Alico - 10-Q quarterly report FY

 

 

 

 

 

 

 

 

 

 

 

The accompanying condensed consolidated financial statements include the accounts of Alico, Inc. (“Alico”) and its wholly owned subsidiaries (collectively referred to as the "Company"), Saddlebag Lake Resorts, Inc. (Saddlebag), Agri-Insurance Company, Ltd. (Agri), Alico-Agri, LLC and Alico Plant World, LLC after elimination of all significant intercompany balances and transactions.

 

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, 2004. 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 May 31, 2005 and the consolidated results of operations for the three and nine month periods ended May 31, 2005 and 2004, and the consolidated cash flows for the nine month periods ended May 31, 2005 and 2004.

 

The basic business of the Company is 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 additional revenue from the prior year's crop totaling $357 thousand in 2005 and $541 thousand in 2004.

 

The results of operations for the stated periods are not necessarily indicative of results to be expected for the full year. Certain items from 2004 have been reclassified to conform to the 2005 presentation.

 

 

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 and the earnings process is complete.

 

 

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 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 May 31, 2005.

 

 

During the quarter ended May 31, 2005, equity investments with a combined cost basis of $1.1 million were determined to be other than temporarily impaired. An adjustment of $267 thousand was made to the cost basis of the securities and was recognized as a reduction in interest and investment income.

The Company was informed on May 25, 2005, by the Florida Department of Agriculture and Consumer Services that citrus canker was confirmed in Alico’s Lake Reedy grove located in Polk County, Florida. Citrus canker is a highly contagious bacterial disease of citrus that causes premature leaf and fruit drop. Citrus canker causes no threat to humans, animals or plant life other than citrus. In order to eradicate the disease, infected and exposed trees within 1900 feet of the canker find must be removed and destroyed in accordance with Florida law. Approximately 150 acres of the 250 acres of citrus trees in the Company’s Lake Reedy Grove have been destroyed. A write-off of $80 thousand consisting of the book value of the trees and fruit inventory costs was taken in May of 2005. The trees were insured, and insurance proceeds are expected to exceed the amount of the write-off.

During June 2005, tissue from an animal from Texas, identified as suspicious in November 2004, retested as positive for bovine spongiform encephalopathy (BSE a/k/a “Mad Cow Disease”). This has caused some foreign countries to ban beef imports from the United States. The incident appears to be isolated and the Company has no reason to believe its beef herd is subject to any risk from this disease.

 

 

The provision for income taxes for the three and nine months ended May 31, 2005 and 2004 is summarized as follows:

 

 

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.

 

 

 

 

 

 

 

 

 

 

 

Interest costs expensed and capitalized was as follows:

 

In June of 2000, Alico formed a wholly owned insurance subsidiary, Agri Insurance Company, Ltd. (Bermuda) ("Agri") in response to the lack of available insurance, both in the traditional commercial insurance markets and governmental sponsored insurance programs, suitable to provide coverages for the increasing number and potential severity of agricultural related events. Such events typically include citrus canker, crop diseases, livestock related maladies and weather. Alico's hoped to prefund its potential exposures related to the referenced events and also to attract new underwriting capital if Agri is successful in profitably underwriting Alico’s own potential risks, as well as similar risks of its historic business partners. Alico utilized its inventory of land and additional contributed capital to bolster the underwriting capacity of Agri.

 

Alico capitalized Agri by contributing real estate located in Lee County, Florida. The real estate was transferred at its historical cost basis. Agri received a determination letter from the Internal Revenue Service (IRS) stating that Agri was exempt from taxation provided that net premium levels, consisting only of premiums with third parties, were below an annual stated level ($350 thousand). Third party premiums have remained below the stated annual level. As the Lee County real estate was sold, substantial gains were generated in Agri, creating permanent book and tax differences.

 

Since receiving the favorable IRS determination letter, certain transactions entered into by other taxpayers under the same IRS Code Section came under scrutiny and criticism by the news media. In response and to provided for the possibility of an IRS challenge, Management has recorded a contingent liability of $17.0 million for income taxes. Management’s decision was in part influenced by perceived changes in the regulatory environment. The Company believes that it can successfully defend any such challenge.  However, because a challenge has been made and there is a possibility that the challenge may be successful, Management has provided for the contingency.

 

 

 

In October 2003, the Internal Revenue Service began an examination of the Company tax returns for the years ended August 31, 2003, 2002, 2001 and 2000, and Agri tax returns for calendar years 2002, 2001 and 2000. Any assessments resulting from the examinations will be currently due and payable. No assessments have been proposed to date. A revenue agent issued a report in May 2004, challenging Agri's tax-exempt status for the years examined; however, the report did not quantify the adjustment or the assessment proposed. Agri responded with a written report that disputes the facts, interpretation of law, and conclusions cited in the Agent’s report. Upon receipt of Agri’s response in July 2004, the Agent has proposed requesting a Technical Advice Memorandum (TAM) from the national office to assist in settling the differences. Currently, discussions are ongoing between the agents and Agri as to the technical requirements and the appropriate scope for the proposed TAM filing. The IRS has not proposed any adjustments to date for Alico. The Company cannot predict what position the IRS will ultimately take with respect to this matter. The Revenue Agent's report regarding Alico could be issued within the current fiscal year.

 

At its meeting on June 10, 2005 the Board of Directors declared a special dividend of $1.00 per share payable to stockholders of record as of June 30, 2005, with payment expected on or around July 15, 2005. Additionally, the Company announced that the Board had authorized the payment of regular quarterly dividends beginning with the end of the Company’s fourth quarter on August 31, 2005. The first such dividend in the amount of $0.25 will be paid to shareholders of record as of September 30, 2005 with payment expected on or around October 15, 2005. Both dividends will be recorded in the fourth quarter of fiscal 2005.

Alico has three reportable segments: citrus, sugarcane, and ranching. The commodities produced by these segments are sold to wholesalers and processors who prepare the products for consumption. The Company's operations are located in Florida.

 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company's most recent annual report. Alico, Inc. evaluates performance based on profit or loss from operations before income taxes. Alico, Inc.'s reportable segments are strategic business units that offer different products. They are managed separately because each segment requires different management techniques, knowledge and skills.

 

The following table presents information for each of the Company's operating segments as of and for the three month and nine months ended May 31, 2005 and 2004:

 

On November 3, 1998, the Company adopted the Alico, Inc., Incentive Equity Plan ("the Incentive Plan") pursuant to which the Board of Directors of the Company may grant options, stock appreciation rights, and/or restricted stock to certain directors and employees. The Incentive Plan authorizes grants of shares or options to purchase up to 650,000 shares of authorized but unissued common stock. Stock options granted have a strike price and vesting schedules which are at the discretion of the Board of Directors and determined on the effective date of the grant. The strike price cannot be less than 50% of the market price.

 

On May 31, 2005, there were 16,371 shares exercisable and 292,844 shares available for grant.

 

Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123, the Company’s net income would have changed to the proforma amounts indicated below: