 1,317 504 Prepaid expenses, other 660 1,115 Total current assets 13,959 30,066 Property, plant and equipment, at cost 242,281 224,230 Less accumulated depreciation and depletion (78,499) (75,219) Net property, plant and equipment 163,782 149,011 Goodwill 1,087 1,087 Other assets 5,777 5,230 Total assets $184,605 185,394 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,376 3,072 Federal and state income taxes payable 3,091 6,799 Accrued payroll 2,487 2,757 Accrued insurance reserves 2,484 2,188 Accrued liabilities, other 669 567 Short-term notes payable - 5,914 Long-term debt due within one year 1,867 1,802 Total current liabilities 13,974 23,099 Long-term debt 49,715 41,185 Deferred income taxes 11,413 15,767 Accrued insurance reserves 5,689 5,689 Other liabilities 1,647 1,567 Shareholders' equity: Preferred stock, no par value; 5,000,000 shares authorized; none issued - - Common stock, $.10 par value; 25,000,000 shares authorized, 2,955,975 and 2,929,075 shares issued and outstanding, respectively 296 293 Capital in excess of par value 26,660 25,784 Retained earnings 75,211 72,010 Total shareholders' equity 102,167 98,087 Total liabilities and shareholders' equity $184,605 185,394 See accompanying notes. PATRIOT TRANSPORTATION HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share amounts) (Unaudited) THREE MONTHS SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, 2005 2004 2005 2004 Revenues: Transportation $ 27,496 24,281 54,531 48,052 Real Estate 4,518 4,105 8,857 8,018 Total revenues (includes related Party revenue of $1,662, $991 $3,197 and $2,823, respectively) 32,014 28,386 63,388 56,070 Cost of operations: Transportation 24,289 21,385 47,892 41,996 Real Estate 2,056 1,992 3,910 3,842 Gross profit 5,669 5,009 11,586 10,232 Selling, general and administrative expense 2,329 2,155 4,729 4,374 Operating profit 3,340 2,854 6,857 5,858 Other income 5 99 15 98 Interest expense (812) (974) (1,625) (1,958) Income from continuing operations before income taxes 2,533 1,979 5,247 3,998 Provision for income taxes (988) (733) (2,046) (1,521) Income from continuing operations 1,545 1,246 3,201 2,477 Discontinued operations net of tax - 5,727 - 5,814 Net income $ 1,545 6,973 3,201 8,291 Earnings per common share-basic: Income from continuing operations $ .52 .43 1.09 .84 Discontinued operations $ - 1.95 - 1.99 Net income $ .52 2.38 1.09 2.83 Earnings per common share-diluted: Income from continuing operations $ .51 .42 1.06 .83 Discontinued operations $ - 1.92 - 1.96 Net income $ .51 2.34 1.06 2.79 Number of shares used in computing: Basic earnings per common share 2,948 2,931 2,940 2,932 Diluted earnings per common share 3,037 2,979 3,019 2,976 See accompanying notes. PATRIOT TRANSPORTATION HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED MARCH 31, 2005 AND 2004 (In thousands) (Unaudited) 2005 2004 Cash flows from operating activities: Net income $ 3,201 8,291 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 6,219 6,152 Deferred income taxes (4,099) 2,499 Gain on disposition of property, plant and equipment (382) (9,233) Tax benefit from stock option exercise 227 244 Net changes in operating assets and liabilities: Accounts receivable 248 (649) Prepaid expenses and other current assets (625) 318 Other assets (774) (505) Accounts payable and accrued liabilities 177 (651) Federal and state income taxes payable (3,708) - Accrued insurance reserves and other long-term liabilities 80 17 Net cash provided by operating activities 564 6,483 Cash flows from investing activities: Purchase of property and equipment (21,203) (1,824) Cash held in escrow 16,553 (11,092) Proceeds from sale of property and equipment 823 13,300 Net cash provided by (used in) investing activities (3,827) 384 Cash flows from financing activities: Proceeds from issuance of long-term debt 3,776 8,500 Net decrease in revolving debt (219) (13,833) Repayment of long-term debt (877) (962) Repurchase of Company Stock - (2,132) Exercise of employee stock options 652 1,238 Net cash provided by (used in) financing activities 3,332 (7,189) Net increase (decrease) in cash and cash equivalents 69 (322) Cash and cash equivalents at beginning of period 199 757 Cash and cash equivalents at end of the period $ 268 435 See accompanying notes. PATRIOT TRANSPORTATION HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (Unaudited) (1) Basis of Presentation. The accompanying consolidated financial statements include the accounts of Patriot Transportation Holding, Inc. and its subsidiaries (the "Company"). These statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (primarily consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included. Operating results for the three months and six months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2005. The accompanying consolidated financial statements and the information included under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the Company's consolidated financial statements and related notes included in the Company's Form 10-K for the year ended September 30, 2004. Certain reclassifications have been made to the Fiscal 2004 financial statements to conform to the presentation adopted in Fiscal 2005. (2) Recent Accounting Pronouncements. In December 2004, the FASB issued a revised Statement No. 123 "Share-Based Payment." (SFAS 123R) This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services, and affects the Company's accounting for its stock option plans. The standard is effective for the Company at the beginning of its next fiscal year (October 1, 2005). The Company intends to use the modified prospective application, and therefore at the effective date compensation costs shall be included in the determination of net income for all new, modified, repurchased, or cancelled awards and all prior awards whose requisite service conditions have not been met. Compensation costs to be expensed upon adoption are the grant-date fair value of the stock option awards. While we cannot determine the impact on future net earnings as a result of the adoption of SFAS 123R, the estimated compensation expense related to prior periods is presented in Note 8. The compensation expense for future periods will be dependent on the number of options granted, the market price of the common stock at the date of grant, the vesting period and other factors. (3) Business Segments. The Company has identified two business segments, each of which is managed separately along product lines. The Company's operations are substantially in the Southeastern and Mid-Atlantic states. The transportation segment hauls liquid and dry commodities by motor carrier. The real estate segment owns real estate of which a substantial portion is under mining royalty agreements or leased. The real estate segment also holds certain other real estate for investment and is developing commercial and industrial properties. Operating results and certain other financial data for the Company's business segments are as follows (in thousands): Three Months ended Six Months ended March 31, March 31,__ 2005 2004 2005 2004 Revenues: Transportation $ 27,496 24,281 54,531 48,052 Real estate 4,518 4,105 8,857 8,018 $ 32,014 28,386 63,388 56,070 Operating profit Transportation $ 1,364 1,121 2,813 2,467 Real estate 2,460 2,112 4,946 4,174 Corporate expenses (484) (379) (902) (783) $ 3,340 2,854 6,857 5,858 Identifiable assets March 31, September 30, 2005 2004 Transportation $ 45,532 42,479 Real estate 137,474 125,030 Cash items 268 16,752 Unallocated corporate assets 1,331 1,133 $184,605 185,394 (4) Long-Term debt. Long-term debt is summarized as follows (in thousands): March 31, September 30, 2005 2004___ Revolving Credit, Uncollateralized, variable rate $ 2,982 3,201 Construction loan 6.17% 6,490 2,713 5.7% to 9.5% mortgage notes payable in installments through 2020 42,110 42,987 51,582 48,901 Less portion due in one year 1,867 7,716 $49,715 41,185 The Company has a $37,000,000 uncollaterized Revolving Credit Agreement with four banks which was to terminate on December 31, 2004. On November 10, 2004, the Company and the four banks entered into an Amended and Restated Revolving Credit Agreement (the Revolver) which will terminate on December 31, 2009. The Revolver bears interest at an initial rate of 1% over the selected LIBOR which was 3.84% at March 31, 2005. The margin rate may change quarterly based on the Company's ratio of Consolidated Total Debt to Consolidated Total Capital. An initial commitment fee of 0.15% per annum is payable quarterly on the unused portion of the commitment. The commitment fee may also change quarterly based upon the ratio described above. The Revolver contains restrictive covenants including limitations on paying cash dividends. (5) Related Party Transactions. The Company, through its transportation subsidiaries, hauls commodities by tank and flatbed trucks for Florida Rock Industries, Inc. (FRI). Charges for these services are based on prevailing market prices. Other wholly owned subsidiaries lease certain construction aggregates mining and other properties to FRI. In addition, the Company outsources certain administrative functions to FRI. The cost of these administrative functions was $23,000 and $99,000 for the quarters ending March 31, 2005 and 2004, respectively. On March 30, 2004, a subsidiary sold a parcel of land and improvements containing approximately 6,321 acres in Suwannee and Columbia Counties, near Lake City, Florida to a subsidiary of FRI for $13,000,000 in cash, resulting in a gain of $5,655,000 after income taxes of $3,465,000. The sales price was approved by the Company's Audit Committee, composed of independent Directors of the Company, after considering among other factors, an independent appraisal, the current use of the property and consultation with management. See Note (6) for further information. (6) Discontinued operations. During fiscal year 2004, the Company sold three tracts of land that were accounted for as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). A summary of discontinued operations is as follows: Three Months ended Six Months ended March 31, March 31,__ 2005 2004 2005 2004 Royalties and rents $ - 241 - 444 Operating expenses - 125 - 188 Income before income taxes - 116 - 256 Income taxes - (44) - (97) Income from discontinued operations $ - 72 - 159 Gain from sale of Discontinued properties - 9,120 - 9,120 Income taxes - (3,465) - (3,465) Net gain from sale of Discontinued properties $ - 5,655 - 5,655 (7) Earnings per share. The following details the denominators of the basic and diluted earnings per common share computations. THREE MONTHS SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, 