Filed by Bowne Pure Compliance
 

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 2007
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: 0-261
Alico, Inc.
(Exact name of registrant as specified in its charter)
     
Florida   59-0906081
     
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
P.O. Box 338, LaBelle, FL   33975
     
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: 863-675-2966
N/A
(Former name, former address and former fiscal year, if changed since last report.)
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.
þ  Yes  o No
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 þ    Non-accelerated filer   o
(Do not check if a smaller reporting company)
  Smaller Reporting Company o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o  Yes  þ No
There were 7,373,728 shares of common stock, par value $1.00 per share, outstanding at February 11, 2008.
 
 

 


 

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
                         
                    One Month ended  
    Three months ended December 31,     September 30,  
    2007     2006     2007  
 
                       
Operating revenue
                       
Agricultural operations
  $ 19,009     $ 23,411     $ 989  
Non-agricultural operations
    676       670       188  
Real estate operations
    3,869       2,447        
 
                 
Total operating revenue
    23,554       26,528       1,177  
 
                 
 
                       
Operating expenses
                       
Agricultural operations
    18,215       20,220       912  
Non-agricultural operations
    108       113       46  
Real estate operations
    891       240       59  
 
                 
Total operating expenses
    19,214       20,573       1,017  
 
                 
 
                       
Gross profit
    4,340       5,955       160  
Corporate general and administrative
    3,001       3,167       850  
 
                 
 
                       
Income (loss) from operations
    1,339       2,788       (690 )
 
                       
Other income (expenses):
                       
Profit on sales of bulk real estate:
                       
Sales
    817       1,870        
Cost of sales
          578        
 
                 
Profit on sales of bulk real estate, net
    817       1,292        
Interest & investment income
    4,333       1,626       693  
Interest expense
    (2,466 )     (1,261 )     (820 )
Other
    265       74       (4 )
 
                 
 
                       
Total other income, (expense) net
    2,949       1,731       (131 )
 
                 
 
                       
Income (loss) before income taxes
    4,288       4,519       (821 )
Provision for income taxes
    1,498       1,939       (141 )
 
                 
 
                       
Net income (loss)
  $ 2,790     $ 2,580     $ (680 )
 
                 
 
                       
Weighted-average number of shares outstanding
    7,361       7,373       7,358  
 
                 
 
                       
Weighted-average number of shares outstanding assuming dilution
    7,375       7,393       7,376  
 
                 
 
                       
Per share amounts:
                       
Basic
  $ 0.38     $ 0.35     $ (0.09 )
Diluted
    0.38       0.35       (0.09 )
Dividends
  $ 0.00     $ 0.25     $ 0.28  

 

2


 

ALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
                         
    December 31,     September 30,        
    2007     2007     August 31,  
    (unaudited)     (unaudited)     2007  
ASSETS
                       
 
                       
Current assets:
                       
Cash and cash equivalents
  $ 39,811     $ 31,599     $ 34,825  
Marketable securities available for sale
    49,275       46,511       46,242  
Accounts receivable
    17,490       14,848       15,738  
Mortgage and notes receivable
    3,387       3,832       487  
Inventories
    28,301       27,232       25,214  
Current deferred tax asset
    2,716       2,661       2,312  
Other current assets
    2,242       2,719       2,398  
 
                 
 
                       
Total current assets
    143,222       129,402       127,216  
 
                       
Mortgages and notes receivable, net of current portion
    5,063       6,688       9,939  
Investments, deposits and other
    4,335       3,237       3,262  
Deferred tax benefit
    3,810       3,805       3,950  
Cash surrender value of life insurance, designated
    7,542       7,656       7,530  
Property, buildings and equipment
    180,319       178,968       178,917  
Less: accumulated depreciation
    (52,160 )     (50,422 )     (49,927 )
 
                 
 
                       
Total assets
  $ 292,131     $ 279,334     $ 280,887  
 
                 

(continued)

 

3


 

ALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands)
                         
    December 31,     September 30,        
    2007     2007     August 31,  
    (unaudited)     (unaudited)     2007  
LIABILITIES & STOCKHOLDERS’ EQUITY
                       
 
                       
Current liabilities:
                       
Accounts payable
  $ 4,903     $ 1,943     $ 2,328  
Income taxes payable
    4,981       3,418       3,335  
Current portion of notes payable
    1,349       1,350       1,350  
Accrued expenses
    5,042       4,425       4,330  
Dividend payable
    2,024       4,048       2,024  
Accrued ad valorem taxes
          2,105       1,876  
Other current liabilities
    1,563       2,153       2,276  
 
                 
 
                       
Total current liabilities
    19,862       19,442       17,519  
 
                       
Notes payable, net of current portion
    144,011       134,534       135,539  
Deferred retirement benefits, net of current portion
    5,269       5,098       5,041  
Commissions and deposits payable
    4,358       4,265       3,842  
 
                 
 
                       
Total liabilities
    173,500       163,339       161,941  
 
                 
 
                       
Stockholders’ equity:
                       
 
                       
Common stock
    7,376       7,376       7,376  
Additional paid in capital
    9,950       10,199       10,169  
Treasury stock
    (783 )     (891 )     (1,046 )
Accumulated other comprehensive income
    36       49       45  
Retained earnings
    102,052       99,262       102,402  
 
                 
 
                       
Total stockholders’ equity
    118,631       115,995       118,946  
 
                 
 
                       
Total liabilities and stockholders’ equity
  $ 292,131     $ 279,334     $ 280,887  
 
                 
See accompanying Notes to Condensed Consolidated Financial Statements.

 

4


 

ALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
                         
    Three months ended     One Month Ended  
    December 31,     September 30,  
    2007     2006     2007  
 
                 
 
                       
Cash flows from operating activities:
                       
 
                       
Net cash provided by (used for) operating activities
  $ 3,314     $ (1,035 )   $ (1,753 )
 
                 
 
                       
Cash flows from investing activities:
                       
 
                       
Real estate deposits and accrued commissions
          1,616        
Purchases of property and equipment
    (2,131 )     (3,229 )     (293 )
Purchases of other investments
    (644 )            
Proceeds from sale of real estate
          600        
Proceeds from sales of property and equipment
    586       1,223       90  
Purchases of marketable securities
    (15,645 )     (7,539 )     (1,574 )
Proceeds from sales of marketable securities
    12,849       14,215       1,309  
Note receivable collections
    2,873       1,693        
Other
    70              
 
                 
 
                       
Net cash provided by (used for) investing activities
    (2,042 )     8,579       (468 )
 
                 
 
                       
Cash flows from financing activities:
                       
 
                       
Repayment of loans
    (1,824 )     (4,621 )     (2,106 )
Proceeds from loans
    11,300       11,124       1,101  
Proceeds from stock transactions
    16              
Proceeds used for stock transactions
    (528 )            
Dividends paid
    (2,024 )     (2,028 )      
 
                 
 
                       
Net cash provided by (used for) financing activities
    6,940       4,475       (1,005 )
 
                 
 
                       
Net increase (decrease) in cash and cash equivalents
  $ 8,212     $ 12,019     $ (3,226 )
 
                       
Cash and cash equivalents:
                       
At beginning of period
  $ 31,599     $ 25,158     $ 34,825  
 
                 
 
                       
At end of period
  $ 39,811     $ 37,177     $ 31,599  
 
                 

(continued)

 

5


 

                         
    Three months ended     One Month Ended  
    December 31,     September 30,  
    2007     2006     2007  
 
                 
 
                       
Supplemental disclosures of cash flow information
                       
 
                       
Cash paid for interest, net of amount capitalized
  $ 2,199     $ 1,044     $ 43  
 
                 
 
                       
Cash paid for income taxes
        $ 2,075        
 
                 
 
                       
Net non cash investing activities:
                       
Issuance of mortgage notes
        $ 13,341        
 
                 
Fair value adjustments to securities available for sale net of tax effects
  $ (2 )   $ 37     $ 27  
 
                 
Reclassification of breeding herd to property and equipment
  $ 458     $ 566        
 
                 

See accompanying Notes to Condensed Consolidated Financial Statements

 

6


 

ALICO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except for per share data)
1. Basis of financial statement presentation:
On September 28, 2007, the Board of Directors of the Company approved a change in the Company’s fiscal year end from August 31 to September 30. The fiscal year change is effective beginning with the Company’s 2008 fiscal year. The Company’s 2008 fiscal year began on October 1, 2007 and will end September 30, 2008, resulting in a one month transition period that began September 1, 2007 and ended September 30, 2007. This Form 10Q includes the unaudited results for the quarter ended December 31, 2007 and 2006, and the unaudited results for the one month ended September 30, 2007. The Company has also included selected unaudited results for the one month ended September 30, 2006 for comparative purposes in Note 14. The audited results for the one month ended September 30, 2007 will be included separately in the Company’s Annual Report on Form 10K for the fiscal year ending September 30, 2008.
The accompanying condensed consolidated financial statements (“Financial Statements”) include the accounts of Alico, Inc. (“Alico”) and its wholly owned subsidiaries, Alico Land Development Company, Agri-Insurance Company, Ltd. (“Agri”), Alico-Agri, Ltd., Alico Plant World, LLC and Bowen Brothers Fruit, LLC (“Bowen”) (collectively referred to as the “Company”) after elimination of all significant intercompany balances and transactions.
The following Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. The Company believes that the disclosures made are adequate to make the information not misleading.
The accompanying unaudited condensed consolidated financial statements have been prepared on a basis consistent with the accounting principles and policies reflected in the Company’s annual report for the year ended August 31, 2007. In the opinion of Management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of its consolidated financial position at December 31, 2007, September 30, 2007 and August 31, 2007 and the consolidated results of operations and cash flows for the quarters ended December 31, 2007 and 2006, and one month ended September 30, 2007.
The Company is involved in agriculture, which is of a seasonal nature and subject to the influence of natural phenomena and wide price fluctuations. Fluctuation in the market prices for citrus fruit has caused the Company to recognize adjustments to revenue from the prior year’s crop totaling $53 thousand for the quarter ended December 31, 2007, and $(20) thousand for the quarter ended December 31, 2006.
The results of operations for the stated periods are not necessarily indicative of results to be expected for the full year. Certain items from 2006 have been reclassified to conform to the 2007 presentation.
2. Real Estate:
Real estate sales are recorded under the accrual method of accounting. Under this method, a sale is not recognized until certain criteria are met including whether the profit is determinable, collectibility of the sales price is reasonably assured or the earnings process is complete.
Real estate project costs incurred for the acquisition, development and construction of real estate projects are capitalized. Additionally, costs to market real estate are capitalized if they are reasonably expected to be removed from the sale of the project and have been performed to obtain regulatory approval for the sale. An allowance is provided to reduce capitalized project costs to estimated realizable value.

 

7


 

During the fourth quarter of fiscal year 2006, the Company established a real estate department to manage its real estate assets. Gains or losses resulting from real estate transactions entered into before the establishment of the Company’s real estate department, which have not been substantially modified as defined by GAAP, have been recorded as non-operating items. Gains or losses resulting from contracts substantially modified or initiated by the Company’s real estate department are classified as operating items.
Properties are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment losses are recognized when the carrying amount of a property exceeds its fair value. Such events or changes in circumstances include significant decreases in the market price of such properties; significant adverse changes in legal factors, the business climate or the extent or manner in which the asset is being used; an accumulation of costs significantly in excess of amounts originally expected for the property; continuing operating cash flow losses associated with the property or an expectation that it is more likely than not that the property will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Impairment losses are measured as the amount by which the carrying amount of a property exceeds its fair value.
3. Marketable Securities Available for Sale:
The Company has classified 100% of investments in marketable securities as available for sale and, as such, the securities are carried at estimated fair value. Unrealized gains and losses determined to be temporary are recorded as other comprehensive income, net of related deferred taxes, until realized. Unrealized losses determined to be other than temporary are recognized in the period the determination is made.
The cost and estimated fair value of marketable securities available for sale at December 31, 2007 and August 31, 2007 and September 30, 2007 were as follows:
                                                                 
    December 31, 2007     August 31, 2007  
    (Unaudited)                      
            Gross     Estimated             Gross     Estimated  
            Unrealized     Fair             Unrealized     Fair  
    Cost     Gains     Losses     Value     Cost     Gains     Losses     Value  
 
                                                               
Debt securities
                                                               
 
                                                               
Municipal bonds
  $ 32,800     $ 51     $ (1 )   $ 32,850     $ 28,881     $ 6     $ (10 )   $ 28,877  
Mutual funds
    2,000                   2,000       2,000                   2,000  
Fixed maturity funds
    11,759       16       (4 )     11,771       12,656       55       (4 )     12,707  
Corporate bonds
    2,659             (5 )     2,654       2,673       1       (16 )     2,658  
 
                                               
 
                                                               
Marketable securities available for sale
  $ 49,218     $ 67     $ (10 )   $ 49,275     $ 46,210     $ 62     $ (30 )   $ 46,242  
 
                                               

 

8


 

                                 
    September 30, 2007  
    (Unaudited)  
            Gross     Estimated  
            Unrealized     Fair  
    Cost     Gains     Losses     Value  
 
                               
Debt securities
                               
 
                               
Municipal bonds
  $ 29,213     $ 23     $ (2 )   $ 29,234  
Mutual funds
    2,000                   2,000  
Fixed maturity funds
    12,569       49       (2 )     12,616  
Corporate bonds
    2,670             (9 )     2,661  
 
                       
 
                               
Marketable securities available for sale
  $ 46,452     $ 72     $ (13 )   $ 46,511  
 
                       
The aggregate fair value of investments in debt instruments (net of mutual funds of $2,000) as of December 31, 2007 and September 30, 2007 by contractual maturity date consisted of the following:
                 
    Aggregate Fair Value  
    December 31,     September 30,  
    2007     2007  
Due within 1 year
  $ 37,863     $ 31,093  
Due between 1 and 2 years
    148       4,205  
Due between 2 and 3 years
    221       219  
Due between 3 and 4 years
           
Due between 4 and 5 years
    1,200       1,512  
Due beyond five years
    7,843       7,482  
 
           
Total
  $ 47,275     $ 44,511  
 
           
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at:
                                                 
    December 31, 2007  
    Less than 12 months     12 months or greater     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
Fixed maturity funds
  $ 4,919     $ (3 )   $     $     $ 4,919     $ (3 )
Corporate bonds
                2,654       (6 )     2,654       (6 )
Municipal Bonds
    1,617       (1 )                 1,617       (1 )
 
                                   
Total
  $ 6,536     $ (4 )   $ 2,654     $ (6 )   $ 9,190     $ (10 )
 
                                   

 

9


 

                                                 
    September 30, 2007  
    Less than 12 months     12 months or greater     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
Fixed maturity funds
  $ 3,478     $ (2 )   $     $     $ 3,478     $ (2 )
Corporate bonds
                2,661       (9 )     2,661       (9 )
Municipal Bonds
    5,475       (2 )                 5,475       (2 )
 
                                   
Total
  $ 8,953     $ (4 )   $ 2,661     $ (9 )   $ 11,614     $ (13 )
 
                                   
Net realized gain on the sale of securities for the three months ended December 31, 2007 and 2006 and one month ended September 30, 2007 were $0, ($35 thousand) and $0, respectively.
Debt instruments and funds. The unrealized losses on fixed maturity funds, corporate bonds and municipal bonds were primarily due to changes in interest rates. At December 31, 2007 the Company held loss positions in 33 debt instruments. Because the decline in market values of these securities is attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not believe any of the unrealized losses represent other than temporary impairment based on the evaluation of available evidence as of December 31, 2007.
4. Mortgages and notes receivable:
The balances of the Company’s mortgages and notes receivable were as follows:
                         
    December 31,     September 30,        
    2007     2007     August 31,  
    (unaudited)     (unaudited)     2007  
 
                       
Mortgage notes receivable on retail land sales
  $ 271     $ 299     $ 311  
Mortgage notes receivable on bulk land sales
    65,518       65,963       65,963  
 
                 
 
                       
Total mortgage and notes receivable
    65,789       66,262       66,274  
Less: Deferred revenue
    (57,034 )     (53,253 )     (53,254 )
Discount on notes to impute market interest
    (305 )     (2,489 )     (2,594 )
Current portion
    (3,387 )     (3,832 )     (487 )
 
                 
 
                       
Non-current portion
  $ 5,063     $ 6,688     $ 9,939  
 
                 
Mortgage notes receivable related to retail land sales are generated from the sale of lots by the Company’s Alico Land Development subsidiary. Mortgage notes related to bulk land sales were generated by the sale of the Company’s Lee County properties. Real estate sales are recorded under the accrual method of accounting. Gains from commercial or bulk land sales are not recognized until payments received for property to be developed within two years after the sale equal 20% or property to be developed after two years equal 25% of the contract sales price according to the installment sales method.
Profits from commercial real estate sales are discounted to reflect the market rate of interest when the stated rate of the mortgage note is less than the market rate. The recorded imputed interest discounts are realized as the balances due are collected. In the event of early liquidation, interest is recognized on the simple interest method.

