Alico - 10-K annual report

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Exact name of registrant as specified in its charter)

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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Title of class

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 such registrant was required to file such reports), and (2) has been subject to such filings requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act)

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 or Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K.

As of October 31, 2005 there were 7,368,612 shares of stock outstanding and the aggregate market value (based upon the average bid and asked price, as quoted on the NASDAQ) of the common stock held by non-affiliates was approximately $168,455,315.

The Company's land is managed for multiple uses wherever possible. For example, cattle ranching, forestry and land leased for farming, grazing, recreation and oil exploration utilize the same acreage in some instances.

The Company is not in the retail land sales and development business, except through its wholly owned subsidiary, Saddlebag Lake Resorts, Inc. However, it does from time to time sell properties which, in the judgment of Management and the Board of Directors, are surplus to the Company's primary operations. Additionally, the Company’s wholly owned subsidiary, Alico-Agri, Ltd., engages in bulk land sales.

For further discussion of the relative importance of the various segments of the Company's operations, including financial information regarding revenues, operating profits and assets attributable to each major segment of the Company's business, see Note 13 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this document.

The Company has four wholly owned subsidiaries: Saddlebag Lake Resorts, Inc. ("Saddlebag"), Agri-Insurance Company, Ltd. ("Agri"), Alico-Agri, Ltd. (“Alico-Agri”), and Alico Plant World, LLC (“Plant World”).

 

 

Saddlebag has been active in the subdividing, development and sale of real estate since its inception in 1971. Saddlebag has two subdivisions near Frostproof, Florida that have been developed and are actively marketing lots. One of the subdivisions has sold all of its units, and approximately 95% of the lots in the second development have been sold.

Agri, formed during fiscal 2000, was created to write crop insurance against catastrophic losses due to weather and disease. Independent third party actuaries compute premiums and coverage amounts for policies issued by Agri.

Premiums for indemnities quoted are set by independent actuaries/underwriters hired by Agri in Bermuda based on underwriting considerations established by them. Premiums vary depending upon the size of the property, its age and revenue-producing history, as well as the proximity of the insured property to known disease-prone areas or other insured hazards.

Agri provided catastrophic business interruption insurance for Ben Hill Griffin, Inc. (“Griffin”) during fiscal 2003, 2002 and 2001. The total coverage under the policy was $3.5 million, $3.2 million and $3.2 million for the 2003, 2002 and 2001 calendar years, respectively. Each policy term was one year expiring in December. The premiums charged under this policy were $138 thousand, $110 thousand and $104 thousand for 2003, 2002 and 2001, respectively.

Agri provided coverage for Tri-County, LLC, a subsidiary of Atlantic Blue Trust, Inc., the holder of approximately 47.4% of the Company’s common stock, in fiscal year 2004. The coverage term was from August 2004 to July 2005. Total coverage under the policy was $2.7 million and the premium collected was $45 thousand.

Additionally, Agri directly underwrote catastrophic business interruption coverage for its parent company, Alico, Inc., insuring all but two of Alico’s citrus groves during fiscal 2005, 2004, 2003 and 2002. The total coverage under the policy was $34 million, $28.5 million, $13.6 million and $12.7 million for the fiscal years 2005, 2004, 2003 and 2002, respectively. Premiums charged for the policy were $1.5 million, $1.1 million, $0.9 million and $0.8 million during fiscal years 2005, 2004, 2003 and 2002, respectively. The current policy expires in August 2006. Alico’s remaining two groves were insured by Agri during calendar years 2004 and 2003. The coverage provided under this policy was $3.7 million and $20. million for calendar years 2004 and 2003, respectively, and the premium charged was $98 thousand and $119 thousand during the 2004 and 2003 calendar years, respectively.

Alico-Agri, Ltd. was formed during fiscal 2003 to manage the real estate holdings of Agri. The partnership allows Alico to provide management and administrative services so that Agri can focus on insurance issues. Agri transferred all of its property holdings and the related contracts to Alico-Agri for a 99% partnership interest. Alico, the managing partner, transferred cash for a 1% interest in the partnership.

In September 2004, the Company, through Alico-Agri, purchased the assets of La Belle Plant World, Inc. a wholesale grower and shipper of vegetable transplants to commercial farmers. The purchase price was $4.9 million for the land, office building, greenhouses and associated equipment. Alico Plant World, LLC was set up as a wholly owned subsidiary of Alico-Agri, Ltd. Plant World was purchased for the purpose of diversifying Alico’s agricultural operations and to leverage Alico’s existing relationships with the farming community.

The financial results of the operation of these subsidiaries are consolidated with those of the Company. Intercompany activities and balances are eliminated in consolidation. (See Note 1 of the Notes to the Consolidated Financial Statements.)

The Company has three reportable segments - Citrus, Ranch and Sugarcane and Sod. Results of the Company’s sod operations are consolidated with sugarcane, because they are not individually significant, they are located within the sugarcane complex, and they share common management and employees. For financial information about each segment, including revenue, profit (loss), and total assets for the past three years, please see Note 13 of the Notes to the Consolidated Financial Statements.