2005 2004 2005 2004 Weighted average common shares outstanding during the period - shares used for basic earnings per share 2,947,727 2,930,866 2,939,692 2,932,041 Common shares issuable under Stock options which are potentially dilutive 89,605 48,205 78,832 43,658 Common shares used for diluted earnings per share 3,037,332 2,979,071 3,018,524 2,975,699 Income from continuing operations 1,545,000 1,246,000 3,201,000 2,477,000 Discontinued operations - 5,727,000 - 5,814,000 Net income 1,545,000 6,973,000 3,201,000 8,291,000 Earnings per common share basic Income from continuing operations $ .52 .43 1.09 .84 Discontinued operations $ - 1.95 - 1.99 Net income $ .52 2.38 1.09 2.83 Earnings per common share diluted Income from continuing operations $ .51 .42 1.06 .83 Discontinued operations $ - 1.92 - 1.96 Net income $ .51 2.34 $1.06 2.79 For the six months ended March 31, 2004, 7,000 shares attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than the average price of the common shares, and therefore their inclusion would have been anti-dilutive. (8) Stock-Based Compensation Plan. The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation. Three Months ended Six Months ended March 31, March 31, 2005 2004 2005 2004 Net income, as reported $ 1,545 6,973 3,201 8,291 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 192 123 471 349 Pro forma net income $ 1,353 6,850 2,730 7,942 Earnings per common share: Basic, as reported $ .52 2.38 1.09 2.83 Basic, pro forma $ .46 2.34 .93 2.71 Diluted, as reported $ .51 2.34 1.06 2.79 Diluted, pro forma $ .45 2.30 .90 2.67 (9) Contingent liabilities. Certain of the Company's subsidiaries are involved in litigation on a number of matters and are subject to certain claims which arise in the normal course of business. The Company has retained certain self-insurance risks with respect to losses for third party liability and property damage. In the opinion of management none of these matters are expected to have a material adverse effect on the Company's consolidated financial condition, results of operations or cash flows. The Company maintains a Profit Sharing and Deferred Earnings Plan (the "Plan") for its employees. Participants in the Plan may direct their account balances to be invested in a number of different investment options, including common stock of the Company that is purchased by the Plan in the open market. The acquisition by the Plan's trustee for the benefit and at the direction of Plan participants of shares of Company common stock have not been registered, and the Company intends to file a Form S-8 to register the shares of its common stock acquired or to be acquired by Plan participants. The Company is subject to claims for rescission of acquisitions of shares of the Company's common stock occurring during the one year period following the date of acquisition of the shares (the statute of limitations period that applies to claims for rescission), due to the failure to register the shares in accordance with applicable securities law. Approximately 1,918 shares of the Company's common stock were transferred to Plan participants during the Plan year ended December 31, 2004 and, if rescinded, would have an aggregate repurchase price of approximately $68,000, plus interest. The Company may also face penalties in connection with these matters and could be subject to claims for rescission for acquisitions prior to the one-year statute of limitation. The Company does not believe that any potential rescission liability would be material to its balance sheet or shareholders' equity. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview - The Company's operations are influenced by a number of external and internal factors. External factors include levels of economic and industrial activity in the United States and the Southeast, petroleum product usage in the Southeast which is driven in part by tourism and commercial aviation, fuel costs, driver availability and cost, regulations regarding driver qualifications and hours of service, construction activity, FRI's sales from the Company's mining properties, interest rates and demand for commercial warehouse space in the Baltimore/Washington area. Internal factors include revenue mix, capacity utilization, auto and workers' compensation accident frequencies and severity, other operating factors, administrative costs, and construction costs of new projects. During the first half of fiscal 2005, the transportation segment's ten largest customers accounted for approximately 43% of the transportation segment's revenue. One of those customers accounted for 10.6% of transportation segment's revenues. The loss of any one of these customers could have an adverse effect on the Company's revenues and income. Financial results of the Company for any individual quarter are not necessarily indicative of results to be expected for the year. Comparative Results of Operations for the Three Months Ended March 31, 2005 and 2004 Consolidated Results. - Income from continuing operations for the second quarter of fiscal 2005 was $1,545,000, an increase of $299,000 or 24% compared to $1,246,000 for the same period last year. The second quarter of 2004 included $5,727,000 in income from discontinued operations resulting in net income of $6,973,000 compared to net income of $1,545,000 for the second quarter of 2005. Fully diluted earnings per share for the second quarter of fiscal 2005 was $0.51 compared to $2.34 in the second quarter of fiscal 2004. Transportation Three Months Ended March 31 (dollars in thousands) ___2005 % 2004 %_ Transportation revenue $ 25,221 92% 23,288 96% Fuel surcharges 2,275 8% 993 4% Revenues 27,496 100% 24,281 100% Compensation and benefits 10,920 40% 10,080 41% Fuel expenses 5,025 18% 3,586 15% Insurance and losses 3,284 12% 2,833 12% Depreciation expense 2,007 7% 2,000 8% Other, net 3,053 11% 2,886 12% Cost of operations 24,289 88% 21,385 88% Gross profit $ 3,207 12% 2,896 12% Revenues Second Quarter 2005 vs Second Quarter 2004 - Transportation segment revenues were $27,496,000 in the second quarter of 2005, an increase of $3,215,000 over the same quarter last year. Fuel surcharges accounted for $1,282,000 of the increase, resulting from higher diesel fuel costs during the quarter compared to the same quarter last year. Excluding fuel surcharges, revenue per mile increased 5.2%, reflecting better pricing for our services. Revenue miles in the current quarter were up 2.9% compared to the second quarter of 2004. Expenses Second Quarter 2005 vs Second Quarter 2004 - The Transportation segment cost of operations in the second quarter of 2005 increased $2,904,000 to $24,289,000, as compared to $21,385,000 in the same quarter last year. The primary factors for the increase are higher diesel fuel costs and an increase in risk and health insurance costs. Our average diesel fuel cost per gallon increased 30.3% in the second quarter of 2005 compared to the same quarter last year. Real Estate Three Months Ended March 31 (dollars in thousands) ___2005 % 2004 %_ Royalties and rent $ 1,457 32% 1,369 33% Developed property rentals 3,061 68% 2,736 67% Total Revenue 4,518 100% 4,105 100% Mining and land rent expenses 274 7% 513 13% Developed property management 1,782 39% 1,479 36% Cost of Operations 2,056 46% 1,992 49% Gross profit $ 2,462 54% 2,113 51% Revenues Second Quarter 2005 vs Second Quarter 2004 - Real Estate segment revenues for the second quarter of fiscal 2005 were $4,518,000, an increase of $413,000 or 10.1% over the same quarter last year. Lease revenue from developed properties increased $325,000 or 11.9%, due to an increase in occupied square feet resulting from the purchase of two completed buildings in March 2004 and the purchase of one building in early November 2004. These purchases added 491,000 square feet, of which 339,000 was leased during the second quarter of fiscal 2005. Royalties from mining operations increased as a result of increased royalties per ton. Expenses Second Quarter 2005 vs Second Quarter 2004 - Real estate segment expenses increased slightly to $2,056,000 during the second quarter of fiscal 2005, compared to $1,992,000 for the same quarter last year. Expenses related to development activities increased as a result of the new building additions. Consolidated Gross Profit - Consolidated gross profit was $5,669,000 in the second quarter of fiscal 2005 compared to $5,009,000 in the same period last year, an increase of 13.2%. Consolidated selling, general and administrative expense - Selling, general and administrative expenses were consistent quarter to quarter. SG&A expense was 7.3% of revenue for the second quarter of fiscal 2005 compared to 7.6% for the same period last year. Income from continuing operations - Income from continuing operations was $1,545,000 or $0.51 per diluted share in the second quarter of fiscal 2005, an increase of $299,000 or 24.0% compared to $1,246,000 or $0.42 per diluted share in the same period last year. Discontinued Operations - During fiscal 2004 the Company had three sales of real estate that have been accounted for as discontinued operations, in accordance with SFAS 144. The income from the operations of these components have been reflected in the consolidated income statement as income from discontinued operations, net of income taxes. The results of operations of these properties, consisting of royalty and rental income, operating expenses and depreciation, have been reclassified to discontinued operations. Income from the disposed properties, net of income taxes of $44,000 was $72,000 for the three months ending March 31, 2004. One of these properties was sold during the quarter ended March 31, 2004 and the gain from sale of $5,655,000 after income taxes of $3,465,000 has been recorded as discontinued operations. Net income - Primarily as a result of the property sale in the second quarter of 2004, net income decreased to $1,545,000 in the second quarter of fiscal 2005 from $6,973,000 in the same period last year. Diluted earnings per share decreased to $0.51 in the second quarter of fiscal 2005 from $2.34 in the same period last year. Comparative Results of Operations for the Six Months Ended March 31, 2005 and 2004 Consolidated Results. - Income from continuing operations for the first six months of fiscal 2005 was $3,201,000, compared to $2,477,000 for the same period last year. The first six months of 2004 included $5,814,000 in income from discontinued operations resulting in net income of $8,291,000 compared to net income of $3,201,000 for the first six months of fiscal 2005. Fully diluted earnings per share for the first six months of fiscal 2005 was $1.06 compared to $2.79 for the same period last year. Transportation Six Months Ended March 31 (dollars in thousands) ___2005 % 2004 % Transportation revenue $ 49,896 92% 46,309 96% Fuel surcharges 4,635 8% 1,743 4% Revenues 54,531 100% 48,052 100% Compensation and benefits 21,606 40% 19,995 42% Fuel expenses 9,924 18% 6,795 14% Insurance and losses 6,517 12% 5,584 12% Depreciation expense 3,988 7% 4,025 9% Other, net 5,857 11% 5,597 12% Cost of operations 47,892 88% 41,996 87% Gross profit $ 6,639 12% 6,056 13% Revenues for the Six Months Ended March 31, 2005 and 2004 - The Transportation segment revenues were $54,531,000 in the first six months of 2005, an increase of $6,479,000 over the same period last year. Fuel surcharges accounted for $2,892,000 of the increase. Excluding fuel surcharges, revenue per mile increased 5.2%, reflecting better pricing for our services. Revenue miles for the six months were up 2.5% compared to the first six months of 2004. Expenses for the Six Months Ended March 31, 2005 and 2004 - The Transportation segment cost of operations in the first six months of 2005 increased $5,896,000 to $47,892,000, as compared to $41,996,000 in the same period last year. The primary factors for the increase are higher diesel fuel costs and an increase in risk and health insurance costs. Our average diesel fuel cost per gallon increased 35.5% in the first six months of 2005 compared to the same period last year. Real Estate Six Months Ended March 31 (dollars in thousands) ___2005 % 2004 % Royalties and rent $ 2,882 33% 2,834 35% Developed property rentals 5,975 67% 5,184 65% Total Revenue 8,857 100% 8,018 100% Mining and land rent expenses 631 7% 1,005 13% Developed property management 3,279 37% 2,837 35% Cost of Operations 3,910 44% 3,842 48% Gross profit $ 4,947 56% 4,176 52% Revenues for the Six Months Ended March 31, 2005 and 2004 - Real Estate segment revenues for the first six months of fiscal 2005 were $8,857,000, an increase of $839,000 or 10.5% over the same period last year. Lease revenue from developed properties increased $791,000 or 15.3%, due to a 25.3% increase in occupied square feet resulting from the purchase of two completed buildings in March 2004 and the purchase of one building in early November 2004. These purchases added 491,000 square feet, of which 339,000 was leased during the first six months of fiscal 2005. Royalties from mining operations increased as a result of increased royalties per ton. Expenses for the Six Months Ended March 31, 2005 and 2004 - Real estate segment expenses increased slightly to $3,910,000 during the first six months of fiscal 2005, compared to $3,842,000 for the same period last year. Expenses related to development activities increased as a result of the new building additions. Consolidated Gross Profit - Consolidated gross profit was $11,586,000 in the first six months of fiscal 2005 compared to $10,232,000 in the same period last year, an increase of 13.2%. Consolidated selling, general and administrative expense - Selling, general and administrative expenses were consistent year over year. SG&A expense was 7.5% of revenue for the first six months of fiscal 2005 compared to 7.8% for the same period last year. Income from continuing operations - Income from continuing operations was $3,201,000 or $1.06 per diluted share in the first six months of fiscal 2005, an increase of $724,000 or 29.2% compared to $2,477,000 or $0.83 per diluted share in the same period last year. Discontinued Operations - During fiscal 2004 the Company had three sales of real estate that have been accounted for as discontinued operations, in accordance with SFAS 144. The income from the operations of these components have been reflected in the consolidated income statement as income from discontinued operations, net of income taxes. The results of operations of these properties, consisting of royalty and rental income, operating expenses and depreciation, have been reclassified to discontinued operations. Income from the disposed properties, net of income taxes of $97,000 was $159,000 for the six months ending March 31, 2004. One of these properties was sold during the quarter ending March 31, 2004, resulting in a gain of $5,655,000 after income taxes of $3,465,000 and is included in discontinued operations. Net income - As a result of the foregoing, net income decreased to $3,201,000 in the first six months of fiscal 2005 from $8,291,000 in the same period last year. Diluted earnings per share decreased to $1.06 in the first six months of fiscal 2005 from $2.79 in the same period last year. Liquidity and Capital Resources For the first six months of Fiscal 2005, the Company used cash provided by operations, cash released from escrow and borrowings under its construction loan to finance its operating activities and the purchase of $21,203,000 in property and equipment. At September 30, 2004, the Company had $16,553,000 of cash from the sales of real estate during fiscal 2004, which were placed in escrow in anticipation of using the funds in an Internal Revenue Code Section 1031 tax-deferred exchange. A portion of the funds were used to purchase land and buildings for $7,200,000 in a tax deferred exchange and the remaining funds were released from escrow. The Company has a $37,000,000 revolving line of credit (Revolver) under which $34,018,000 was available at March 31, 2005. During the first quarter of fiscal 2005, the Company renewed the Revolver with substantially the same terms and conditions, except that the termination date was extended to December 31, 2009. The Company had $11,932,000 of irrevocable letters of credit outstanding at March 31, 2005. Most of the letters of credit are irrevocable for a period of one year and are automatically extended for additional one-year periods unless notified by the issuing bank not less than thirty days before the expiration date. Substantially all of these were issued for workers' compensation and liability insurance retentions. If these letters of credit are not extended the Company will have to find alternative methods of collateralizing or funding these obligations. The Board of Directors has authorized Management to repurchase shares of the Company's common stock from time to time as opportunities arise. As of March 31, 2005, $3,490,000 was authorized to repurchase the Company's common stock. The Company does not currently pay any dividends on common stock. In December 2003, the Company committed to develop a 145,000 square foot build-to-suit warehouse/office building pursuant to a 15 year triple net lease. This project is expected to cost approximately $14,900,000 and is being financed through a construction loan and the Company's existing Revolver. The terms of the construction financing are for borrowings not to exceed $11,800,000 for a period not to exceed 18 months converting to a 15 year non-recourse mortgage at project completion. The interest rate is 6.17% for both the construction and mortgage loans. Borrowings under the construction loan totaled $6,490,0000 at March 31, 2005. The building is scheduled for completion by July 2005. While the Company is affected by environmental regulations, such regulations are not expected to have a major effect on the Company's capital expenditures or operating results. Management believes that the Company is financially postured to be able to take advantage of external and internal growth opportunities in both our real estate and transportation segments. Recent Accounting Pronouncements. In December 2004, the FASB issued a revised Statement No. 123 "Share-Based Payment." (SFAS 123R) This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services, and affects the Company's accounting for its stock option plans. The standard is effective for the Company at the beginning of its next fiscal year (October 1, 2005). The Company intends to use the modified prospective application, and therefore at the effective date compensation costs shall be included in the determination of net income for all new, modified, repurchased, or cancelled awards and all prior awards whose requisite service conditions have not been met. Compensation costs to be expensed upon adoption are the grant-date fair value of the stock option awards. While we cannot determine the impact on future net earnings as a result of the adoption of SFAS 123R, the estimated compensation expense related to prior periods is presented in Note 8. The compensation expense for future periods will be dependent on the number of options granted, the market price of the common stock at the date of grant, the vesting period and other factors. Related Party Transactions. The Company, through its transportation subsidiaries, hauls commodities by tank and flatbed trucks for Florida Rock Industries, Inc. (FRI). Charges for these services are based on prevailing market prices. Other wholly owned subsidiaries lease certain construction aggregates mining and other properties to FRI. In addition, the Company outsources certain administrative functions to FRI. The cost of these administrative functions was $23,000 and $99,000 for the quarters ending March 31, 2005 and 2004, respectively. The Company leases certain mining properties to FRI under long-term leases. The Company and FRI believe that certain of these properties, upon completion of mining and subsequent reclamation, present valuable opportunities for residential or commercial development. Accordingly, the Company and FRI have decided to investigate jointly the ultimate market potential for these properties. The Company expects that the preliminary investigation will not be completed for several months. On March 30, 2004, a subsidiary sold a parcel of land and improvements containing approximately 6,321 acres in Suwannee and Columbia Counties, near Lake City, Florida to a subsidiary of FRI for $13,000,000 in cash, resulting in a gain of $5,655,000 after income taxes of $3,465,000. The sales price was approved by the Company's Audit Committee, composed of independent Directors of the Company, after considering among other factors, an independent appraisal, the current use of the property and consultation with management. See Note (6) for further information. Forward-Looking Statements. Certain matters discussed in this report contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from these indicated by such forward-looking statements. These forward-looking statements relate to, among other things, capital expenditures, liquidity, capital resources and competition and may be indicated by words or phrases such as "anticipate", "estimate", "plans", "projects", "continuing", "ongoing", "expects", "management believes", "the Company believes", "the Company intends" and similar words or phrases. The following factors and others discussed in the Company's periodic reports and filings with the Securities and Exchange Commission are among the principal factors that could cause actual results to differ materially from the forward-looking statements: driver availability and cost; regulations regarding driver qualification and hours of service; availability and terms of financing; freight demand for petroleum products including recessionary and terrorist impacts on travel in the Company's markets; freight demand for building and construction materials in the Company's markets; risk insurance markets; competition; general economic conditions; demand for flexible warehouse/office facilities in the Baltimore/Washington area; interest rates; levels of construction activity in FRI's markets; fuel costs; and inflation. However, this list is not a complete statement of all potential risks or uncertainties. These forward-looking statements are made as of the date hereof based on management's current expectations, and the Company does not undertake an obligation to update such statements, whether as a result of new information, future events or otherwise. Additional information regarding these and other risk factors may be found in the Company's other filings made from time to time with the Securities and Exchange Commission. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS There are no material changes to the disclosures made in Form 10-K for the fiscal year ended September 30, 2004 with respect to this item. ITEM 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures. As required by Rule 13A-15 under the Exchange Act, as of the end of the period covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. The evaluation conducted by the Company's President and Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer has provided them with reasonable assurance that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rule and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer as appropriate, to allow timely decisions regarding required disclosures. Changes in internal controls. There have been no changes in internal controls or in other factors that could significantly affect these controls during the quarter, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II OTHER INFORMATION Item 1. Legal Proceedings See Note 9 to the Consolidated Financial Statements included in this Form 10-Q. Item 4. Submission of Matters to a Vote of Security Holders On January 26, 2005, the Company held its annual shareholders meeting. At the meeting, the shareholders elected the following directors by the vote shown. Term Votes Votes Broker/ Ending For Withheld Non-Votes Edward L. Baker 2009 2,816,884 16,420 - Charles E. Commander III 2009 2,816,886 16,418 - H. W. Shad III 2008 2,816,884 16 420 - The directors whose terms of office as a director have continued after the meeting are John D. Baker II, Thompson S. Baker II, Luke E. Fichthorn III, James H. Winston, Robert H. Paul III, and Martin E. Stein, Jr. Item 6. Exhibits (a) Exhibits. The response to this item is submitted as a separate Section entitled "Exhibit Index", starting on page 20. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. May 12, 2005 PATRIOT TRANSPORTATION HOLDING, INC. John E. Anderson John E. Anderson President and Chief Executive Officer Ray M. Van Landingham Ray M. Van Landingham Vice President Finance & Administration and Chief Financial Officer John D. Klopfenstein John D. Klopfenstein Controller and Chief Accounting Officer PATRIOT TRANSPORTATION HOLDING, INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2005 EXHIBIT INDEX (3)(a)(1) Articles of Incorporation of Patriot Transportation Holding Inc., incorporated by reference to the corresponding exhibit filed with Form S-4 dated December 13,1988. File No. 33-26115. (3)(a)(2) Amendment to the Articles of Incorporation of Patriot Transportation Holding, Inc. filed with the Secretary of State of Florida on February 19, 1991 incorporated by reference to the corresponding exhibit filed with Form 10-K for the fiscal year ended September 30, 1993. File No. 33-26115. (3)(a)(3) Amendments to the Articles of Incorporation of Patriot Transportation Holding, Inc. filed with the Secretary of State of Florida on February 7,1995, incorporated by reference to an appendix to the Company's Proxy Statement dated December 15, 1994. File No. 33-26115. (3)(a)(4) Amendment to the Articles of Incorporation of Patriot Transportation Holding, Inc., filed with the Florida Secretary of State on May 6, 1999 incorporated by reference to a form of such amendment filed as Exhibit 4 to the Company's Form 8-K dated May 5, 1999. File No. 33-26115. (3)(a)(5) Amendment to the Articles of Incorporation of Patriot Transportation Holding, Inc. filed with the Secretary of State of Florida on February 21, 2000, incorporated by reference to the corresponding exhibit filed with Form 10-Q for the quarter ended March 31, 2000. File No. 33-26115. (3)(b)(1) Restated Bylaws of Patriot Transportation Holding, Inc. adopted December 1, 1993, incorporated by reference to the corresponding exhibit filed with Form 10-K for the fiscal year ended September 30, 1993. File No. 33-26115. (3)(b)(2) Amendment to the