 

10


 

In July 2005, the Company’s Alico-Agri subsidiary sold property in Lee County, Florida for $62.9 million. At the time of the sale, the Company received a down payment of $6.2 million and a 2.5% interest bearing mortgage note of $56.6 million in exchange for the land sold. Because the down payment did not meet the thresholds for full gain recognition, a deferred revenue account was established as an offset to the carrying amount of the note. Additionally, because the stated interest rate of the note was below market rates at the date of inception, a note discount was recorded. In December 2006, the Company restructured the contract and received $3.8 million upon execution. The major provisions of the restructuring were the extension of the principal payments and an increase in the interest rate to 4.0% annually, causing readjustment of the note discount.
Under the terms of the renegotiated contract, $3.8 million of the closing proceeds were subtracted from the existing mortgage receivable principal of $56.6 million and accrued interest of $1.7 million was added back to the mortgage receivable as additional principal. Four annual principal plus interest payments of the remaining $54.5 million mortgage were scheduled to commence with a payment of $13.6 million on September 28, 2007.
The Company again restructured the contract in October of 2007. Major provisions of the renegotiation included a reduction of the scheduled principal payments due in September of 2008 and 2009; an increased interest rate based on LIBOR plus a percentage to be applied forward from July 2005; and quarterly interest payments equal to the applicable quarterly interest rate as described above on the outstanding principal balance for the term of the note. Further provisions include increased flexibility of the Company to receive lots in the event of default. The Company received a payment of $6.8 million related to the renegotiated contract consisting of $0.4 million of principal, $6.1 million of interest and the balance as an expense reimbursement. As a result of the changed interest terms from the October 2007 restructure, the note discount was eliminated.
In December 2006, the Company sold property in Lee County, Florida for $12.0 million. The Company recognized revenue of $0.6 million and recorded a mortgage note receivable for $11.4 million and deferred revenue of $10.2 million. The mortgage note receivable, which accrues interest at the rate of 6% annually, was discounted by $0.3 million to adjust for the current market rate of interest. Interest only will be collected annually for the first four years, followed by four equal annual payments of principal and interest.
5. Inventories:
A summary of the Company’s inventories is shown below:
                         
    December 31,     September 30,        
    2007     2007     August 31,  
    (unaudited)     (unaudited)     2007  
 
                       
Unharvested fruit crop on trees
  $ 13,866     $ 12,982     $ 12,177  
Unharvested sugarcane
    4,401       5,410       4,922  
Beef cattle
    6,676       5,757       5,429  
Unharvested sod
    1,540       1,476       1,449  
Plants and vegetables
    1,746       1,484       1,086  
Rock, fill and other
    72       123       151  
 
                 
 
                       
Total inventories
  $ 28,301     $ 27,232     $ 25,214  
 
                 
The Company records its inventory at the lower of cost or net realizable value. At December 31, 2007, the Company adjusted its cattle inventory down by $256 thousand due to changing market conditions and reduced its vegetable inventory by $188 thousand due to damage from heavy rains. At December 31, 2006, the Company wrote down sugarcane inventory by $338 thousand and vegetable inventory by $216 thousand. The adjustments were included as costs of sales in the period of adjustment.

 

11


 

6. Income taxes:
The provision for income taxes for the three months ended December 31, 2007 and 2006 and one month ended September 30, 2007 is summarized as follows:
                         
    Three months ended December 31,     One month ended  
    (unaudited)     September 30,  
    2007     2006     2007  
 
                       
Current:
                       
Federal income tax
  $ 1,202     $ 993     $ 16  
State income tax
    257       170       12  
 
                 
 
    1,459       1,163       28  
 
                 
 
                       
Deferred:
                       
Federal income tax
    (24 )     701       (194 )
State income tax
    63       75       25  
 
                 
 
    39       776       (169 )
 
                 
 
                       
Total provision for income taxes
  $ 1,498     $ 1,939     $ (141 )
 
                 
The Internal Revenue Service (IRS) issued a thirty day letter dated August 14, 2006 pertaining to audits of Alico for the tax years 2000 through 2004. In the thirty day letter, the IRS proposed several alternative theories as a basis for its argument that Alico should have reported additional taxable income in the years under audit. These theories principally related to the formation and capitalization of the Company’s Agri Insurance subsidiary and its tax exempt status during the years under audit. The Company has been working with IRS appeals to resolve the case and has reached a tentative agreement for the payment of federal taxes, penalties and interest of approximately $66.2 million. In order to cease additional interest from accruing on this liability, the Company has paid $66.2 million to the IRS from its revolving credit line. Based on the contemplated settlement, the Company estimated additional state taxes and interest of approximately $10.3 million at December 31, 2007 which will be due and payable when the IRS audit is concluded. Further details regarding the settlement, including the future of Agri, are in ongoing negotiations with the IRS and a proposed closing document has been prepared by the Company’s tax counsel and provided to IRS Appeals for review. The Company expects full resolution of this matter by the end of March 2008; however, the Company has executed statute extensions with the IRS for the tax returns affected until December 31, 2008.
Alico capitalized Agri by contributing real estate located in Lee County Florida. The real estate was transferred at its historical cost basis. As the Lee County real estate was sold, substantial gains were generated in Agri, creating differences between amounts recorded on Agri’s books and the related tax returns. For property transferred to Agri but not sold during the years under audit, the historical tax basis will be stepped-up to the fair market value of the property at the time of transfer. The Company has estimated the amount of basis step-up based on discussions with the IRS and classified the step ups resulting from the transfer of property not sold as of August 31, 2004 based on their estimated tax benefits as a deferred tax asset at August 31, 2007. Should the actual outcome of the IRS settlement differ from the estimated amounts, the deferred taxes related to the basis step-ups could fluctuate from the amounts recorded.
Since January 1, 2004 Agri has been filing as a taxable entity. This change in tax status resulted from changes in the Internal Revenue Code.
The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“Interpretation No. 48”), on October 1, 2007. Among other things, FIN 48 requires application of a “more likely than not” threshold to the recognition and derecognition of tax positions. It further requires that a change in judgment related to prior years’ tax positions be recognized in the quarter of such change.
At October 1, 2007, the Company had $441,000 of potential tax exposure related to uncertain tax positions, which was recorded as a one time adjustment to retained earnings. All of this amount would, if recognized, affect the effective tax rate. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense and classifies such interest and penalties in the liability for uncertain tax positions. Interest and penalties accrued as of the date of adoption are approximately $57,000. As of December 31, 2007, the Company had approximately $73,000 accrued for the payment of interest and penalties related to uncertain tax positions.

 

12


 

The U.S. Internal Revenue Agency is currently examining the returns of Alico and related entities for tax years 2000 through 2004. The statute of limitations for those years has been extended as part of that examination. Additionally, the tax years ended August 31, 2005 and August 31, 2006 remain open to examination. The state income tax returns have not been audited and are subject to audit for the same tax periods open for federal tax purposes. We believe that the unrecognized tax liabilities currently recorded will change significantly within 12 months of the report date due to the filing of amended returns. The unrecognized tax liabilities could decrease by $450,000 (due to payment) within the next 12 months.
Pursuant to recent Securities Exchange Commission guidance, the Company has not provided the tabular reconciliation disclosures required by FIN 48. The Company will provide all required FIN 48 disclosures in its 2008 Annual Report on Form 10-K.
7. Indebtedness:
Alico, Inc. has a Credit Facility with Farm Credit of Southwest Florida that provides a $175.0 million revolving line of credit which matures on August 1, 2010. Funds from the Credit Facility may be used for general corporate purposes including: (i) the normal operating needs of the Company and its operating divisions, (ii) the purchase of capital assets and (iii) the payment of dividends. The Credit Facility also allows for an annual extension at the lender’s option.
The Credit Facility contains numerous restrictive covenants described more fully in the Company’s annual report on Form 10-K. In the opinion of Management, the Company was in compliance with all of the covenants and provisions of the amended Credit Facility at December 31, 2007.
The Company’s Chief Executive Officer, John R. Alexander, is a member of the Board of Directors of the Company’s primary lender, Farm Credit of Southwest Florida. Mr. Alexander abstains from voting on matters that directly affect the Company.
The following table reflects outstanding debt under the Company’s various loan agreements:
                                         
    Principal Balance              
    December 31,     September 30,     August 31,     Interest        
    2007     2007     2007     Rate     Collateral  
a) Revolving Credit Facility
  $ 137,319     $ 127,519     $ 128,419     Libor +1.50 %   Real estate
b) Mortgage note payable
    7,917       8,234       8,339       6.68 %   Real estate
c) Mortgage note payable
    52       52       52       7.00 %   Real estate
d) Vehicle financing
    72       79       79       0%-2.90 %   3 Vehicles
 
                                 
Total
  $ 145,360     $ 135,884     $ 136,889                  
 
                                 
a)   Terms described above; Additional credit available at December 31, 2007 was $37,681.
 
b)   First mortgage on 7,680 acres of cane, citrus, pasture and improvements in Hendry County, Florida with commercial lender. Monthly principal payments of $106 thousand plus accrued interest.
 
c)   First mortgage on a parcel of land in Polk County, Florida with private seller. Annual
equal payments of $55 thousand.
 
d)   3-5 year term loans. Monthly principal payments plus interest.
 
e)   The LIBOR rate was 4.88%, 5.50% and 5.63% at December 31, 2007, September 30, 2007
and August 31, 2007, respectively.

 

13


 

Maturities of the Company’s debt at December 31, 2007, September 30, 2007, and August 31, were as follows:
                         
    December 31,     September 30,     August 31,  
    2007     2007     2007
Due within 1 year
  $ 1,349     $ 1,350       1,350  
Due between 1 and 2 years
    1,293       1,297       1,298  
Due between 2 and 3 years
    138,592       128,794       129,695  
Due between 3 and 4 years
    1,274       1,273       1,273  
Due between 4 and 5 years
    1,269       1,270       1,269  
Due beyond five years
    1,583       1,900       2,004  
 
                 
Total
  $ 145,360     $ 135,884     $ 136,889  
 
                 
Interest costs expensed and capitalized to property, buildings and equipment were as follows:
                         
    Three months ended     One month ended  
    December 31,     September 30,  
    2007     2006     2007  
    (unaudited)     (unaudited)     (unaudited)  
 
                       
Interest expense
  $ 2,466     $ 1,261     $ 820  
Interest capitalized
    12       13       5  
 
                 
 
                       
Total interest cost
  $ 2,478     $ 1,274     $ 825  
 
                 
As an agricultural credit cooperative, Farm Credit of Southwest Florida is owned by the member-borrowers who purchase stock/participation certificates in the cooperative. Allocations of patronage are made to members on an annual basis according to the proportionate amount of interest paid by the member. Allocations are made in cash and non cash participation certificates. The Company has recorded the cash allocations as received as a reduction of interest expense. Non cash patronage receivables of $854 thousand have been included as other income in the accompanying condensed consolidated statements of operations for the three months ended December 31, 2007. Such amounts relate to cumulative non cash allocations which are considered by management to have both a qualitatively and quantitatively immaterial effect on any prior period.
8. Dividends:
At its meeting on September 28, 2007 the Board of Directors declared a quarterly dividend of $0.275 per share payable to stockholders of record as of December 29, 2007 that was paid on January 15, 2008. At its meeting on January 18, 2008, the Board of Directors declared a quarterly dividend of $0.275 per share payable to stockholders of record as of April 30, 2008 with payment expected on or around May 16, 2008.
9. Disclosures about reportable segments:
The Company has four reportable segments: Bowen, Citrus Groves, Sugarcane and Cattle. Bowen provides harvesting and marketing services for citrus producers including Alico’s Citrus Grove division. Additionally, Bowen purchases citrus fruit and resells the fruit to citrus processors and fresh packing facilities. The Citrus Groves segment produces citrus fruit for sale to citrus processors and fresh packing facilities. The Sugarcane segment produces sugarcane for delivery to the sugar mill and refinery. The Cattle division raises beef cattle for sale to western feedlots and meat packing facilities. The goods and services produced by these segments are sold to wholesalers and processors in the United States who prepare the products for consumption. The Company’s operations are located in Florida.

 

14


 

Although the Company’s Real Estate, Plant World, Vegetable and Sod segments do not meet the quantitative thresholds to be considered as reportable segments, information about these segments has been included in the schedules below. For a description of the business activities of the Plant World, Vegetables and Sod segments please refer to Item 1 of the Company’s annual report on Form 10-K for the year ended August 31, 2007.
The accounting policies of all of the segments are the same as those described in the summary of significant accounting policies in the Company’s annual report on Form 10-K for the year ended August 31, 2007. The Company evaluates performance based on direct margins from operations before general and administrative costs and income taxes not including nonrecurring gains and losses.
The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties; that is, at the then current market prices.
The Company’s reportable segments are strategic business units that offer different products. They are managed separately because each business requires different knowledge, skills and marketing strategies.
Information concerning the various segments of the Company as of and for the three months ended December 31, 2007 and 2006 and one month ended September 30, 2007 are summarized on the following page:

 

15


 

                         
    Three months ended     One month ended  
    December 31,     September 30,  
    2007     2006     2007  
Revenues (from external customers except as noted)
                       
Bowen
  $ 7,815     $ 7,633     $ 143  
Intersegment fruit sales through Bowen
    1,264       804        
Citrus groves
    4,665       6,172       5  
Sugarcane
    3,221       3,738        
Cattle
    486       3,653       330  
Real Estate
    3,869       2,447        
Alico Plant World
    902       749       419  
Vegetables
    1,724       1,117        
Sod
    196       349       92  
 
                 
Revenue from segments
    24,142       26,662       989  
Other operations
    676       670       188  
Less: intersegment revenues eliminated
    (1,264 )     (804 )      
 
                 
 
                       
Total operating revenue
  $ 23,554     $ 26,528     $ 1,177  
 
                 
 
                       
Operating expenses
                       
Bowen
  $ 7,712     $ 7,424     $ 222  
Intersegment fruit sold through Bowen
    1,264       804        
Citrus groves
    3,845       3,708       3  
Sugarcane
    3,251       4,144        
Cattle
    858       3,035       289  
Real Estate
    891       240       59  
Alico Plant World
    833       491       190  
Vegetables
    1,400       1,216        
Sod
    316       202       208  
 
                 
Segment operating expenses
    20,370       21,264       971  
Other operations
    108       113       46  
Less: intersegment expenses eliminated
    (1,264 )     (804 )      
 
                 
 
                       
Total operating expenses
  $ 19,214     $ 20,573     $ 1,017  
 
                 
 
                       
Gross profit (loss):
                       
Bowen Brothers Fruit
  $ 103     $ 209     $ (79 )
Citrus groves
    820       2,464       2  
Sugarcane
    (30 )     (406 )      
Cattle
    (372 )     618       41  
Real Estate
    2,978       2,207       (59 )
Alico Plant World
    69       258       229  
Vegetables
    324       (99 )      
Sod
    (120 )     147       (116 )
 
                 
Gross profit from segments
    3,772       5,398       18  
Other
    568       557       142  
 
                 
Gross profit
  $ 4,340     $ 5,955     $ 160  
 
                 

 

16


 

                         
    Three months ended     One month ended  
    December 31,     September 30,  
    2007     2006     2007  
Depreciation, depletion and amortization:
                       
Bowen Brothers Fruit
  $ 62     $ 68     $ 21  
Citrus Groves
    556       606       188  
Sugarcane
    518       517       171  
Cattle
    398       487       134  
Alico Plant World
    162       163       53  
Vegetables
    30       13       12  
Sod
    54       48       18  
 
                 
Total segment depreciation and amortization
    1,780       1,902       597  
Other depreciation, depletion and amortization
    241       214       78  
 
                 
Total depreciation, depletion and amortization
  $ 2,021     $ 2,116     $ 675  
 
                 
                         
    December 31,     September 30,        
    2007     2007     August 31,  
    (unaudited)     (unaudited)     2007  
Total Assets:
                       
Bowen Brothers Fruit
  $ 6,171     $ 2,891     $ 3,042  
Citrus groves
    55,641       53,339       54,558  
Sugarcane
    43,728       45,128       46,053  
Cattle
    21,756       20,837       20,813  
Alico Plant World
    7,525       6,862       6,711  
Vegetables
    4,574       3,238       2,766  
Sod
    5,432       5,400       5,362  
 
                 
Segment assets
    144,827       137,695       139,305  
Other Corporate assets
    147,304       141,639       141,582  
 
                 
Total assets
  $ 292,131     $ 279,334     $ 280,887  
 
                 
10. Stock Compensation Plans:
The Board of Directors of the Company may grant options, stock appreciation rights, and/or restricted stock to certain directors and employees. No stock options were granted during fiscal year 2007, the three months ended December 31, 2007, or the one month ended September 30, 2007.
The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost is recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.
At December 31, 2007, September 30, 2007 and August 31, 2007, there were 7,158, 8,158 and 8,158, options respectively, fully vested and exercisable and 273,815 shares available for grant. The options outstanding had a fair value of $133 thousand, $208 thousand, and $271 thousand at December 31, 2007, September 30, 2007 and August 31, 2007, respectively. There was no unrecognized compensation expense related to outstanding stock option grants at August 31, 2007, September 30, 2007 or December 31, 2007.

 

17


 

In fiscal year 2006, the Company began granting restricted shares to certain key employees as long term incentives. The restricted shares vest in accordance with the table and description outlined below. The payment of each installment is subject to continued employment with the Company. At December 31, 2007, September 30, 2007 and August 31, 2007 there were 8,000 restricted shares vested in accordance with these grants.
The table below summarizes the Company’s restricted share awards granted to date:
                                         
                    Compensation     Compensation     Weighted  
                    Expense Recognized     Expense Recognized     Average  
                    for the     for the     Grant date  
            Fair Market Value     three months ended     one month ended     Fair value  
Grant Date   Shares Granted     on Date of Grant     December 31, 2007     September 30, 2007     Per share  
April 2006
    20,000     $ 908     $ 43       14          
October 2006
    20,000       1,239       67       22          
 
                               
 
                                       
Total
    40,000     $ 2,147     $ 110     $ 36     $ 53.68  
 
                             
The shares granted in April 2006 vest 25% in April 2010 and 25% annually thereafter until fully vested. Four thousand of the shares granted in October 2006 related to past service and were immediately vested and an additional 4,000 shares vested August 31, 2007. The remaining shares granted in October 2006 vest 33% effective August 31, 2008 and 33% annually thereafter until fully vested. The Company is recognizing compensation cost equal to the fair market value of the stock at the grant dates prorated over the vesting period of each award. The fair value of the unvested restricted stock awards at December 31, 2007 was $1.2 million and will be recognized over a weighted average period of 6 years.
During November 2007, the CEO and COO elected to receive a portion of their annual incentive bonus in Company stock. The CEO chose to receive 4,000 shares at a value of $177 thousand, while the COO chose to receive 500 shares at a value of $22 thousand. These shares do not contain any restrictions, but were issued under the Company’s Incentive Equity Plan. Compensation expense for these awards was accrued and recognized during the fourth quarter of the Company’s fiscal 2007 year.
11. Other Comprehensive Income:
Other comprehensive income, arising from market fluctuations in the Company’s securities portfolio, was as follows:
                         
    For the three months ended     For the one month ended  
    December 31,     September 30,  
    2007     2006     2007  
Accumulated Other Comprehensive Income (loss) at beginning of period
  $ 49     $ (29 )   $ 45  
 
                       
Change resulting from market fluctuations, net of tax, and realized gains and losses
    (13 )     40       4  
 
                 
 
                       
Accumulated Other Comprehensive Income
  $ 36     $ 11     $ 49  
 
                 
12. New Accounting Pronouncements:
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. The Company is required to adopt SFAS No. 157 effective at the beginning of fiscal year 2009. The Company does not expect the adoption of SFAS 157 to have a material impact on its financial statements.

 

18


 

In February 2007, the FASB issued FASB Statement No. 159 (FAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115,” which provides companies the irrevocable option to measure many financial assets and liabilities at fair value with the changes in fair value recognized in earnings. SFAS No. 159 will be effective for fiscal year 2009. The Company does not expect the adoption of SFAS 159 to have a material impact on its financial statements.
13. Treasury Stock
The Company’s Board of Directors has authorized the repurchase of up to 131,000 shares of the Company’s common stock through August 31, 2010, for the purpose of funding restricted stock grants under its 1998 Incentive Equity Plan in order to provide restricted stock to eligible Directors and Senior Managers and align their interests with those of the Company’s shareholders.
The stock repurchases began in November 2005 and will be made on a quarterly basis until August 31, 2010 through open market transactions, at times and in such amounts as the Company’s broker determines subject to the provisions of a 10b5-1 Plan which the Company has adopted for such purchases. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. All purchases will be made subject to restrictions of Rule 10b-18 relating to volume, price and timing so as to minimize the impact of the purchases upon the market for the Company’s shares. The Company does not anticipate that any purchases under the Plan will be made from any officer, director or control person. There are currently no arrangements with any person for the purchase of the shares. In accordance with the approved plans, the Company may purchase an additional 75,230 shares. The Company purchased 12,000 shares in the open market during the first quarter of fiscal year 2008 at an average price of $43.98 per share.
The following table provides information relating to purchases of the Company’s common shares by the Company on the open market pursuant to the aforementioned plans for the quarter ended December 31, 2007 (no treasury purchases occurred during the month ended September 30, 2007):
                                 
                    Total shares        
                    purchased as        
                    part of publicly     Total dollar value  
    Total number of     Average price     announced plans     of shares purchased  
Date   shares purchased     paid per share     or programs     (thousands)  
11/20/2007
    2,500     $ 44.23       2,500     $ 112  
11/21/2007
    2,500       43.64       2,500       110  
11/26/2007
    2,500       42.92       2,500       108  
11/27/2007
    2,000       42.52       2,000       86  
11/28/2007
    2,500       44.29       2,500       112  
 
                       
 
                               
Total
    12,000     $ 43.98       12,000     $ 528  
 
                       

 

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14. Transition Period Financial Information:
On September 28, 2007, the Company’s fiscal year end was changed from August 31 to September 30. Accordingly, the Company is presenting unaudited financial statements for the one month transition period ended September 30, 2007. The following table provides certain unaudited comparative financial information of the same period of the prior year.
                 
    One Month Ended  
    September 30,     September 30,  
(In thousands, except per share data)   2007     2006  
Statement of operations data:
               
Operating revenue
  $ 1,177     $ 1,682  
Operating and general and administrative expenses
    1,867       2,499  
 
           
Earnings (loss) from operations
    (690 )     (817 )
Other earnings (loss)
    (131 )     101  
Income taxes (benefit)
    (141 )     (341 )
 
           
Net earnings (loss)
  $ (680 )   $ (375 )
 
           
Earnings (loss) per share:
               
Basic
  $ (0.09 )   $ (0.05 )
Diluted
  $ (0.09 )   $ (0.05 )
                 
    September 30,     September 30,  
    2007     2006  
Balance sheet data:
               
Current assets
  $ 129,402     $ 110,029  
Total assets
    279,334       261,761  
Current liabilities
    19,442       16,950  
Other liabilities
    143,897       104,035  
Stockholders’ equity
  $ 115,995     $ 140,776  

 

