Alico - 10-Q quarterly report FY

 

 

The accompanying condensed consolidated financial statements include the accounts of Alico, Inc. (“Alico”) and its wholly owned subsidiaries, Saddlebag Lake Resorts, Inc. (“Saddlebag”), 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 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, 2005. 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 February 28, 2006 and August 31, 2005 and the consolidated results of operations for the three and six month periods ended February 28, 2006 and 2005, and the consolidated cash flows for the six month periods ended February 28, 2006 and 2005.

 

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 $257 thousand for the quarter ended February 28, 2006, $418 thousand for the quarter ended November 30, 2005 and $31 thousand for the quarter ended November 30, 2004.

 

Alico, through its newly formed subsidiary Bowen Brothers Fruit, LLC (Bowen), purchased the assets of Bowen Brothers Fruit Co., Inc. for $1.9 million on February 13, 2006. The purchase was made in order to provide Alico with additional marketing expertise and with the ability to harvest its own fruit crop. Bowen’s operations generated revenues of $5.7 million and expenses of $5.7 million for the period from the date of acquisition to February 28, 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 2005 have been reclassified to conform to the 2006 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.

In October 2005, the Company through Alico-Agri Ltd., purchased 291 acres of lake-front property in Polk County, Florida, for $9.2 million.

In November 2005, the Company sold approximately 280 acres of citrus grove land located south of Labelle, Florida in Hendry County for $5.6 million cash in escrow. The Company will retain operating rights to the grove until residential development begins. The Company is exploring the possibility of a like-kind exchange regarding this transaction. The Company recognized a net profit on the sale of $4.4 million.

 

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.

 

                                                                                                                                           ;                                                                                                                                             Aggregate 

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 February 28, 2006.

 

Net realized gains on the sale of securities for the six months ended February 28, 2006 and 2005 were $3.3 million and $0.5 million, respectively.

During the first six months, Management decided to sell its equity investments and to reinvest in liquid debt securities. As of February 28, 2006, total equity investments had been reduced to $218 thousand.

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. At February 28, 2006 the Company had deferred revenue of $44.6 million related to commercial real estate, which was sold subject to a mortgage note receivable.

Profits from commercial real estate sales are discounted to reflect the market rate of interest where 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. At February 28, 2006, the Company had an imputed interest discount of $2.6 million recorded in mortgages and notes receivable.

 

 

Hurricane Wilma, a category three hurricane swept through southwest Florida in October 2005. The hurricane caused extensive damage to the Company’s crops and infrastructure in Collier and Hendry Counties. During August and September of 2004 a series of three hurricanes struck a portion of the Company’s citrus groves in Polk County Florida.

Crop damages estimated during the first quarter as a result of hurricane Wilma were replaced by actual results as harvests were completed. The Company originally estimated damages to its sugarcane crop at 50% due to water and wind damage. As actual harvests have been completed, the damage was determined to total 14% of the original crop estimate and the casualty loss was adjusted by $2.7 million during the quarter ended February 28, 2006. The Company recognized losses resulting from damages to inventory from the hurricanes as follows: (see also note 15)

The Company records its inventory at the lower of cost or net realizable value. Due to changing market conditions, the Company determined that its inventories for sugarcane and plants in greenhouses had accumulated costs in excess of their estimated net realizable value. The Company recorded losses of $834 and $346 for its sugarcane and plants, during the first quarter of fiscal year 2006, respectively, and $517 and $463, respectively during the six months ended February 28, 2006. The cost bases of other inventories were below their estimated net realizable values at February 28, 2005.

 

The provision for income taxes for the six months ended February 28, 2006 and 2005 is summarized as follows:

 

The Internal Revenue Service is examining the Company’s tax returns for the years ended August 31, 2004, 2003, 2002, 2001 and 2000, and Agri tax returns for calendar years 2003, 2002, 2001 and 2000. The examinations began in October 2003. 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 proposed requesting a Technical Advice Memorandum (TAM) from the national office of the IRS 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 Company cannot predict what position the IRS will ultimately take with respect to this matter.

In October 2005, Alico, Inc. entered into a Credit Facility with a commercial lender. The Credit Facility provides the Company with a $175 million revolving line of credit until August 1, 2010 to be used for general corporate purposes including: (i) the normal operating needs of the Company and its operating divisions, (ii) to refinance existing lines of credit and (iii) to finance the Ginn Receivable (as defined in the Loan Agreement). The terms also allow an annual extension at the lender’s option.

 

Under the Credit Facility, revolving borrowings require quarterly interest payments beginning January 1, 2006 at LIBOR plus a variable rate between 0.8% and 1.5% depending on the Company’s debt ratio. The maximum available credit will be reduced annually by approximately $14 million in August 2006, $31 million in August 2007 and $31 million in August 2008, leaving a remaining balance of $100 million from August 1, 2008 to the note’s maturity at August 1, 2010.

