ALCO

ALICO, INC. 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended May 31, 2006, and the nine-month period ended May 31, 2006. Alico, Inc. is an agricultural company based in Florida with operations in citrus, sugarcane, sod, cattle, and real estate. The company recently acquired Bowen Brothers Fruit, LLC, to enhance marketing and harvesting capabilities. Operations are seasonal and subject to natural phenomena, including significant impacts from Hurricane Wilma and citrus canker.

Key Financial Metrics

Note: Working capital calculated as Current Assets ($109,322) minus Current Liabilities ($20,833).

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 79.6% for the quarter and 35.6% for the nine-month period compared to the prior year, driven primarily by a surge in Citrus revenue ($28.3M vs. $10.2M for the quarter) due to higher market prices offsetting lower volumes.
• Profitability: Net income for the nine months ended May 31, 2006, rose to $6.4 million from $3.6 million in the prior year. This increase was largely due to a $4.4 million net profit on the sale of real estate and higher interest/investment income ($8.1M vs. $2.7M), which offset a $2.8 million casualty loss from Hurricane Wilma.
• Operational Losses: Income from operations for the nine-month period turned negative ($-169k) compared to a profit of $4.1 million in the prior year, primarily due to the casualty loss and decreased rock & sand royalties following the sale of a major mine site.
• Acquisitions: The company acquired Bowen Brothers Fruit, LLC for $1.9 million in February 2006. The subsidiary generated $25.5 million in revenue and expenses from acquisition to May 31, 2006.

Guidance, Outlook, and Risks

• Outlook: Management expects continued profitability from agricultural operations. Citrus profits are expected to exceed prior year levels due to price increases, despite a smaller crop. Cattle profits are expected to be lower than the prior year due to reduced inventory from strategic sales in 2005.
• Dividends: The Board declared a quarterly dividend of $0.275 per share (increased from $0.25) payable in October 2006.
• IRS Contingency (Critical Risk): The IRS is examining tax returns for years 2000-2004, challenging the tax-exempt status of the subsidiary Agri Insurance Company, Ltd. Proposed adjustments could result in additional taxable income ranging from $0.3 million to over $76 million depending on the specific IRS position upheld. The company has recorded a $17.0 million contingent liability but plans to defend vigorously.
• Internal Controls: The company disclosed a material weakness in internal control over financial reporting related to a lack of qualified personnel and ineffective monitoring of journal entries. While remediation is underway, controls were deemed ineffective as of May 31, 2006.
• Real Estate: The company holds significant deferred revenue ($43.7 million) related to commercial real estate sales subject to mortgage notes receivable.

Investor Verification Checklist

• IRS Dispute Resolution: Monitor the status of the IRS examination regarding Agri Insurance Company, Ltd., as the potential tax liability is material and unquantified in terms of final assessment.
• Citrus Volume vs. Price: Verify if the high citrus prices ($7.20/box) can be sustained to offset the reduced harvest volume (estimated 3.2M boxes vs. 4.0M boxes prior year).
• Internal Control Remediation: Track the implementation and testing of new accounting personnel and software to ensure the material weakness is resolved before the next audit.
• Real Estate Sales: Confirm the closing status of the pending $75.5 million Lee County property sale, which is subject to contingencies.
• Debt Covenants: Review compliance with the $175 million credit facility covenants, particularly net worth and coverage ratios, given the recent casualty losses.