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ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement
Some of the statements in this document include statements about future expectations. Statements that are not historical facts are “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Exchange Act and Section 27A of the Securities Act. These forward-looking statements, which include references to one or more potential transactions, expectation of results and strategic alternatives under consideration are predictive in nature or depend upon or refer to future events or conditions, are subject to known, as well as unknown risks and uncertainties that may cause actual results to differ materially from Company expectations. There can be no assurance that any future transactions will occur or be structured in the manner suggested or that any such transaction will be completed. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise.
When used in this document, or in the documents incorporated by reference herein, the words “anticipate”, “believe”, “estimate”, “may”, “intend”, “expect”, “should”, “could” and other words of similar meaning, are likely to address the Company’s growth strategy, financial results and/or product development programs. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. The considerations listed herein represent certain important factors the Company believes could cause such results to differ. These considerations are not intended to represent a complete list of the general or specific risks that may affect the Company. It should be recognized that other risks, including general economic factors and expansion strategies, may be significant, presently or in the future, and the risks set forth herein may affect the Company to a greater or lesser extent than indicated.
Change in fiscal year
On September 28, 2007, the Board of Directors of the Company approved a change in the Company’s fiscal year end from August 31 to September 30. The fiscal year change is effective beginning with the Company’s 2008 fiscal year. The Company’s 2008 fiscal year began on October 1, 2007 and will end September 30, 2008, resulting in a one month transition period that began September 1, 2007 and ended September 30, 2007. This Form 10Q includes the unaudited results for the quarters ended December 31, 2007 and 2006, and the unaudited results for the one month ended September 30, 2007. The Company has also included selected unaudited results for the one month ended September 30, 2006 for comparative purposes in Note 14. The audited results for the one month ended September 30, 2007 will be included separately in the Company’s Annual Report on Form 10K for the fiscal year ending September 30, 2008.
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity and Capital Resources
Working capital increased to $123.4 million at December 31, 2007 from $109.7 million at August 31, 2007. As of December 31, 2007, the Company had cash and cash equivalents of $39.8 million compared to $34.8 million at August 31, 2007. Marketable securities increased to $49.3 million from $46.2 million during the same period. The ratio of current assets to current liabilities decreased to 7.21 to 1 at December 31, 2007 from 7.26 to 1 at August 31, 2007. Total assets increased by $11.2 million to $292.1 million at December 31, 2007, compared to $280.9 million at August 31, 2007.

 

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Management believes the Company will be able to meet its working capital requirements for the foreseeable future with internally generated funds. Management expects continued profitability from the Company’s operations. In addition, the Company has credit commitments to provide for revolving credit of up to $175.0 million of which $37.7 million was available for the Company’s general use at December 31, 2007.
Cash outlays for land, equipment, buildings, and other improvements totaled $2.1 million during the three months ended December 31, 2007, compared with $3.2 million during the three months ended December 31, 2006.
IRS Audit
The Company, through its tax counsel, continues to work with IRS Appeals to reach a closing settlement.
Details regarding the settlement, including the future of Agri, are in ongoing negotiations with the IRS and a proposed closing document has been prepared by the Company’s tax counsel and provided to IRS Appeals for review. The Company expects full resolution of this matter by the end of March 2008; however, the Company has executed statute extensions with the IRS for the tax returns affected until December 31, 2008.
The Internal Revenue Service (IRS) issued a thirty day letter dated August 14, 2006 pertaining to audits of Alico for the tax years 2000 through 2004. In the thirty day letter, the IRS proposed several alternative theories as a basis for its argument that Alico should have reported additional taxable income in the years under audit. These theories principally related to the formation and capitalization of the Company’s Agri Insurance subsidiary and its tax exempt status during the years under audit. The Company has been working with IRS appeals to resolve the case and has reached a tentative agreement for the payment of federal taxes, penalties and interest of approximately $66.2 million. In order to cease additional interest from accruing on this liability, the Company has paid $66.2 million to the IRS from its revolving credit line. Based on the contemplated settlement, the Company estimated additional state taxes and interest of approximately $10.3 million at December 31, 2007 which will be due and payable when the IRS audit is concluded. Further details regarding the settlement, including the future of Agri, are in ongoing negotiations with the IRS.
Alico capitalized Agri by contributing real estate located in Lee County Florida. The real estate was transferred at its historical cost basis. As the Lee County real estate was sold, substantial gains were generated in Agri, creating differences between amounts recorded on Agri’s books and the related tax returns. For property transferred to Agri but not sold during the years under audit, the historical tax basis will be stepped-up to the fair market value of the property at the time of transfer. The Company has estimated the amount of basis step-up from discussions with the IRS and classified the step ups resulting from the transfer of property not sold as of August 31, 2004 based on their estimated tax benefits as a deferred tax asset at August 31, 2007. Should the actual outcome of the IRS settlement differ from the estimated amounts, the deferred taxes related to the basis step-ups could fluctuate from the amounts recorded.
Since January 1, 2004, Agri has been filing as a taxable entity. This change in tax status is a direct result of changes in the Internal Revenue Code increasing premium and other annual income levels. Due to these changes, Agri no longer qualifies as a tax-exempt entity.

 

22


 

Real estate activities
Due to complications in the permitting process and an overall slowdown in the real estate market, the Company agreed to restructure a contract in connection with a previous land sale in September 2007, with the terms to be effective as of the original closing in July 2005. Under the terms of the restructure, the Company received $6.8 million on October 22, 2007 representing $0.4 million of principal with the remaining proceeds classified as interest. Additionally, under the terms of the renegotiated agreement, Alico will receive quarterly interest payments based upon LIBOR, plus a percentage, as well as $3.4 million of principal on September 28, 2008, $12.0 million principal payments on September 28, 2009 & 2010, and the remaining principal of $26.6 million on September 28, 2011. Alico received the first quarterly interest payment of $0.9 million due on the note in December, 2007.
The Company received an extension payment of $3.6 million during October, 2007. The payment was in connection with an option contract for a gross sales price of $63.5 million. Under the terms of this contract, the buyer has four annual options with up to three additional annual extensions. The next option will expire on September 28, 2008, unless it is extended. In order to extend the time to exercise the option, the buyer must pay an annual extension fee equal to 6% of the remaining unexercised sales price.
The Company also received an interest payment of $0.7 million in October 2007 representing interest on an $11.4 million mortgage on a third contract. The mortgage provides for interest payments only for the next three years annually in September, followed by four equal annual payments of principal together with accrued interest thereon. The annual interest rate under the note is 6%.
Treasury stock purchase plan
The Company’s Board of Directors has authorized the repurchase of up to 131,000 shares of the Company’s common stock through August 31, 2010, for the purpose of funding restricted stock grants under its 1998 Incentive Equity Plan in order to provide restricted stock to eligible Directors and Senior Managers and align their interests with those of the Company’s shareholders.
The stock repurchases began in November 2005 and will be made on a quarterly basis until August 31, 2010 through open market transactions, at times and in such amounts as the Company’s broker determines subject to the provisions of a 10b5-1 Plan which the Company has adopted for such purchases. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. All purchases will be made subject to restrictions of Rule 10b-18 relating to volume, price and timing so as to minimize the impact of the purchases upon the market for the Company’s shares. The Company does not anticipate that any purchases under the Plan will be made from any officer, director or control person. There are currently no arrangements with any person for the purchase of the shares. In accordance with the approved plans, the Company may purchase an additional 75,230 shares. The Company purchased 12,000 shares in the open market during the first quarter of fiscal year 2008 at an average price of $43.98 per share.
Dividends
The Company paid a quarterly dividend of $0.275 per share on October 15, 2007. At its meeting on September 28, 2007 the Board of Directors declared a quarterly dividend of $0.275 per share payable to stockholders of record as of December 29, 2007 that was paid on January 15, 2008. At its meeting on January 18, 2008, the Board of Directors declared a quarterly dividend of $0.275 per share payable to stockholders of record as of April 30, 2008 with payment expected on or around May 16, 2008.

 

23


 

Results of Operations
                 
Summary of results (in thousands):   Three months ended December 31,  
    2007     2006  
Operating revenue
  $ 23,554     $ 26,528  
Gross profit
    4,340       5,955  
General & administrative expenses
    3,001       3,167  
Income from operations
    1,339       2,788  
Profit on sale of bulk real estate
    817       1,292  
Interest and investment income
    4,333       1,626  
Interest expense
    (2,466 )     (1,261 )
Other income
    265       74  
Provision for income taxes
    1,498       1,939  
Effective income tax rate
    34.9 %     42.9 %
Net income
  $ 2,790     $ 2,580  
Overall, income from operations decreased for the three months ended December 31, 2007 compared with the three months ended December 31, 2006, primarily the result of inferior results from agricultural operations. The Company expects that operations will be profitable in fiscal year 2008, but will be significantly below fiscal year 2007 levels. These expectations are a consequence of lower prices for citrus products for fiscal year 2008 when compared with fiscal year 2007.
Operations by segment are discussed separately below.
General and Administrative
General and administrative expenses decreased by $0.2 million for the three months ended December 31, 2007 when compared with the three months ended December 31, 2006. The Company is working to reduce its general and administrative costs for fiscal year 2008. Thus far, the reduction effort has included eliminating staff positions and using internal staff to reduce Sarbanes Oxley compliance costs which was outsourced for the past several years.
Profit from the Sale of Real Estate
The Company restructured a contract in October 2007, with the terms to be effective as of the original closing in July 2005. The Company recognized approximately $0.8 million of non-operating gain in connection with the restructure.
The Company also restructured several contracts for the sale of real estate during three months ended December 31, 2006. The Company recognized $3.9 million of operating revenue during the three months ended December 31, 2007 from the extension of these contracts. The Company recognized gains of $0.5 million of installment proceeds on a prior sale that was recorded as non-operating income during the three months ended December 31, 2006. Additionally, the Company recorded income in connection with a restructuring of a second contract of $1.9 million during the three months ended December 31, 2006, that was classified as operating revenue.

 

24


 

Provision for Income taxes
The effective tax rate was 34.9 % and 42.9% for the three months ended December 31, 2007 and 2006, respectively. The rates for both years were impacted by adjustments related to the ongoing IRS proceedings for tax years 2000, 2001, 2002, 2003 and 2004 (see Note 6 to the condensed consolidated financial statements).
The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“Interpretation No. 48”), on September 1, 2007. At September 1, 2007, the Company had $441 thousand of potential tax exposure related to uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense and classifies such interest and penalties in the liability for uncertain tax positions. As of December 31, 2007, the Company had approximately $15,000 accrued for the payment of interest and penalties related to uncertain tax positions. The tax years ended August 31, 2005 and August 31, 2006 remain open to examination by the major taxing jurisdictions to which the Company is subject.
Interest and Investment Income
Interest and investment income is generated principally from investments in corporate and municipal bonds, mutual funds, U.S. Treasury securities, and mortgages held on real estate sold on the installment basis.
Interest and investment income was $4.3 million compared with $1.6 million for the three month periods ended December 31, 2007 and 2006, respectively. The increased interest earnings for the three months ended December 31, 2007 were primarily due to the restructuring of a real estate mortgage note receivable, which allowed for higher interest rates effective retroactively to July 2005. Additionally, the Company recognized unallocated patronage from Farm Credit of $854 thousand during the quarter ended December 31, 2007.
Interest Expense
Interest expense increased for the three months ended December 31, 2007 when compared with the three months ended December 31, 2006 due to higher debt levels. The Company’s borrowings increased significantly during the fourth quarter of fiscal year 2007 due to the payment of taxes, interest and penalties associated with the ongoing IRS audits.

 

25


 

Operating Revenues
                 
    Three months ended December 31,  
    2007     2006  
Revenues
               
Agriculture:
               
Bowen Brothers Fruit
  $ 7,815     $ 7,633  
Citrus groves
    4,665       6,172  
Sugarcane
    3,221       3,738  
Cattle
    486       3,653  
Alico Plant World
    902       749  
Vegetables
    1,724       1,117  
Sod
    196       349  
 
           
Agriculture operations revenue
    19,009       23,411  
Real estate operations
    3,869       2,447  
Land leasing and rentals
    536       259  
Mining royalties
    140       411  
 
           
 
               
Total operating revenue
  $ 23,554     $ 26,528  
 
           
Operating revenues decreased by 11.2% to $23.6 million for the three months ended December 31, 2007, when compared with operating revenues of $26.5 million for the three months ended December 31, 2006. The decrease was primarily due to lower revenues from agriculture operations, discussed in detail below.
Gross Profit
                 
    Three months ended December 31,  
    2007     2006  
Gross profit:
               
Agriculture:
               
Bowen Brothers Fruit
  $ 103     $ 209  
Citrus groves
    820       2,464  
Sugarcane
    (30 )     (406 )
Cattle
    (372 )     618  
Alico Plant World
    69       258  
Vegetables
    324       (99 )
Sod
    (120 )     147  
 
           
Gross profit from agricultural operations
    794       3,191  
Real estate operations
    2,978       2,207  
Land leasing and rentals
    459       187  
Mining royalties
    109       370  
 
           
Gross profit
    4,340       5,955  
Profits from the sale of bulk real estate
    817       1,292  
Net interest and investment income
    1,867       365  
Corporate general and administrative and other
    (2,736 )     (3,093 )
 
           
Income before income taxes
  $ 4,288     $ 4,519  
 
           
Gross profit was $4.3 million for the three months ended December 31, 2007 compared with $6.0 million for the three months ended December 31, 2006. The decrease was due primarily to decreased profitability from agricultural operations.

 

26


 

Agricultural Operations
Agricultural operations generate a large portion of the Company’s revenues. Agricultural operations are subject to a wide variety of risks including weather and disease. Additionally, it is not unusual for agricultural commodities to experience wide variations in prices from year to year or from season to season. A discussion of agricultural operations follows:
Bowen
Bowen’s operations generated revenues totaling $7.8 million for the three months ended December 31, 2007 compared with revenue of $7.6 million for the three months ended December 31, 2006. Gross profit for the three months ended December 31, 2007 was $0.1 million compared with $0.2 million for the three months ended December 31, 2006. Citrus prices have declined an estimated 20% during fiscal year 2008 from their prior year levels and are expected to be below their prior year levels throughout the 2008 fiscal year. Due to the decreased prices, Bowen’s per unit margins have also declined.
Citrus Groves
Citrus revenues were $4.7 million for the three months ended December 31, 2007, and $6.2 million for the three months ended December 31, 2006. The Citrus Division recorded gross profits of $0.8 million for the three months ended December 31, 2007, compared with $2.5 million for the three months ended December 31, 2006. The Company expects to harvest more citrus during fiscal year 2008 than it did in fiscal year 2007; however, the Company’s citrus crop matured later during fiscal year 2008 when compared with fiscal year 2007, delaying the harvest and thus causing lower volumes of fruit movement through December. The volume delay is timing related and should recover in subsequent quarters. Citrus prices have declined an estimated 20% during fiscal year 2008 from their prior year levels. For this reason, the Company expects profits from its citrus groves to be lower in fiscal year 2008 when compared with fiscal year 2007. Prices have declined in the citrus industry due to an increasing supply of citrus as groves have recovered from the damages caused by the hurricanes of 2004 and 2005.
Sugarcane
Sugarcane revenues were $3.2 million and $3.7 million for the three months ended December 31, 2007 and December 31, 2006, respectively. Sugarcane operations generated a loss of $30 thousand compared with a loss of $406 thousand for the three months ended December 31, 2007 and December 31, 2006, respectively. Continuing low margins from sugarcane operations has prompted the Company to reduce its harvestable acreage of sugarcane during the current fiscal year in favor of expanding vegetable operations and land leasing. Accordingly, gross profits for the sugarcane division are expected to be lower in fiscal year 2008 when compared to fiscal year 2007 due to an expected reduction in the number of tons harvested.
Cattle
Cattle revenues were $0.5 million for the three months ended December 31, 2007, compared with $3.7 million for the three months ended December 31, 2006. Cattle recorded a loss of ($0.4 million) for the three months ended December 31, 2007 compared with a gross profit of $0.6 million for the three months ended December 31, 2006. More calves were sold during the three months ended December 31, 2006 compared with the three months ended December 31, 2007. As a result, cattle revenues decreased from their prior year levels.

 

27


 

During the first quarter of fiscal year 2008, the Company wrote down the cattle inventory by $256 thousand, to its net realizable value. In an effort to improve conception and general nutrition, the Company has reduced the size of its cattle herd. As the herd size is reduced, cost savings are expected. However, during the current fiscal year, due to a decline in births caused by the reduced size of the cattle herd, and stress brought about by a severe drought, the cost per calf has increased and as a result per unit margins have suffered. As a result, cattle operations are not expected to perform as well in fiscal year 2008 as they did in fiscal year 2007.
Plant World
Plant World generated gross revenues of $0.9 million compared with $0.7 million during the three months ended December 31, 2007 and 2006, respectively. Gross profits were $69 thousand compared with $258 thousand for the three months ended December 31, 2007 and 2006, respectively.
Vegetables
Revenues from the sale of vegetables were $1.7 million for the three months ended December 31, 2007, respectively, compared with $1.1 million for the three months ended December 31, 2006. The Vegetable division recorded gross profits of $0.3 million and a loss of $0.1 million, respectively, for the three months ended December 31, 2007 and December 31, 2006. Alico began farming sweet corn and green beans in the second quarter of fiscal year 2006. The fiscal year 2007 fall corn crop was damaged by insects, which caused the Company to recognize a loss during December of 2006.
During the second quarter of fiscal year 2007, the Company formed a new company, Alico/J&J Farms, LLC and entered into a joint venture with J&J Produce to produce vegetables on land owned by Alico, Inc. The joint venture is currently farming green peppers and eggplant. Alico accounts for its investment in Alico/J&J under the equity method. For the three months ended December 31, 2007, Alico recognized a loss of $215 thousand on its portion of the investment. The loss was included as vegetable revenue for the quarter. Vegetable prices are highly volatile. As such, it is difficult to speculate as to the future profitability of the venture.
Sod
Due to continued slow sales in the real estate market, sod sales have declined considerably for the three months ended December 31, 2007 when compared with the three months ended December 31, 2006. As a result of the reduced sales, the Company has written off a portion of its sod inventory. Sod costs will continue to be expensed as incurred until the sales volume increases sufficiently to reduce inventories.
Off Balance Sheet Arrangements
The Company through its wholly owned subsidiary Bowen Brothers Fruit, LLC enters into contracts for the purchase of citrus products during the normal course of its business. Typically, these purchases are covered by sales contracts. The total purchase contracts under these agreements totaled $21.2 million at December 31, 2007. All of these purchases except for $0.1 million were covered by sales agreements at prices exceeding cost. In addition, Bowen had sales contracts totaling $1.0 million at December 31, 2007 for which purchases had not been contracted. Bowen management currently believes that all committed sales quantities can be purchased below the committed sales price.

 

28


 

Disclosure of Contractual Obligations
The contractual obligations of the Company at December 31, 2007 are set forth in the table below:
                                         
            Payment due by period  
            Less than     1 - 3     3-5     Greater than  
Contractual obligations   Total     1 year     years     years     5 years  
Long-term debt
  $ 145,360     $ 1,349     $ 139,885     $ 2,543     $ 1,583  
Expected interest on debt
    24,547       9,294       14,676       466       111  
Leases — operating
    751       261       481       9        
FIN 48
    456       456                    
Commissions
    3,276       167       1,200       1,623       286  
Citrus purchase contracts
    21,217       15,649       5,568              
Retirement benefits
    5,737       468       788       788       3,693  
Fixed Asset additions
    523       523                    
Consulting contracts
    793       700       93              
 
                             
 
                                       
Total
  $ 202,660     $ 28,867     $ 162,691     $ 5,429     $ 5,673  
 
                             
Critical Accounting Policies and Estimates
The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“Interpretation No. 48”), on September 1, 2007. At September 1, 2007, the Company had $441 thousand of potential tax exposure related to uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense and classifies such interest and penalties in the liability for uncertain tax positions. As of December 31, 2007, the Company had approximately $15,000 accrued for the payment of interest and penalties related to uncertain tax positions. The tax years ended August 31, 2005 and August 31, 2006 remain open to examination by the major taxing jurisdictions to which the Company is subject.
As an agricultural credit cooperative, Farm Credit of Southwest Florida is owned by the member-borrowers who purchase stock/participation certificates in the cooperative. Allocations of patronage are made to members on an annual basis according to the proportionate amount of interest paid by the member. Allocations are made in cash and non cash participation certificates. The Company has recorded the cash allocations as received as a reduction of interest expense. Non cash patronage receivables of $854 thousand have been included as other income in the accompanying condensed consolidated statements of operations for the three months ended December 31, 2007. Such amounts relate to cumulative non cash allocations which are considered by management to have both a qualitatively and quantitatively immaterial effect on any prior period.
Notwithstanding the above, there have been no substantial changes in the Company’s policies regarding critical accounting issues or estimates since the Company’s last annual report on form 10-K.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Reference is made to the discussion under Part II, Item 7A “Quantitative and Qualitative Disclosures about Market Risk” in the company’s 2007 Annual Report on Form 10-K for the fiscal year ended August 31, 2007. There are no material changes since the Company’s disclosure of this item on its last annual report on Form 10-K.

 

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ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, referenced herein as the Exchange Act. These disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company carried out, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures performed pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as amended. Based on their evaluation at the end of fiscal year 2007, the month ended September 30, 2007, and the three months ended December 31, 2007, the Company’s Chief Executive Officer and its Chief Financial Officer concluded that, as of December 31, 2007, the Company’s disclosure controls and procedures were effective.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of August 31, 2007, September 30, 2007 and December 31, 2007. In making the assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework. Based on this assessment, the Management of Alico, Inc. concluded that as of August 31, 2007, September 30, 2007 and December 31, 2007, the Company’s disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and implemented by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those polices and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with Generally Accepted Accounting Principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Based on our evaluations of the internal controls, we have concluded that as of August 31, 2007, September 30, 2007 and December 31, 2007, the Company maintained effective internal control over financial reporting.
Management’s assessment of the effectiveness of internal control over financial reporting as of August 31, 2007 was audited by McGladrey & Pullen, LLP, an independent registered certified public accounting firm, as stated in their report which was included in Item 9A of the Company’s Form 10-K for the fiscal year ended August 31, 2007.

 

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FORM 10-Q
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
This item is omitted as there are no items to report during this interim period.
ITEM 1A. Risk Factors.
This item is omitted as there were no significant changes regarding risk factors from those disclosed in the Company’s annual report on Form 10-K.
ITEM 2. Unregistered sales of Equity Securities
This item is omitted as there are no items to report during this interim period.
ITEM 3. Defaults Upon Senior Securities.
This item is omitted as there are no items to report during this interim period.
ITEM 4. Submission of Matters to a Vote of Security Holders.
At its annual stockholders meeting held on Friday January 18, 2008, the stockholders elected John R. Alexander, JD Alexander, Robert E. Lee Caswell, Evelyn D’An, Phillip S. Dingle, Gregory T. Mutz, Charles Palmer, Robert J. Viguet, Jr. and Dr. Gordon Walker to serve on the Company’s Board of Directors.
Voting results were as follows:
         
Number of shares issued outstanding and entitled to vote:
    7,363,419  
Shares represented by proxy votes:
    5,006,043  
Representative share of proxy votes:
    67.99 %
                                                 
    For     Withheld     Total votes     Total shares  
 
Directors:
                                               
John R. Alexander
    4,949,028       98.86 %     57,015       1.14 %     5,006,043       7,363,419  
JD Alexander
    4,591,401       91.72 %     414,642       8.28 %     5,006,043       7,363,419  
Robert E. Lee Caswell
    4,948,227       98.85 %     57,816       1.15 %     5,006,043       7,363,419  
Evelyn D’An
    4,924,593       98.37 %     81,450       1.63 %     5,006,043       7,363,419  
Phillip S. Dingle
    4,807,469       96.03 %     198,574       3.97 %     5,006,043       7,363,419  
Gregory T. Mutz
    4,948,075       98.84 %     57,968       1.16 %     5,006,043       7,363,419  
Charles L. Palmer
    4,968,383       99.25 %     37,660       0.75 %     5,006,043       7,363,419  
Baxter G. Troutrnan
    758,432       15.15 %     4,247,611       84.85 %     5,006,043       7,363,419  
Robert J. Viguet, Jr.
    4,867,654       97.24 %     138,389       2.76 %     5,006,043       7,363,419  
Gordon Walker
    4,945,761       98.80 %     60,282       1.20 %     5,006,043       7,363,419  

 

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ITEM 5. Other Information.
This item is omitted as there are no items to report during this interim period.
ITEM 6. Exhibits
     
Exhibit 11
  Computation of Earnings per share.
Exhibit 31.1
  Rule 13a-14(a) certification.
Exhibit 31.2
  Rule 13a-14(a) certification.
Exhibit 32.1
  Section 1350 certification.
Exhibit 32.2
  Section 1350 certification.

 

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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.
ALICO, INC.
(Registrant)
February 15, 2008
John R. Alexander
Chairman
Chief Executive Officer
(Signature)
February 15, 2008
Patrick W. Murphy
Vice President
Chief Financial Officer
(Signature)
February 15, 2008
Jerald R. Koesters
Controller
(Signature)

 

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EXHIBIT INDEX
     
Exhibit 11
  Computation of Earnings per share.
Exhibit 31.1
  Rule 13a-14(a) certification.
Exhibit 31.2
  Rule 13a-14(a) certification.
Exhibit 32.1
  Section 1350 certification.
Exhibit 32.2
  Section 1350 certification.

 

34