Bylaws of Patriot Transportation Holding, Inc. adopted August 3, 1994, incorporated by reference to the corresponding exhibit filed with Form 10-K for the fiscal year ended September 30, 1994. File No. 33-26115. (3)(b)(3) Amendments to the Articles of Incorporation of Patriot Transportation Holding, Inc. filed with the Secretary of State of State of Florida on February 7, 1995, incorporated by reference to an appendix to the Company's Proxy Statement dated December 15, 1994. File No. 33-26115. (3)(b)(4) Amendment to the Restated Bylaws of Patriot Transportation Holding, Inc. adopted May 5, 2004, incorporated by reference to an exhibit filed with Form 10-Q for the quarter ended June 30, 2004. File No. 33-26115. (4)(e) The Company and its consolidated subsidiaries have other long-term debt agreements, none of which exceed 10% of the total consolidated assets of the Company and its subsidiaries, and the Company agrees to furnish copies of such agreements and constituent documents to the Commission upon request. (4)(f) Rights Agreement, dated as May 5, 1999 between the Company and First Union National Bank, incorporated by reference to Exhibit 4 to the Company's Form 8-K dated May 5, 1999. File No. 33-26115. (10)(a) Various lease backs and mining royalty agreements with Florida Rock Industries, Inc., none of which are presently believed to be material individually, except for the Mining Lease Agreement dated September 1, 1986, between Florida Rock Industries Inc. and Florida Rock Properties, Inc., successor by merger to Grandin Land, Inc. (see Exhibit (10)(c)), but all of which may be material in the aggregate, incorporated by reference to an exhibit filed with Form S-4 dated December 13, 1988. File No. 33-26115. (10)(b) License Agreement, dated June 30, 1986, from Florida Rock Industries, Inc. to Florida Rock & Tank Lines, Inc. to use "Florida Rock" in corporate names, incorporated by reference to an exhibit filed with Form S-4 dated December 13, 1988. File No. 33-26115. (10)(c) Mining Lease Agreement, dated September 1, 1986, between Florida Rock Industries, Inc. and Florida Rock Properties, Inc., successor by merger to Grandin Land, Inc., incorporated by reference to an exhibit previously filed with Form S-4 dated December 13, 1988. File No. 33-26115. (10)(d) Summary of Medical Reimbursement Plan of Patriot Transportation Holding, Inc., incorporated by reference to an exhibit filed with Form 10-K for the fiscal year ended September 30, 1993. File No. 33-26115. (10)(e) Summary of Management Incentive Compensation Plans, incorporated by reference to an exhibit filed with Form 10-K for the fiscal year ended September 30, 1994. File No. 33-26115. (10)(f) Management Security Agreements between the Company and certain officers, incorporated by reference to a form of agreement previously filed (as Exhibit (10)(I)) with Form S-4 dated December 13, 1988. File No. 33-26115. (10)(g)(1) Patriot Transportation Holding, Inc. 1995 Stock Option Plan, incorporated by reference to an appendix to the Company's Proxy Statement dated December 15, 1994. File No. 33-26115. (10)(g)(2) Patriot Transportation Holding, Inc. 2000 Stock Option Plan, incorporated by reference to an appendix to the Company's Proxy Statement dated December 15, 1999. File No. 33-26115. (10)(h) Agreement of Purchase and Sale dated October 21, 2003 between FRP Bird River, LLC and The Ryland Group, Inc., incorporated by reference to an exhibit filed with Form 10-K for the year ended September 30, 2003. File No. 33-26115. (10)(i) Articles III, VII and XII of the Articles of Incorporation of Patriot Transportation Holding, Inc., incorporated by reference to an exhibit filed with Form S-4 dated December 13, 1988. And amended Article III, incorporated by reference to an exhibit filed with Form 10-K for the fiscal year ended September 30, 1993. And Articles XIII and XIV, incorporated by reference to an appendix filed with the Company's Proxy Statement dated December 15, 1994. File No. 33-26115. (10)(j) Specimen stock certificate of Patriot Transportation Holding, Inc., incorporated by reference to an exhibit filed with Form S-4 dated December 13, 1988. File No. 33-26115. (10)(k) Amended and Restated Revolving Credit Agreement dated November 10, 2004 among Patriot Transportation Holding, Inc. as Borrower, the Lenders from time to time party hereto and Wachovia Bank, National Association as Administrative Agent, incorporated by reference to the Company's Form 8-K dated November 16, 2004. File No. 33-26115. (10)(l) Letter of Credit Facility between Patriot Transportation Holding, Inc. and SunTrust Bank, N.A. dated February 16, 2005, incorporated by reference to the Company's Form 8-K dated February 16, 2005. File No. 33-26115. (10)(m) Summary of compensation arrangements with non- employee directors. (10)(n) Summary of compensation arrangements with Named Executive Officers. (14) Financial Code of Ethical Conduct applicable to Chief Executive Officers and Financial Managers, adopted December 4, 2002, incorporated by reference to an exhibit filed with Form 10-K for the year ended September 30, 2003. File No. 33-26115. (31)(a) Certification of John E. Anderson. (31)(b) Certification of Ray M. Van Landingham. (31)(c) Certification of John D. Klopfenstein. (32) Certification of Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 23