The Company’s cattle operation, located in Hendry and Collier Counties, Florida, is engaged primarily in the production of beef cattle and the raising of replacement heifers. The breeding herd consists of approximately 13,500 cows, bulls and replacement heifers. Approximately 56% of the herd is from one to five years old, while the remaining 44% are at least six years old. The Company primarily sells to packing and processing plants in the United States. The Company also sells cattle through local livestock auction markets and to contract cattle buyers in the United States. These buyers provide ready markets for the Company's cattle. In the opinion of Management, the loss of any one or a few of these plants and/or buyers would not have a material adverse effect on the Company's cattle operation. Subject to prevailing market conditions, the Company may hedge its beef inventory by entering into cattle futures contracts to reduce exposure to changes in market prices.

 

 

 

The Company had 500 acres of sod in production during the 2005, 2004 and 2003 fiscal years. The company harvested approximately 6.1 million, 17.2 million and 9.5 million square feet of sod in fiscal year 2005, 2004 and 2003, respectively. The Company is currently developing an additional 500 acres of sod. The Company entered into an agreement in fiscal year 2005 with a United States sod wholesaler to market its crop.

Prior to July 2005, the Company leased a portion of its property in Lee County, Florida to CSR America, Inc. of West Palm Beach, Florida for the mining and production of rock, aggregate, sand, baserock and other road building and construction materials.

Royalties which the company received for these products was based on a percentage of the F.O.B. plant sales price. The Company sold the property where the mines were located in July 2005 and is currently evaluating other properties suitable for mining.

In September 2004, in order to diversify Alico’s agricultural operations and to leverage Alico’s existing relationships with the farming community, the Company formed a subsidiary, Alico Plant World and purchased the assets of a wholesale grower and shipper of commercial vegetable transplants to commercial farmers. Plant World’s infrastructure covers approximately 50 acres of land. During fiscal year 2005, Plant World shipped approximately 69.9 million vegetable transplants to various farmers in several states.

 

A small percentage of the Company's properties are classified as timberlands. The principal forest products sold by the Company are sabal palms and other horticultural commodities. These products are sold to landscaping companies in Florida. The Company does not incur any of the harvesting expenses.

Certain parcels of the lands, from which the timber has been removed, are being converted to semi-improved pasture and other uses.

The Company rents land to others on a tenant-at-will basis, for grazing, farming and recreational uses. Although the income is not significant when compared to overall gross income, it does help to offset the expense of carrying these properties. The Company has developed additional land to lease for farming.

There were no significant changes in the method of rental for these purposes during the past fiscal year.

Since the inception of Saddlebag in 1971, the Company has been active in subdividing, developing and selling of real estate. Saddlebag has two subdivisions near Frostproof, Florida that have been developed and are actively marketing lots. One of the subdivisions has sold all of its units, and approximately 95% of the lots in the second development have been sold.

As indicated, the Company is primarily engaged in a limited number of agricultural activities, all of which are in highly competitive markets. For instance, citrus is grown in foreign countries and several states, the most notable of which are: Brazil, Florida, California, and Texas. Beef cattle are produced throughout the United States and domestic beef sales also compete with imported beef. Sugarcane products are imported from foreign countries. Sod is produced throughout the United States, as are vegetable transplants. Forest and rock products are produced in most parts of the United States. Leasing of land is also widespread.

The Company's share of the United States market for citrus, cattle, sugarcane, sod, vegetable transplants and forest products is less than 3%.

The Company's operations are subject to various federal, state and local laws regulating the discharge of materials into the environment. Management believes the Company is in compliance with all such rules and such compliance has not had a material effect upon capital expenditures, earnings or the Company’s competitive position.

While compliance with environmental regulations has not had a material economic effect on the Company's operations, executive officers are required to spend a considerable amount of time monitoring these matters. In addition, there are ongoing costs incurred in complying with permitting and reporting requirements.

As with any agribusiness enterprise, the Company's business operations are predominantly seasonal in nature. The harvest and sale of citrus fruit generally occurs from October to June. Sugarcane is harvested during the first, second and third quarters. Vegetable transplant sales occur primarily in the first, second and third quarters. Other segments of the Company's business such as its cattle and sod sales, and its timber, mining and leasing operations, tend to be more recurring than seasonal in nature.

Management believes that the Company will be able to meet its working capital requirements for the foreseeable future with internally generated funds. Additionally, the Company has credit commitments that provide for revolving credit that is available for the Company's general use. Raw materials needed to propagate the various crops grown by the Company are readily available from local sources.

The Company is an electronic filer with the SEC and these reports are available through the SEC internet site (http:www.sec.gov), and through the Company’s website as soon as reasonably practicable after filing with the SEC. Copies of documents filed with the SEC are also available free of charge upon request.

 

At August 31, 2005, the Company owned a total of 136,081 acres of land located in four counties in Florida. Acreage in each county and the primary classification with respect to the present use of these properties is shown in the following table:

 

 

Of the above lands, the Company utilizes approximately 21,000 acres of improved pasture plus approximately 49,000 acres of semi improved, native pasture and fallow lands for cattle production. Much of the land is also leased for multi-purpose use such as cattle grazing, oil exploration, agriculture and recreation.

From the inception of the Company's initial development program in 1948, the goal has been to develop the lands for their most profitable use. Prior to implementation of the development program, detailed studies were made of the properties focusing on soil capabilities, topography, transportation, availability of markets and the climatic characteristics of each of the tracts. Based on these and later studies, the use of each tract was determined. Management believes that the lands are suitable for agricultural, residential and commercial uses. However, since the Company is primarily engaged in agricultural activities, some of the lands are considered surplus to its needs for this purpose and, as indicated under Item 1 of this report, sales of such surplus property are made from time to time.

Management believes that each of the major agricultural programs is adequately supported by equipment, buildings, fences, irrigation systems and other amenities required for the operation of the projects.

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On June 10, 2005 the Company held its annual meeting of stockholders. At the meeting, the Company’s stockholders voted to elect the following persons to the Company’s Board of Directors. Each was named as a director nominee in the Company’s proxy statement dated as of May 10, 2005. These elected nominees were: John R. Alexander, Robert E. Lee Caswell, Evelyn D’An, Phillip S. Dingle, Gregory T. Mutz, Charles Palmer, Baxter G. Troutman and Gordon Walker. At the meeting Alico stockholders also voted to approve the Director’s Stock Compensation Plan, allowing eligible Directors to receive their Directors’ fees in Company stock. The results of the votes were as follows:

 

 

The common stock of Alico, Inc. is traded over-the-counter on the NASDAQ National Market System under the symbol ALCO. The high and low prices, by fiscal quarter, during the years ended August 31, 2005 and 2004 are presented below:

As of November 1, 2005, there were approximately 473 holders of record of the Company’s Common Stock as reported by the Company’s Transfer Agent.

During the last three fiscal years the dividends were as follows:

At the Board of Directors meeting held June 10, 2005, the Board declared a dividend of $1.00 per share payable to stockholders of record as of June 30, 2005 with payment to be made on July 15, 2005. Additionally, the Board changed the payment of dividends from an annual to a quarterly basis and declared a quarterly dividend of $.25 per share payable to all stockholders of record as of September 30, 2005, with payment to be made on October 15, 2005. At the Board of Directors meeting held September 30, 2005, the Board declared a quarterly dividend of $0.25 per share payable to stockholders of record as of December 31, 2005, with payment expected on or about January 15, 2006. Dividends are paid at the discretion of the Company's Board of Directors. The Company foresees no change in its ability to pay dividends in the immediate future. Nevertheless, there is no assurance that dividends will be paid in the future since they are dependent upon earnings, the financial condition of the Company, and other factors.

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, 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 our 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, should, believe, estimate, may, intend, expect, 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 extent than indicated.

The following discussion focuses on the results of operations and the financial condition of the Company. This section should be read in conjunction with the consolidated financial statements and notes.

The Company had cash and marketable securities of $84.2 million at August 31, 2005, compared with $79.9 million at August 31, 2004. Working capital was $111.2 million at August 31, 2005 and $115.8 million at August 31, 2004. Management believes that the Company will be able to meet its working capital requirements for the foreseeable future with internally generated funds.

Cash outlay for land, equipment, buildings, and other improvements totaled $12.9 million during fiscal year 2005, compared to $7.3 million during fiscal year 2004 and $7.3 million during fiscal year 2003, respectively. Land preparation for citrus re-development and capital maintenance continued in fiscal year 2005, as did expenditures for replacement equipment and raising breeding cattle. In September 2004, the Company, through Alico-Agri, purchased the assets of La Belle Plant World, Inc. a wholesale grower and shipper of commercial vegetable transplants to commercial farmers. The purchase price was $4.9 million for the land, office building, greenhouses and associated equipment. An additional $1.1 million was spent to refurbish the property in fiscal year 2005.

The Company, through Agri, supplied catastrophic business interruption coverage for Tri-County, LLC, a subsidiary of Atlantic Blue Trust, Inc., the holder of approximately 47.4% of the Company’s common stock. Total coverage under the policy was $2.7 million. This represents the only underwriting exposure at August 31, 2005. Tri-County LLC discovered citrus canker in their groves in 2005, requiring the total destruction of the majority of their citrus trees. Agri accrued a loss reserve in fiscal year 2005 equal to the total potential exposure under the policy for this claim of $1.4 million.

The sale of a Lee County parcel closed in escrow during July 2005. The sales price was $62.9 million consisting of $6.2 million in cash at closing with the balance held as a 2.5% mortgage note receivable of $56.7 million payable in four equal principal installments together with accrued interest annually for the next four years. Both the cash and mortgage note were placed in escrow to allow for the possibility of like-kind exchanges. In October 2005, the Company exchanged a portion of the escrowed funds for a $9.2 million parcel of property in Polk County, Florida. The Company has identified and entered into agreements to acquire several other parcels as candidates for exchange, and should they close, the escrowed funds will be used exclusively for like-kind exchanges. However, the agreements are subject to various contingencies, and there is no assurance that they will close. To qualify for like-kind exchange treatment, the identified property acquisitions must occur on or before January 2006.

Another sale in Lee County is expected to close in fiscal year 2007. This contract is for a gross sales price of $75.5 million, consisting of $7.6 million in cash at closing with the balance payable as a 2.5% mortgage note receivable of $67.9 million. The Company is exploring its options under the contract, including the possibility of a like-kind exchange. The agreement is subject to various contingencies and there is no assurance that it will close within the time period stated.

In March 2005, the Company entered into a contract to sell approximately 280 acres of citrus grove land located south of Labelle, Florida in Hendry County for $5.6 million. The transaction is expected to close in fiscal year 2006. The Company will retain operating rights to the grove until residential development begins.

Gross profits from citrus operations are expected to decrease in fiscal year 2006 when compared to fiscal year 2005. Due to increased citrus canker discoveries, hurricane damage, and real estate development in Florida, the Florida citrus crop is forecast to be much smaller than the previous five year average. The smaller crop should cause the price of citrus products to increase. However, due primarily to the damages sustained during the hurricane, consisting of the crop loss described above, citrus profits are expected to be significantly less than their fiscal year 2005 levels.

Management expects sugarcane operations to post a loss in fiscal year 2006, due to the damages experienced in the hurricane. The Company’s cattle operations in fiscal year 2006 are expected to remain profitable but at lower levels than in fiscal year 2005. To take advantage of favorable market conditions in fiscal year 2005, the Company elected to sell a portion of its calves instead of delivering them to feedlots for later sales. This election caused beef cattle inventory to decrease at August 31, 2005 compared to the prior year and will ultimately result in less units available for sale in fiscal year 2006 compared to fiscal year 2005.

Royalties from rock and sand products will decrease significantly if not cease altogether in fiscal year 2006. The Lee County property on which the mining operations were located was sold in fiscal year 2005. The Company is currently exploring sites suitable for rock and sand mining.

 

In October 2003 the IRS began an examination of the Company tax returns for the fiscal years ended August 31, 2004, 2003, 2002, 2001 and 2000, and Agri tax returns for calendar years 2003, 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 that challenged Agri’s tax exempt status for the years examined; however, the report did not quantify the adjustment or 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 August 31, 2005 the Company had credit commitments that provided for revolving credit of up to $44.0 million, of which $7.7 million was available for the Company's general use (see Note 6 of Notes to consolidated financial statements).

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. Alico is required to reduce the line of credit 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 line of credit is secured by a first 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 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.

A copy of the Credit Facility is included as Exhibits 10.01 & 10.02 to the Company’s Form 8-K dated October 11, 2005, and such Exhibits are incorporated by references.

Operating revenues for fiscal year 2005 increased compared with fiscal year 2004. An increase in revenues from agricultural activities (discussed separately below) was the most significant factor causing the increase.

Operating revenues for fiscal year 2004 increased compared with fiscal year 2003. Increases in revenues from rock and sand royalties and from agricultural activities were the most significant factors causing the increase.

Income from operations was higher in fiscal year 2004 than fiscal year 2003 ($6.7 million in fiscal year 2004 vs. $4.7 million in fiscal year 2003). The increase in income was primarily due to increased royalty income from rock and sand products mined from the Company’s Lee County property. Mining activity increased due to continued development around southwest Florida.

Interest and investment income is generated principally from investments in marketable equity securities, corporate and municipal bonds, mutual funds, U.S. Treasury securities and mortgages held on real estate sold on the installment basis. Realized investment earnings were reinvested throughout fiscal years 2005, 2004 and 2003, increasing investment levels during each year.

Interest and investment income increased in fiscal year 2005 when compared with fiscal year 2004 ($4.4 million vs. $2.5 million in fiscal year 2005 and 2004, respectively). The increase was caused by an increase in investment level in fiscal year 2005 when compared with fiscal year 2004 ($70.8 million at August 31, 2005 vs. $55.6 million at August 31, 2004), coupled with improved conditions in the financial markets and higher interest rates. The investment levels increased due to the reinvestment of realized investment earnings, together with additional invested capital.

Interest and investment income increased in fiscal year 2004 when compared with fiscal year 2003 ($2.5 million vs. $1.2 million in fiscal year 2004 and 2003, respectively). The increase was caused by an increase in investment level in fiscal year 2004 when compared with fiscal year 2003 ($55.6 million at August 31, 2004 vs. $38.8 million at August 31, 2003), coupled with improved conditions in the financial markets. The investment levels increased due to the reinvestment of realized investment earnings, together with additional invested capital provided by proceeds from the sale of bulk excess real estate in December of 2003.

Interest expense increased during fiscal year 2005 when compared to fiscal year 2004 due to higher interest rates. The majority of the Company’s borrowings are based on the London interbank offered rate (LIBOR). The LIBOR increased by approximately 1% during the year to 3.69%.

Interest expense declined during fiscal year 2004 when compared to fiscal year 2003. The Company was able to pay down principal on higher interest notes using its existing revolving credit facility, effectively lowering its overall interest rate.

 

Gross profit was $6.2 million in fiscal year 2005, $4.1 million in fiscal year 2004, and $4.0 million for fiscal 2003.

Revenue from citrus sales increased 7% during fiscal year 2005 compared with fiscal year 2004 ($26.2 million in fiscal year 2005 vs. $24.5 million in fiscal year 2004). Total field boxes of citrus harvested decreased to 3.9 million in fiscal year 2005 from 4.6 million in fiscal year 2004. A series of three hurricanes struck Florida during August and September of 2004, which caused damage to much of Florida's citrus crop, including the Company’s crops grown in Polk County, Florida.

The crop damages created by the hurricanes caused a reduction in the supply of Florida citrus (150 million boxes in fiscal year 2005 from 242 million boxes in 2004), resulting in improved citrus prices ($6.56 average per box in fiscal year 2005 vs. $5.36 average per box in fiscal year 2004). The improvement in revenue per box is the primary cause of the profitability increase in the Citrus division.

Total citrus expenses declined during fiscal year 2005 ($20.0 million compared with $20.4 million in fiscal years 2005 and 2004, respectively). The decline in expense was primarily due to the decreased number of field boxes harvested in fiscal year 2005 compared with fiscal year 2004 as discussed above.

Citrus canker was discovered in several of the Company’s groves in Hendry and Polk Counties during fiscal year 2005. 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 an effort to eradicate the disease, Florida law requires infected and exposed trees within 1900 feet of the canker find to be removed and destroyed. As a result of the canker discoveries, approximately 940 acres of citrus trees were destroyed. In accordance with the Florida Canker Eradication Program, citrus may not be replanted on the property until it has been determined that the property has been canker-free for two years. Accordingly, the Company is evaluating the properties for their best future use.

Revenue from citrus sales increased 2% during fiscal year 2004, compared to fiscal year 2003 ($24.5 million during fiscal year 2004 vs. $24.1 million during fiscal year 2003). Total field boxes of citrus harvested increased to 4.6 million in fiscal year 2004 from 4.3 million in fiscal year 2003, due to favorable growing conditions. The greater harvest was the primary cause of the increase in revenue.

Total citrus expenses increased during fiscal year 2004 ($20.4 million compared with $20.1 million in fiscal year 2004 and 2003, respectively). The increased expense was primarily due to the increased number of field boxes harvested in fiscal year 2004 compared with fiscal year 2003.

The final returns from citrus pools are not precisely determinable at year-end. Returns are estimated each year based on the most current information available. Differences between the estimates and the final realization of revenues can be significant, and the differences between estimated and final results can be either positive or negative. Revenues collected in excess of prior year and year end estimates were $357 thousand, $728 thousand, and $198 thousand during fiscal years 2005, 2004 and 2003, respectively.

Gross profit for fiscal year 2005 was $0.4 million, compared with $2.7 million in fiscal year 2004 and $3.2 million in fiscal year 2003. The 2005, 2004, and 2003 fiscal year crops yielded approximately 407,000, 465,000 and 523,000 standard tons, respectively. The total number of tons that can be harvested is limited by government imposed quotas. Yields per acre were 40.71, 44.25, and 45.51 for the 2005, 2004 and 2003 fiscal years, respectively.

Sales revenue from sugarcane and sod decreased to $9.7 million in fiscal year 2005 from $12.4 million in the prior fiscal year. The decrease was primarily due to two factors, the reduced number of tons harvested due to quotas as outlined above, and reduced prices ($22.91 per ton average in fiscal year 2005 compared with $25.02 per ton average in fiscal year 2004). The decrease in revenue was the primary reason for the gross profit decrease in fiscal year 2005 when compared with fiscal year 2004.

Due to the decreased number of tons harvested, total expenses in fiscal year 2005 were below fiscal year 2004 total expenses ($9.3 million compared with $9.7 million in fiscal year 2005 and 2004, respectively).

Sales revenue from sugarcane and sod decreased to $12.4 million in fiscal year 2004 from $13.4 million in fiscal year 2003. Due to normal crop rotation and replanting in fiscal year 2004, fewer acres were harvested (11,131 in fiscal 2004 compared with 11,840 in fiscal year 2003). This was the primary cause of the decrease in sales revenue for fiscal year 2004. The reduced acres harvested in fiscal year 2004 also resulted in lower total expenses than in the prior year ($9.7 million in fiscal year 2004 vs. $10.2 million in fiscal year 2003).

The gross profit from ranch operations for fiscal years 2005, 2004 and 2003 was $2.1 million, $1.5 million, and $0.4 million, respectively.

Revenues from cattle sales increased by 14% to $11.0 million in fiscal year 2005, compared to $9.7 million in the previous fiscal year. The increase was due to an increase in the number of cattle sold (13,257 in fiscal year 2005 compared with 10,603 in fiscal year 2004) coupled with increased prices for beef cattle ($0.90 per pound average in fiscal year 2005 compared with $0.82 per pound average in fiscal year 2004). Prices increased as a result of a decrease in the domestic beef supply. In order to take advantage of a favorable marketing opportunity, the Company sold 3,480 calves in lieu of placing the calves into the feedlot. This resulted in the Company selling more cattle in fiscal year 2005 than in the previous year. As a result of the increase in the number of cattle sold in fiscal year 2005, total expenses likewise increased to $8.9 million in fiscal year 2005 from $8.2 million in fiscal year 2004.

Revenues from cattle sales increased by 35% to $9.7 million in fiscal year 2004, compared to $7.2 million in the previous fiscal year. The increase was due to an increase in the number of cattle sold (10,603 in fiscal year 2004 compared with 9,062 in fiscal year 2003), coupled with increased prices for beef cattle. More animals of the age and size required by meat packers were available for sale in fiscal year 2004 than in fiscal year 2003 due to the timing of placements into western feedlots. Prices increased as a result of a decrease in the domestic beef supply. As a result of the increase in the number of cattle sold in fiscal year 2004, costs increased to $8.2 million in fiscal year 2004 from $6.8 million in fiscal year 2003.

The Company's cattle marketing activities include retention of calves in western feedlots, contract and auction sales, and risk management contracts.

In September 2004, in order to diversify Alico’s agricultural operations and leverage its existing relationships within the farming community, the Company formed a subsidiary, Alico Plant World, LLC and purchased the assets of a wholesale grower and shipper of vegetable transplants to commercial farmers. During fiscal year 2005, Plant World shipped approximately 69.9 million transplants to various farmers in several states. Plant World generated revenue of $2.6 million, incurred costs and expenses of $2.1 million and recorded a net profit before taxes of $0.5 million.

Profits from the sale of sabal palms and other horticultural items utilized for landscaping purposes, during fiscal year 2005 were $0.2 million compared with $0.4 million and $0.3 million for fiscal years 2004 and 2003, respectively.

Returns from rock products and sand were $3.0 million for fiscal year 2005, $3.4 million for 2004 and $2.2 million during 2003. Royalties from rock and sand products will decrease significantly if not cease altogether in fiscal year 2006. The Lee County property on which the mining operations were located was sold in fiscal year 2005. The Company is currently exploring sites suitable for rock and sand mining.

Revenues from land rentals were $1.9 million in fiscal year 2005, as compared with $1.2 million in fiscal year 2004 and $1.0 million for fiscal year 2003. During fiscal year 2005 and 2004, in response to increased prices and demand for Southwest Florida real estate, the Company raised its rental rates for properties. The fiscal year 2004 improvement is primarily due to an increase in the amount of land leased for farming.

A series of three hurricanes struck Florida during August and September of 2004, which caused damage to the Company’s citrus crops grown in Polk County, Florida and the Company’s sugarcane crop grown in Hendry County, Florida. Additionally, citrus canker was discovered in several of the Company’s groves in Hendry and Polk Counties during fiscal year 2005. As a result of the canker discoveries, approximately 940 acres of citrus trees were destroyed. The resulting loss of $1.9 million, consisting of inventoried costs and the basis of trees and crops destroyed net of insurance proceeds expected, was recorded in fiscal year 2005.

Profit from retail land sales made through Saddlebag were $482 thousand in fiscal year 2005, $153 thousand in fiscal year 2004 and $32 thousand during fiscal year 2003. Profit from bulk land sales were $5.5 million in fiscal year 2005, $20.3 million in fiscal year 2004 and $15.0 million in fiscal year 2003.

As discussed below, a sales contract is in place for all of the remaining Lee County property with the closing expected within the next two fiscal years. The total sales price of the contract is $75.5 million. The Board of Directors has not decided how these funds will be used if received.

The Company is continuing its marketing and permitting activities for its land that surrounds Florida Gulf Coast University in Lee County, Florida. There is a sales contract in place for all this property, totaling $75.5 million. The agreement is in the due diligence stage with the closing date expected within the next two fiscal years. The contract is subject to various contingencies and there is no assurance that it will close.

The Company formed Agri-Insurance Company, Ltd. (Agri) a wholly owned subsidiary, during July of 2000. The insurance company was initially capitalized by transferring cash and approximately 3,000 acres of the Lee County property. Through Agri, the Company has been able to underwrite previously uninsurable risk related to catastrophic crop and other losses. The coverages currently underwritten by Agri will indemnify its insureds for the loss of the revenue stream resulting from a catastrophic event.

Premiums for quoted coverages are set by independent actuaries/underwriters hired by Agri in Bermuda based on underwriting considerations established by them. Premiums vary depending upon the size of the property, its age and revenue-producing history as well as the proximity of the insured property to known disease-prone areas or other insured hazards.

Agri underwrote a limited amount of coverage for Ben Hill Griffin, Inc. during fiscal years 2001 - 2004. Since August 2002, Agri has insured the Alico, Inc. citrus groves. Due to Agri's limited operating history, it would be difficult to speculate about the impact that Agri could have on the Company's financial position, results of operations and liquidity in future periods.

In 2004, Agri wrote an insurance policy for Tri-County Grove, LLC, a subsidiary of Atlantic Blue Trust, Inc., the holder of approximately 47.4% of the Company’s common stock. The coverage term was from August 2004 to July 2005. Total coverage under the policy was $2.7 million and the premium charged was $45 thousand. Tri-County Grove, LLC discovered citrus canker in their groves in 2005, requiring the total destruction of the majority of their citrus trees. Agri accrued a loss reserve in fiscal year 2005, equal to the total potential exposure under the policy for this claim of $1.4 million.

During the third quarter of fiscal year 2003, the Company entered into a limited partnership with Agri to manage Agri's real estate holdings. Agri transferred all of the Lee County property and associated sales contracts to the limited partnership, Alico-Agri, Ltd (Alico-Agri), in return for a 99% partnership interest. Alico, Inc. transferred $1.2 million cash for a 1% interest. The creation of the partnership allows Agri to concentrate solely on insurance matters while utilizing Alico's knowledge of real estate management.

 

The sale of a Lee County parcel closed in escrow during July 2005. The sales price was $62.9 million consisting of $6.2 million in cash at closing with the balance held as a 2.5% mortgage note receivable of $56.7 million payable in four equal principal installments together with accrued interest annually for the next four years. Both the cash and mortgage note were placed in escrow to allow for the possibility of like-kind exchanges. In October 2005, the Company exchanged a portion of the escrowed funds for a $9.2 million parcel of property in Polk County, Florida. The Company has identified and entered into agreements to acquire several other parcels as candidates for exchange, and should they close, the escrowed funds will be used exclusively for like-kind exchanges. However, the agreements are subject to various contingencies, and there is no assurance that they will close. To qualify for like-kind exchange treatment, the identified property acquisitions must occur on or before January 2006.

In March 2005, the Company entered into a contract to sell approximately 280 acres of citrus grove land located south of Labelle, Florida in Hendry County for $5.6 million. The transaction is expected to close in fiscal 2006. The Company will retain operating rights to the grove until development begins.

During the second quarter of fiscal year 2004, the Company, through Alico-Agri, completed the sale of 244 acres in Lee County, Florida. The sales price was $30.9 million and resulted in a gain of $19.7 million. The sale generated $20.9 million cash with the remaining $10.0 million held in the form of a mortgage note receivable, which was collected in December 2004.

During the fourth quarter of fiscal year 2003, the Company sold 358 acres in Hendry County, Florida for $669 thousand. The sale generated a gain of $335 thousand. Additionally, the Company sold 266 acres in Polk County, Florida to the State of Florida for $617 thousand, generating a gain of $612 thousand.

In the fourth quarter of fiscal year 2003, the Company, through Alico-Agri, completed the sale of 313 acres in Lee County, Florida. The sales price was $9.7 million and resulted in a gain of $8.7 million. Additionally, Alico-Agri completed the sale of 40 acres in Lee County, Florida. The sales price of the property was $5.5 million and generated a gain of $4.7 million.

John R. Alexander, Robert E. Lee Caswell, Evelyn D’An, Phillip S. Dingle, Gregory T. Mutz, Charles Palmer, Baxter G. Troutman, and Dr. Gordon Walker were elected by the stockholders to serve as directors of the Corporation at its annual stockholders meeting held June 10, 2005. Additionally, the stockholders approved the Alico, Inc. Director Stock Compensation Plan.

At the annual meeting of the Board of Directors following the Stockholders meeting, the Board re-elected Mr. Alexander as Chairman, President and Chief Executive Officer and Mr. Gregory T. Mutz as Lead Director. Mr. Alexander had been appointed by the Board to serve as Acting Chief Executive Officer beginning March 1, 2005, following the retirement of W.

 

 

Bernard Lester on February 28, 2005. Mr. Alexander previously held the office of Chief Executive Officer of the Company between February and June of 2004 when he voluntarily relinquished that position and nominated Mr. Lester to replace him. The Board also re-elected Patrick W. Murphy as Chief Financial Officer. Mr. Murphy has served as Chief Financial Officer since April 15, 2005, following the resignation of L. Craig Simmons.

 

On February 1, 2005, directors Richard C. Ackert, William L. Barton, Larry A. Carter, Stephen M. Mulready and Thomas E. Oakley (the "Independent Directors") resigned as directors of the board of Alico and stated that they would not run for re-election at the Company’s next annual meeting of stockholders. The resignations caused the Company to be out of compliance with the independent director, compensation committee, nomination committee and audit committee requirements for continued listing on The Nasdaq Stock Market under Marketplace Rules 4350(c)(1), 4350(c)(3), 4350(c)(4)(A) and 4350(d)(2), respectively, and was so notified by the Nasdaq Listing Qualifications Department in writing.

The Company responded with a written plan for compliance and began to solicit and consider qualified Director Nominees.

 

On February 24, 2005, Gregory T. Mutz and Robert E. Lee Caswell were elected to the Company’s Board of Directors.

On April 1, 2005, the Company received a letter from the Listing Qualifications Department of the Nasdaq Stock Market indicating that unless appealed and their determination reversed, Alico's securities would be delisted from the Nasdaq Stock Market. On April 7, 2005, the Company filed a notice of appeal and requested a hearing before a Nasdaq Listing Qualifications Panel to review the Staff’s determination. On April 4, 2005, the Company’s Directors elected Dr. Gordon Walker to the Board of Directors of Alico as an Independent Director. Also on April 4, 2005, the Company accepted the resignation of Mr. J. D. Alexander as a director of the Company.

On April 6, 2005, the Company’s Directors elected Messrs. Charles Palmer and Phillip S. Dingle to the Board of Directors. On April 25, 2005, the Company announced the election of Evelyn D’An to its Board of Directors. Mr. Mutz, Dr. Walker, Mr. Palmer, Mr. Dingle and Ms. D’An have been determined to be Independent Directors.

As a result of the election of these new Independent Directors, the Company was able to reconstitute its Audit Committee and its various other committees requiring the participation of Independent Directors. As a result of such compliance, the Nasdaq Listing Qualifications Panel determined that the delisting notice was moot. The Company’s stock was never delisted, and the Company is now in compliance with all applicable marketplace rules.

In August 2004 Atlantic Blue Trust, Inc., the Company’s largest stockholder, requested that the Company consider a restructuring of the Company. On January 31, 2005, Atlantic Blue Trust, Inc. withdrew its request.

The Company received an unsolicited letter from National Land Partners, LLC expressing the desire to discuss a potential acquisition of Alico by National Land. The Company’s Board of Directors referred the National Land letter to a Special Committee. On December 16, 2004, the special committee along with representatives of Atlantic Blue Trust met with

 

representatives of National Land Partners, LLC. At the conclusion of that meeting, such representatives of Atlantic Blue Trust and its stockholders advised National Land Partners and the Special Committee that neither Atlantic Blue Trust nor any of the holders of Atlantic Blue Trust's stock would be interested in selling the Alico shares held by Atlantic Blue Trust or supporting a sale transaction at the price offered by National Land Partners or even at a substantially higher price. National Land Partners acknowledged that it will not proceed with a transaction to acquire Alico without the support of Atlantic Blue Trust and its stockholders.

Hurricane Wilma, a category three hurricane, swept through southwest Florida in October, 2005, causing extensive damage to the Company’s crops and infrastructure in Collier and Hendry Counties. Preliminary estimates indicate a loss of approximately 28% of the Company’s total citrus crop, 50% of the Company’s sugarcane crop, and 100% of the Company’s vegetable crops. Approximately 83% of the Company’s greenhouses sustained varying levels of damage along with numerous other buildings and structures used to support the Company’s various agribusiness operations in Collier and Hendry Counties. Due to the large amount of rainfall in the area, much of the Company’s property remained under water for weeks after the storm, which may affect the Company’s cattle herd. Insurance proceeds are expected to cover a portion of the losses. The loss related to hurricane Wilma will be recognized in the first quarter of fiscal 2006. The Company is still working to quantify the loss at the time of this filing.

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. Alico is required to reduce the line of credit 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 line of credit is secured by a first 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 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.

A copy of the Credit Facility is included as Exhibits 10.01 & 10.02 to the Company’s Form 8-K dated October 11, 2005, and such Exhibits are incorporated by references.

In October 2005, the Company exchanged a portion of the escrowed funds resulting from the Lee County property sale for a $9.2 million parcel of property in Polk County, Florida. The Company has also identified and expects to enter into agreements to acquire several other parcels as candidates for exchange. Should these agreements close, the escrowed funds will be used exclusively for like-kind exchanges. The agreements are subject to various contingencies and there is no assurance that they will close. To qualify for like-kind exchange treatment, the identified acquisitions must occur by January 2006.

At a Board of Directors meeting held September 30, 2005, the Board declared a quarterly dividend of $0.25 per share payable to stockholders of record as of December 31, 2005, with payment expected on or about January 15, 2006.

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Premiums for coverages quoted are set by independent actuaries/underwriters hired by Agri in Bermuda based on underwriting considerations established by them. Premiums vary depending upon the size of the property, its age and revenue-producing history as well as the proximity of the insured property to known disease-prone areas or other insured hazards.

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The contractual obligations of the Company at August 31, 2005 are set forth in the table below:

 

The preparation of the Company’s financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates the estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes that the estimates and assumptions are reasonable in the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances. The following critical accounting policies have been identified that affect the more significant judgments and estimates used in the preparation of the consolidated financial statements.

The Company records inventory at the lower of cost or net realizable value. Management regularly assesses estimated inventory valuations based on current and forecasted usage of the related commodity and any other relevant factors that affect the net realizable value.

Based on fruit buyers' and processors' advances to growers, stated cash and futures markets combined with experience in the industry, management reviews the reasonableness of the citrus revenue accrual. Adjustments are made throughout the year to these estimates as more current relevant information regarding the citrus market becomes available. Differences between the estimates and the final realization of revenues can be significant, and the differences between estimated and final results can be either positive or negative. Fluctuation in the market prices for citrus fruit has caused the Company to recognize additional revenue from prior years’ crop totaling $357 thousand, $728 thousand, and $198 thousand during fiscal year 2005, 2004, and 2003, respectively.

Income from sugarcane under a pooled agreement is recognized at the time the crop is harvested. Based on the processor’s advance payment, past sugarcane prices and its experience in the industry, management reviews the reasonableness of the sugarcane revenue accrual. Adjustments are made as additional relevant information regarding the sugar market becomes available. Market price changes to the sugar pool have caused the Company to adjust revenue from the prior year’s crop by ($198 thousand), $325 thousand, and $356 thousand during the fiscal year 2005, 2004, and 2003, respectively.

In accordance with Statement of Position 85-3 "Accounting by Agricultural Producers and Agricultural Cooperatives", the cost of growing crops are capitalized into inventory until the time of harvest. Once a given crop is harvested, the related inventoried costs are recognized as a cost of sale to provide an appropriate matching of costs incurred with the related revenue earned.

Alico formed a wholly owned insurance subsidiary, Agri Insurance Company, Ltd. (Bermuda) ("Agri") 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 coverages for the increasing number and potential severity of agricultural related events. Such events include citrus canker, crop diseases, livestock related maladies and weather. Alico’s goal included not only prefunding its potential exposures related to the aforementioned events, but also to attempt to attract new underwriting capital if it is 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 a stated annual level ($350 thousand). Annual third party premiums have remained below the stated 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 for income taxes in the event of an IRS challenge. Management’s decision has been influenced by perceived changes in the regulatory environment. The Company believes that it can successfully defend any such challenge. However, because it is probable that a challenge will be made and that it may possibly be successful, Management has provided for this contingency.

In October 2003 the IRS began an examination of the Company tax returns for the fiscal years ended August 31, 2004, 2003, 2002, 2001 and 2000, and Agri tax returns for calendar years 2003, 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 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.

The table below presents the costs and estimated fair value of the investment portfolio at August 31, 2005:

 

 

Fixed rate securities tend to decline with market rate interest increases. Variable rate securities are generally affected more by general market expectations and conditions. Additionally, the Company has debt with interest rates that vary with the LIBOR. A 1% increase in this rate would impact the Company’s annual interest expense by approximately $363 thousand based on the Company’s outstanding debt under these agreements at August 31, 2005.