The Credit Facility is partially collateralized by a mortgage on approximately 7,680 acres of agricultural property in Hendry County, Florida and any subsequent real estate acquisitions by the Company obtained with advances under the Credit Facility.

Under the Credit Facility it is an event of default if the Company fails to make the payments required of it or otherwise to fulfill the provisions and covenants applicable to it. In the event of default, the Loan shall bear an increased interest rate of 2% in addition to the then-current rate specified in the Note. Alternatively, in the event of default the lender may, at its option, terminate its revolving credit commitment and require immediate payment of the entire unpaid principal amount of the Loan, accrued interest and all other obligations immediately due and payable. The Company is currently in compliance with all of the covenants and provisions of the agreement.

The Credit Facility also contains numerous restrictive covenants including those requiring the Company to maintain minimum levels of net worth, retain certain Debt, Current and Fixed Charge Coverage Ratios, and set limitations on the extension of loans or additional borrowings by the Company or any subsidiary.

Outstanding debts under the Company’s various loan agreements were as follows at February 28, 2006:

 

Interest costs expensed and capitalized to property, buildings and equipment were as follows:

 8. Other non-current liability:

 

Alico formed a wholly owned insurance subsidiary, Agri Insurance Company, Ltd. (Bermuda) in June of 2000. Agri was formed in response to the lack of insurance availability, both in the traditional commercial insurance markets and governmental sponsored insurance programs, suitable to provide coverage for the increasing number and potential severity of agricultural events. Such events include citrus canker, crop diseases, livestock related maladies and weather. Alico’s goal included not only pre-funding its potential exposures related to the aforementioned events, but also to attempt to attract new underwriting capital if it was successful in profitably underwriting its own potential risks as well as similar risks of its historic business partners.

 

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 remained below the stated annual level. As the Lee County real estate was sold, substantial gains were generated in Agri, creating permanent book/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 reaction, Management has recorded a contingent liability of $17.0 million at February 28, 2006 and August 31, 2005 for income taxes in the event of an IRS challenge. Management’s decision has been influenced by perceived changes in the regulatory environment. Because Management believes it is probable that a challenge will be made and probable that it may be successful as to some of the possible assertions, Management has provided for the contingency.

 

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.

 

 

A regular quarterly dividend of $0.25 per share was paid to stockholders of record as of December 31, 2005 on January 15, 2006. A shareholders meeting held on January 6, 2006, the Board declared a regular quarterly dividend of $0.25 per share payable to shareholders of record as of March 31, 2006 with payment expected on or about April 15, 2006. At its meeting on March 31, 2006 the Board of Directors declared a regular quarterly dividend of $0.25 per share payable to stockholders of record as of June 30, 2006, with payment expected on or around July 15, 2006.

 

Alico has four reportable segments: Citrus groves, citrus purchasing, harvesting and marketing (Bowen Brothers Fruit, LLC), sugarcane and sod, and cattle. Citrus groves and citrus purchasing, harvesting and marketing are consolidated under the caption "citrus" on the Company's Statement of Operations.  The goods and services produced by these segments are sold to wholesalers and processors who prepare the products for consumption. The Company's operations are located in Florida.

 

Alico, through its newly formed subsidiary Bowen Brothers Fruit, LLC (Bowen), purchased the assets of Bowen Brothers Fruit Co., Inc. for $1.9 million on February 13, 2006. The purchase was made in order to provide Alico with additional marketing expertise and with the ability to harvest its own fruit crop. Bowen is a citrus company that is a purchaser, harvester and marketer of citrus fruit.  The revenue and expenses for Bowen are consolidated with the Company's citrus groves on the Statement of Operations.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company's annual report on Form 10K filed for the fiscal year ended August 31, 2005. 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 and services. They are managed separately because each segment requires different management techniques, knowledge and skills.

The following table presents information (unaudited) for each of the Company's operating segments:

 

 

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.

No stock options were issued during the six months ended February 28, 2006 and 2005. Because no stock options were issued during the periods, there was no difference in net income and proforma net income for the six month periods ended February 28, 2006 and 2005.

 

 

Other comprehensive income, arising from market fluctuations in the Company's securities portfolio, was as follows:

 

In May 2005 the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”. SFAS 154 replaces APB No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Changes in Interim Financial Statements”. SFAS No. 154 changes the accounting for, and reporting of, a change in accounting principle. SFAS No. 154 requires retrospective application to the prior period’s financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impractical to do so. SFAS No. 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005. Currently, the Company is not aware of any financial impact that the adoption of this statement will have on its consolidated financial statements.

 

The Company may purchase an additional 20,000 shares pursuant to the approved Director Compensation Plan.

 

Hurricane Wilma caused extensive damage to the Company’s crops and infrastructure in Collier and Hendry Counties. Additionally, canker was confirmed in three groves totaling 420 acres. During August and September of 2004 a series of three hurricanes struck a portion of the Company’s citrus groves in Polk County Florida. The Company recognized (recoveries) losses resulting from damages caused by the hurricanes and canker as follows: