UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended February 28, 2006

or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____ to ____

Commission File Number: 0-261

Alico, Inc.
(Exact name of registrant as specified in its charter)

Florida       59-0906081
(State or other jurisdiction of     (I.R.S. Employer
incorporation or organization)      Identification No.)

P.O. Box 338, LaBelle, FL       33975
(Address of principal executive offices)     (Zip Code)

Registrant's telephone number, including area code: 863-675-2966
 
N/A
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] Yes [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated file [ ] Accelerated filer [X] Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
[ ]Yes [X] No

There were 7,367,369 shares of common stock, par value $1.00 per share, outstanding at April 7, 2006.
1

PART I. FINANCIAL INFORMATION
                 
ITEM 1. FINANCIAL STATEMENTS
                 
                   
ALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands except per share data)
                   
   
Three months ended
 
Six months ended
 
   
February 28,
 
February 28,
 
   
2006
 
2005
 
2006
 
2005
 
Revenue:
                 
    Citrus
 
$            12,766
 
$              9,586
 
$              13,974
 
$            10,465
 
    Sugarcane and sod
   
5,144
   
5,286
   
7,130
   
7,739
 
    Cattle
   
426
   
2,184
   
2,650
   
4,319
 
    Plants, vegetables and trees
   
2,516
   
953
   
3,082
   
1,581
 
    Rock & sand royalties
   
256
   
847
   
492
   
1,727
 
    Oil lease & land rentals
   
376
   
432
   
793
   
908
 
    Retail land sales
   
7
   
110
   
32
   
297
 
                           
        Operating revenue
   
21,491
   
19,398
   
28,153
   
27,036
 
                           
Cost of sales:
                         
    Citrus production, harvesting & marketing
   
10,961
   
8,734
   
11,549
   
8,809
 
    Sugarcane and sod production, harvesting & hauling
   
4,838
   
5,258
   
7,461
   
7,337
 
    Cattle
   
318
   
1,709
   
2,029
   
3,611
 
    Plants, vegetables and trees
   
2,122
   
844
   
2,997
   
1,399
 
    Retail land sales
   
5
   
39
   
16
   
141
 
    Casualty (recovery) loss
   
(2,941
)
 
-
   
2,766
   
408
 
                           
        Total costs of sales
   
15,303
   
16,584
   
26,818
   
21,705
 
                           
        Gross profit
   
6,188
   
2,814
   
1,335
   
5,331
 
        General & administrative expenses
   
2,623
   
3,717
   
4,447
   
5,451
 
                           
Income (loss) from operations
   
3,565
   
(903
)
 
(3,112
)
 
(120
)
                           
Other income (expenses):
                         
    Sale of real estate
   
-
   
-
   
5,555
   
-
 
    Cost of real estate sold
   
-
   
-
   
1,162
   
-
 
    Net profit on the sale of real estate
   
-
   
-
   
4,393
   
-
 
                           
    Interest & investment income
   
1,499
   
1,305
   
6,484
   
2,569
 
    Interest expense
   
(793
)
 
(560
)
 
(1,784
)
 
(1,068
)
    Other
   
49
   
44
   
138
   
12
 
                           
        Total other income, net
   
755
   
789
   
9,231
   
1,513
 
                           
    Income (loss) before income taxes
   
4,320
   
(114
)
 
6,119
   
1,393
 
    Provision for income taxes
   
1,653
   
(103
)
 
2,299
   
439
 
                           
        Net income (loss)
 
$
2,667
 
$
(11
)
$
3,820
 
$
954
 
                           
        Weighted-average number of shares outstanding
   
7,365
   
7,316
   
7,367
   
7,314
 
                           
Per share amounts:
                         
    Basic
 
$
0.36
 
$
(0.00
)
$
0.52
 
$
0.13
 
    Fully diluted
 
$
0.36
 
$
(0.00
)
$
0.52
 
$
0.13
 
    Dividends declared
 
$
0.25
 
$
-
 
$
0.50
 
$
-
 
                           
See accompanying Notes to Condensed Consolidated Financial Statements.
                           
 
2


ALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
               
       
February 28,
     
       
2006
 
August 31,
 
       
(unaudited)
 
2005
 
 ASSETS
 
 
         
               
Current assets:
             
    Cash and cash equivalents
     
$             23,794
 
$                 13,384
 
    Marketable securities available for sale
     
51,132
 
70,824
 
    Accounts receivable
     
13,068
 
11,216
 
    Mortgages and notes receivable, current portion
     
416
 
2,370
 
    Inventories
         
16,756
   
20,902
 
    Deposits in escrow
         
5,160
   
6,812
 
    Land inventories
         
1,223
   
1,809
 
    Other current assets
         
1,110
   
1,660
 
                     
        Total current assets
         
112,659
   
128,977
 
                     
                     
Mortgages and note receivable, net of current portion
         
9,891
   
6,395
 
Other assets
         
2,432
   
692
 
Cash surrender value of life insurance, designated
         
5,765
   
5,676
 
Property, buildings and equipment
         
167,747
   
150,997
 
Less: accumulated depreciation
         
(46,596
)
 
(45,043
)
                     
                     
        Total assets
       
$
251,898
 
$
247,694
 
                     
See accompanying Notes to Condensed Consolidated Financial Statements.
                     
3

 
ALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
               
       
February 28,
     
       
2006
 
August 31,
 
       
(unaudited)
 
2005
 
 LIABILITIES & STOCKHOLDERS' EQUITY
 
 
         
               
Current liabilities:
             
    Accounts payable
     
$                     6,326
 
$                        2,180
 
    Current portion of notes payable
     
3,312
 
3,309
 
    Accrued expenses
     
2,648
 
3,588
 
    Insurance claims payable
     
1,381
 
1,404
 
    Dividend payable
     
1,844
 
1,842
 
    Accrued ad valorem taxes
     
393
 
2,008
 
    Deferred income taxes
     
1,493
 
2,280
 
    Retirement benefits payable
     
539
 
432
 
    Current portion of donation payable
     
773
 
776
 
               
        Total current liabilities
     
18,709
 
17,819
 
               
Notes payable, net of current portion
     
54,492
 
48,039
 
Deferred income taxes
     
12,941
 
13,424
 
Deferred retirement benefits
     
4,109
 
4,376
 
Commissions payable
         
2,833
   
2,125
 
Other non-current liability
         
16,954
   
16,954
 
Donation payable
         
-
   
771
 
                     
        Total liabilities
         
110,038
   
103,508
 
                     
Stockholders' equity:
                   
                     
Common stock
         
7,375
   
7,369
 
Additional paid in capital
         
9,386
   
9,183
 
Treasury stock
         
(433
)
 
-
 
Accumulated other comprehensive (loss) income
         
(73
)
 
2,195
 
Retained earnings
         
125,605
   
125,439
 
                     
        Total stockholders' equity
         
141,860
   
144,186
 
                     
        Total liabilities and stockholders' equity
       
$
251,898
 
$
247,694
 
                     
See accompanying Notes to Condensed Consolidated Financial Statements.
 
4

 
ALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
           
   
Six months ended
 
   
Feb. 28,
 
Feb. 28,
 
   
2006
 
2005
 
           
Cash flows from operating activities:
         
           
        Net cash provided by operating activities
 
$                  2,802
 
$                      383
 
           
Cash flows from investing activities:
         
           
Purchases of property and equipment
 
(17,515
)
(9,587
) 
Proceeds from sale of real estate
   
7,239
   
102
 
Proceeds from sales of property and equipment
   
2,562
   
570
 
Purchases of marketable securities
   
(81,473
)
 
(22,733
)
Proceeds from sales of marketable securities
   
94,138
   
4,181
 
Note receivable collections
   
113
   
10,102
 
               
        Net cash provided by (used for) investing activities
   
5,064
   
(17,365
)
               
Cash flows from financing activities:
             
               
Repayment of bank loan
   
(41,789
)
 
(7,917
)
Proceeds from bank loan
   
48,245
   
13,090
 
Proceeds (used for) provided by stock transactions
   
(224
)
 
148
 
Dividends paid
   
(3,688
)
 
-
 
 
             
        Net cash provided by financing activities
   
2,544
   
5,321
 
               
        Net increase (decrease) in cash and cash equivalents
 
$
10,410
 
$
(11,661
)
               
Cash and cash investments:
             
    At beginning of period
 
$
13,384
 
$
24,299
 
               
        At end of period
 
$
23,794
 
$
12,638
 
 
5



   
Six months ended
 
   
Feb. 28,
 
Feb. 28,
 
   
2006
 
2005
 
           
           
Supplemental disclosures of cash flow information
         
           
    Cash paid for interest, net of amount capitalized
   
1,547
   
1,089
 
               
    Cash paid for income taxes
   
918
   
2,411
 
               
Net cash investing activities:
             
    Issuance of mortgage notes
   
29
   
194
 
    Fair value adjustments to securities available for sale
             
        net of tax effects
   
(2,268
)
 
1,723
 
    Reclassification of breeding herd to property and
             
        equipment
   
516
   
562
 
               
 
6


ALICO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except for per share data)
 
1. Basis of financial statement presentation:
 
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.
 
2. Real Estate:
 
Real estate sales are recorded under the accrual method of accounting. Under this method, a sale is not recognized until certain criteria are met including whether the profit is determinable, collectibility of the sales price is reasonably assured 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.
7

3. Marketable Securities Available for Sale:
 
The Company has classified 100% of investments in marketable securities as available for sale and, as such, the securities are carried at estimated fair value. Unrealized gains and losses determined to be temporary are recorded as other comprehensive income, net of related deferred taxes, until realized. Unrealized losses determined to be other than temporary are recognized in the period the determination is made.
 
The cost and estimated fair values of marketable securities available for sale at February 28, 2006 and August 31, 2005 were as follows:
   
February 28, 2006
 
August 31, 2005
 
   
 (Unaudited) 
                 
       
Gross
 
Estimated
     
Gross
 
Estimated
 
       
Unrealized
 
Fair
     
Unrealized
 
Fair
 
Equity securities:
 
Cost
 
Gains
 
Losses
 
Value
 
Cost
 
Gains
 
Losses
 
Value
 
                                   
Preferred stocks
 
$
-
 
$
-
 
$
-
 
$
-
 
$
1,363
 
$
81
 
$
(17
)
$
1,427
 
Common stocks
   
69
         
(5
)
 
64
   
6,483
   
1,066
   
(218
)
 
7,331
 
Mutual funds
   
150
   
4
   
-
   
154
   
17,029
   
2,846
   
(86
)
 
19,789
 
                                                   
Total equity securities
   
219
   
4
   
(5
)
 
218
   
24,875
   
3,993
   
(321
)
 
28,547
 
                                                   
Debt securities
                                                 
                                                   
Municipal bonds
   
33,622
   
125
   
(17
)
 
33,730
   
20,548
   
74
   
-
   
20,622
 
Mutual funds
   
220
   
-
   
-
   
220
   
4,344
   
155
   
(76
)
 
4,423
 
Fixed maturity funds
   
3,113
         
(4
)
 
3,109
   
2,799
   
-
   
(41
)
 
2,758
 
Corporate bonds
   
14,071
   
-
   
(216
)
 
13,855
   
14,897
   
12
   
(435
)
 
14,474
 
                                                   
Total debt securities
   
51,026
   
125
   
(237
)
 
50,914
   
42,588
   
241
   
(552
)
 
42,277
 
                                                   
Marketable securities
                                                 
    available for sale
 
$
51,245
 
$
129
 
$
(242
)
$
51,132
 
$
67,463
 
$
4,234
 
$
(873
)
$
70,824
 
                                                   
The aggregate fair value of investments in debt instruments with a cost basis of $50,806 (net of mutual funds of $220) as of February 28, 2006 by contractual maturity date, consisted of the following:  
                                                                                                                                                                                                                                                                                       Aggregate 
                                                                                                                                                                                                                                                                                        Fair Value
Due within 1 year
 
$           29,202
 
Due between 1 and 2 years
 
5,225
 
Due between 2 and 3 years
 
2,735
 
Due between 3 and 4 years
   
134
 
Due between 4 and 5 years
   
272
 
Due beyond five years
   
13,126
 
Total
 
$
50,694
 
         
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.

8

February 28, 2006 (unaudited)
                           
   
Less than 12 months
 
12 months or greater
 
Total
 
   
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
   
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
Preferred stocks
 
$                    -
 
$                     -
 
$                      -
 
$                      -
 
$                      -
 
$                     -
 
Common stocks
   
64
   
5
   
-
   
-
   
64
   
5
 
Equity mutual funds
   
-
   
-
   
-
   
-
   
-
   
-
 
Municipal bonds
   
8,075
   
17
   
-
   
-
   
8,075
   
17
 
Debt mutual funds
   
-
   
-
   
-
   
-
   
-
   
-
 
Fixed maturity funds
   
1,453
   
4
   
-
   
-
   
1,453
   
4
 
Corporate bonds
   
10,905
   
108
   
2,949
   
108
   
13,854
   
216
 
Total
 
$
20,497
 
$
134
 
$
2,949
 
$
108
 
$
23,446
 
$
242
 
                                       
 
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.

Equity securities and funds.
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.

Debt instruments and funds. The unrealized losses on municipal bonds and corporate bonds were primarily due to changes in interest rates. At February 28, 2006 the Company held loss positions in 85 debt instruments. Because the decline in market values of these securities is attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not believe any of the unrealized losses represent other than temporary impairment based on evaluations of available evidence as of February 28, 2006.

4. Mortgage and notes receivable:

Mortgage and notes receivable arose from real estate sales. The balances are as follows:
 
 
         
   
February 28,
     
   
2006
 
August 31,
 
   
(unaudited)
 
2005
 
           
Mortgage notes receivable on retail land sales
 
$                       504
 
$                       580
 
Mortgage notes receivable on bulk land sales
   
56,976
   
56,976
 
Other notes receivable
   
2
   
10
 
               
Total mortgage and notes receivable
   
57,482
   
57,566
 
Less: Deferred revenue
   
(44,581
)
 
(46,207
)
        Discount on note to impute market interest
   
(2,594
)
 
(2,594
)
        Current portion
   
(416
)
 
(2,370
)
               
Non-current portion
 
$
9,891
 
$
6,395
 
               
9


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.

5. Inventories:
 
A summary of the Company's inventories is shown below:
         
           
   
February 28,
     
   
2006
 
August 31,
 
   
(unaudited)
 
2005
 
           
Unharvested fruit crop on trees
 
$                  7,063
 
$                 8,176
 
Unharvested sugarcane
   
2,369
   
5,691
 
Beef cattle
   
6,026
   
5,024
 
Unharvested sod
   
678
   
831
 
Plants in greenhouses
   
534
   
1,156
 
Unharvested vegetables
   
86
   
24
 
               
Total inventories
 
$
16,756
 
$
20,902
 
               
The Company's unharvested sugarcane and cattle are partially uninsured.
             
               
 
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)

10

   
Three Months ended
 
Six Months ended
 
   
February 28,
 
February 28,
 
February 28,
 
February 28,
 
   
2006
 
2005
 
2006
 
2005
 
   
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
                   
Unharvested citrus
 
$
141
 
$
408
 
$
3,589
 
$
408
 
Unharvested sugarcane
   
(2,697
)
 
-
   
313
   
-
 
Unharvested vegetables
   
-
   
-
   
147
   
-
 
                           
Total inventory losses
 
$
(2,556
)
$
408
 
$
4,049
 
$
408
 
                           
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.

6. Income taxes:
 
The provision for income taxes for the six months ended February 28, 2006 and 2005 is summarized as follows:
 
   
Three months ended
 
Six months ended
 
   
Feb. 28,
 
Feb. 28,
 
Feb. 28,
 
Feb. 28,
 
   
2006
 
2005
 
2006
 
2005
 
   
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
                   
Current:
                 
    Federal income tax
 
$                      391
 
$                      (19)
 
$                  888
 
$                   414
 
    State income tax
 
41
 
(2)
 
94
 
44
 
     
432
   
(21)
 
 
982
   
458
 
                           
Deferred:
                         
    Federal income tax
   
1,103
   
(74)
 
 
1,190
   
(17)
 
    State income tax
   
118
   
(8)
 
 
127
   
(2)
 
     
1,221
   
(82)
 
 
1,317
   
(19)
 
                           
Total provision for income taxes
 
$
1,653
 
$
(103)
 
$
2,299
 
$
439
 
                           
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.
11

The Revenue Agent's report regarding Alico could be issued within the current fiscal year. See also note 8 to the condensed consolidated financial statements.  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.

7. Indebtedness:

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:

12

 
February 28, 2006
                 
       
Additional
         
   
Principal
 
Credit
 
Interest
     
   
Balance
 
Available
 
Rate (h)
 
Collateral
 
a) Revolving credit line
 
$             45,420
 
$           129,580
 
Libor +1%
 
7680 acres
 
b) Term loan
 
2,000
 
-
 
5.80%
 
Unsecured
 
c) Mortgage note payable
   
10,239
   
-
   
6.68%
 
 
Real estate
 
d) Other
   
145
   
-
   
7.00%
 
 
Real estate
 
        Total
 
$
57,804
 
$
129,580
             
                           
August 31, 2005
                         
 
   
Additional
             
   
Principal
   
Credit
   
Interest
       
   
Balance
   
Available
   
Rate (h)
 
 
Collateral
 
b) Term loan
 
$
4,000
   
-
   
5.80%
 
 
Unsecured
 
c) Mortgage note payable
   
10,872
   
-
   
6.68%
 
 
Real estate
 
d) Other
   
146
   
-
   
7.00%
 
 
Real estate
 
e) Revolving credit line
   
21,330
   
4,670
   
Libor +1%
 
 
Unsecured
 
f) Demand note
   
-
   
3,000
   
Libor +1%
 
 
Unsecured
 
g) Revolving credit line
   
15,000
   
-
   
Libor +1%
 
 
Unsecured
 
        Total
 
$
51,348
 
$
7,670
             
                           
a) Terms described above
                         
b) 5-year fixed rate term loan with commercial lender. $2 million principal due annually. Interest due quarterly.
c) First mortgage on 7,680 acres of cane, citrus, pasture and improvements in Hendry County, Florida with commercial lender. Monthly principal payments of $106 thousand
   plus accrued interest.
                         
d) First mortgage on a parcel of land in Polk County, Florida with private seller.  Annual equal payments of $55 thousand.
e) Line of credit with commerical bank, refinanced in October, 2005
f) Working capital loan with commerical bank, due on demand, refinanced in October, 2005
g) Line of credit with commerical lender, refinanced in October, 2005
h) The Libor rate was 4.63% at February 28, 2006 and 3.87% at August 31, 2005.
                           
Maturities of the Company's debt at February 28, 2006 is as follows:
                         
                           
Due within 1 year
       
$
3,312
             
Due between 1 and 2 years
         
1,315
             
Due between 2 and 3 years
         
1,318
             
Due between 3 and 4 years
         
1,267
             
Due between 4 and 5 years
         
46,687
             
Due beyond five years
         
3,905
             
Total
       
$
57,804
             
                           
 
13

Interest costs expensed and capitalized to property, buildings and equipment were as follows:
   
Three months ended
 
Six months ended
 
   
Feb. 28,
 
Feb. 28,
 
Feb. 28,
 
Feb. 28,
 
   
2006
 
2005
 
2006
 
2005
 
   
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
                   
Interest expense
 
$                    793
 
$                     560
 
$                  1,784
 
$                  1,068
 
Interest capitalized
   
31
   
53
   
48
   
104
 
                           
Total interest cost
 
$
824
 
$
613
 
$
1,832
 
$
1,172
 
                           
 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.

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 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. Management intends, however, to contest any assertion that additional tax is owed. The Revenue Agent’s report regarding Alico could be issued within the current fiscal year.
14

 
9. Dividends:
 
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.
 
10. Disclosures about reportable segments:

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:
 

   
Three months ended
 
Six months ended
 
   
Feb. 28,
 
Feb. 28,
 
Feb. 28,
 
Feb. 28,
 
   
2006
 
2005
 
2006
 
2005
 
Citrus
                 
  Groves
                 
    Revenue
 
$
7,044
 
$
9,586
 
$
8,252
 
$
10,465
 
    Costs and expenses
   
5,241
   
8,734
   
5,829
   
8,809
 
                           
    Segment profit
   
1,803
   
852
   
2,423
   
1,656
 
                           
    Depreciation
 
$
647
 
$
596
   
1,274
   
1,215
 
                           
    Segment assets
             
$
47,320
 
$
53,728
 
                           
15

   
Three months ended
 
Six months ended
 
   
Feb. 28,
 
Feb. 28,
 
Feb. 28,
 
Feb. 28,
 
   
2006
 
2005
 
2006
 
2005
 
Purchasing, Harvesting
                 
and Marketing
                 
    Revenue
 
$              5,722
 
-
 
$                5,722
 
-
 
    Costs and expenses
 
5,720
 
-
 
5,720
 
-
 
                   
    Segment profit
 
2
 
-
 
2
 
-
 
                   
    Depr & Amortization
 
$
298
 
$
-
 
$
298
 
$
-
 
                           
    Segment assets
             
$
5,908
 
$
-
 
                           
Total Citrus
                         
    Revenue
 
$
12,766
 
$
9,586
 
$
13,974
 
$
10,465
 
    Costs and expenses
   
10,961
   
8,734
   
11,549
   
8,809
 
                           
    Segment profit
   
1,805
   
852
   
2,425
   
1,656
 
                           
    Depr & Amortization
 
$
945
 
$
596
 
$
1,572
 
$
1,215
 
                           
    Segment assets
             
$
53,228
 
$
53,728
 
                           
Sugarcane and sod
                         
    Revenue
 
$
5,144
 
$
5,286
 
$
7,130
 
$
7,739
 
    Costs and expenses
   
4,838
   
5,258
   
7,461
   
7,337
 
                           
    Segment profit (loss)
   
306
   
28
   
(331
)
 
402
 
                           
    Depreciation
 
$
451
 
$
550
 
$
948
 
$
1,077
 
                           
    Segment assets
             
$
49,184
 
$
49,397
 
                           
Cattle
                         
    Revenue
 
$
426
 
$
2,184
 
$
2,650
 
$
4,319
 
    Costs and expenses
   
318
   
1,709
   
2,029
   
3,611
 
                           
    Segment profit
   
108
   
475
   
621
   
708
 
                           
    Depreciation
 
$
411
 
$
378
 
$
824
 
$
753
 
                           
    Segment assets
             
$
22,604
 
$
20,862
 
                           
16

 

   
Three months ended
 
Six months ended
 
   
Feb. 28,
 
Feb. 28,
 
Feb. 28,
 
Feb. 28,
 
   
2006
 
2005
 
2006
 
2005
 
                   
Other
                 
    Revenue
 
$                4,703
 
$                3,659
 
$                  16,576
 
$                 ,094
 
    Costs and expenses
   
2,602
   
5,128
   
13,172
   
8,467
 
                           
    Segment profit (loss)
   
2,101
   
(1,469
)
 
3,404
   
(1,373
)
                           
    Depreciation
 
$
399
 
$
242
 
$
567
 
$
426
 
                           
    Segment assets
             
$
126,882
 
$
120,531
 
                           
Total
                         
    Revenue
 
$
23,039
 
$
20,715
 
$
40,330
 
$
29,617
 
    Costs and expenses
   
18,719
   
20,829
   
34,211
   
28,224
 
                           
    Segment profit (loss)
   
4,320
   
(114
)
 
6,119
   
1,393
 
                           
    Depr & Amortization
 
$
2,206
 
$
1,766
 
$
3,911
 
$
3,471
 
                           
    Segment assets
             
$
251,898
 
$
244,518
 
                           
11. Stock Compensation Plans:
 
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.
 
At February 28, 2006 and August 31, 2005, there were 16,371 stock options fully vested and exercisable and 292,844 stock options available for grant.
17

12. Other Comprehensive Income:
 
Other comprehensive income, arising from market fluctuations in the Company's securities portfolio, was as follows:
 
ALICO, INC.
Schedule of Other Comprehensive Income
(unaudited)
(in thousands)
                   
   
For the three months ended
 
For the six months ended
 
   
Feb. 28,
 
Feb. 28,
 
Feb. 28,
 
Feb. 28,
 
   
2006
 
2005
 
2006
 
2005
 
Accumulated Other Comprehensive Income
                 
(loss) at beginning of period
 
$
(214
)
$
3,327
 
$
2,195
 
$
1,529
 
                           
Unrealized Security gains (losses)
   
212
   
(235
)
 
(2,306
)
 
1,878
 
Taxes provided for unrealized (gains) losses
   
(71
)
 
160
   
38
   
(155
)
                           
Other Comprehensive Income
   
141
   
(75
)
 
(2,268
)
 
1,723
 
                           
Accumulated Other Comprehensive Income
 
$
(73
)
$
3,252
 
$
(73
)
$
3,252
 
                           
13. Future Application of Accounting Standards:

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.

14. Treasury Stock

The following table provides information relating to purchases of the Company’s common shares by the Company on the open market pursuant to the Director Compensation Plan approved by the Company’s shareholders on June 10, 2005 for the first six months of fiscal 2006:

Date
 
Total Number of Shares Purchased
 
Average price paid per share
 
Total Dollar value of shares purchased
 
               
11/28/2005
   
10,000
 
$
43.30
 
$
433,000
 
                     
 
The Company may purchase an additional 20,000 shares pursuant to the approved Director Compensation Plan.
18

15. Casualty Losses:
 
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:
                                                                                                                                                                              Three months ended                                                      Six months ended
   
February 28,
 
February 28,
 
February 28,
 
February 28,
 
   
2006
 
2005
 
2006
 
2005
 
   
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
                   
Inventoried costs
 
$           (2,556)
 
$                          -
 
$                4,049
 
$                      408
 
Basis of property and equipment
   
(1,094
)
 
-
 
$
875
   
-
 
Insurance proceeds received
   
709
   
-
 
$
(2,158
)
 
-
 
Insurance proceeds receivable
   
-
   
-
   
-
   
-
 
                           
Total casualty (recoveries)
                         
losses to inventories
 
$
(2,941
)
$
-
 
$
2,766
 
$
408
 
                           
Crop damages estimated during the three months ended November 30, 2005 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 discovered to total 14% of the original crop estimate and $2.7 million of the casualty loss was recovered and recognized for the three months ended February 28, 2006.

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. Prior to January 10, 2006, Florida law required infected and exposed trees within 1900 feet of the canker find to be removed and destroyed.  The Company’s policy was to recognize a loss estimated as the total destruction of all trees within 1900 feet of the canker find as soon as canker was confirmed. This estimate of loss damage preceded the actual destruction of the trees. During the second quarter, the USDA suspended the rule requiring the destruction of citrus groves testing positive for canker. When the USDA suspended the rule requiring the destruction of citrus groves, those portions of grove that were previously estimated as lost but had not yet been destroyed were reestablished, reducing the casualty loss accrued. The adjustment related to the recovery of previously estimated canker losses was $244 for the three months ended February 28, 2006.

16. Subsequent Event:

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. The Board declared a regular quarterly dividend of $0.25 per share payable to shareholders of record as of June 30, 2006 with payment expected on or about July 15, 2006.

In April 2006, the Company entered into a contract for the purchase of a 523 acre mine site for rock and fill. The purchase price for this property is $10.6 million. The contract is currently in the due diligence period. The property was identified in January 2006 as a possible 1031 exchange candidate for the sale of the 280 acre orange grove that closed in November 2005. There is no assurance this contract will close.
19

ITEM 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
Cautionary Statement
____________________
 
Some of the statements in this document include statements about future expectations. Statements that are not historical facts are "forward-looking statements" for the purpose of the safe harbor provided by Section 21E of the Exchange Act and Section 27A of the Securities Act. These forward-looking statements, which include references to one or more potential transactions, and strategic alternatives under consideration, are predictive in nature or depend upon or refer to future events or conditions, are subject to known, as well as, unknown risks and uncertainties that may cause actual results to differ materially from Company expectations. There can be no assurance that any future transactions will occur or be structured in the manner suggested or that any such transaction will be completed. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise.
 
When used in this document, or in the documents incorporated by reference herein, the words "anticipate", "believe", "estimate", "may", "intend", "expect", "should", "could" and other words of similar meaning, are likely to address the Company's growth strategy, financial results and/or product development programs. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. The considerations listed herein represent certain important factors the Company believes could cause such results to differ. These considerations are not intended to represent a complete list of the general or specific risks that may affect the Company. It should be recognized that other risks, including general economic factors and expansion strategies, may be significant, presently or in the future, and the risks set forth herein may affect the Company to a greater or lesser extent than indicated.
 
LIQUIDITY AND CAPITAL RESOURCES:
 
Working capital decreased to $94.0 million at February 28, 2006, from $111.2 million at August 31, 2005. As of February 28, 2006, the Company had cash and cash equivalents of $23.8 million compared to $13.4 million at August 31, 2005. Marketable securities decreased to $51.1 million from $70.8 million during the same period. The ratio of current assets to current liabilities decreased to 6.02 to 1 at February 28, 2006 from 7.24 to 1 at August 31, 2005. Total assets increased by $4.2 million to $251.9 million at February 28, 2006, compared to $247.7 million at August 31, 2005.
 
Management believes that the Company will be able to meet its working capital requirements for the foreseeable future with internally generated funds. In addition, the Company has credit commitments, which provide for revolving credit of up to $175.0 million, of which $129.6 million was available for the Company's use at February 28, 2006 (see Note 7 to condensed consolidated financial statements).

Hurricane Wilma, a category three hurricane, swept through southwest Florida on October 24, 2005, causing extensive damage to the Company’s crops and infrastructure in Collier and Hendry Counties. The Company has recorded an estimated casualty loss of $2.8 million (net of expected insurance proceeds) of damages to crop inventories and property and equipment resulting from the hurricane.

Management expects continued profitability from the Company’s agricultural operations in fiscal 2006, but at reduced levels from fiscal year 2005, mostly due to losses experienced during the hurricane.
20

Gross profits from citrus operations are expected to remain profitable in fiscal year 2006. 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 is expected to cause the unit price of citrus products to increase and may cause profits from the citrus division to equal or exceed those of the prior year.

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 decision resulted in a decrease of beef cattle inventory at August 31, 2005 and is expected to result in fewer cattle available for sale in fiscal year 2006 compared with fiscal year 2005.

Cash outlays for land, equipment, buildings, and other improvements totaled $17.5 million during the six months ended February 28, 2006, compared to $9.6 million during the six months ended February 28, 2005. In February 2006, Alico, through its newly formed subsidiary Bowen Brothers Fruit, LLC, purchased the assets of Bowen Brothers Fruit Co., Inc. for $1.9 million. In October 2005, the Company through Alico-Agri, purchased 291 acres of lake-front property in Polk County, Florida, for $9.2 million. In September 2004, the Company, through Alico-Agri Ltd., purchased the assets of La Belle Plant World, Inc. The purchase price was $4.9 million for the land, office building, greenhouses and associated equipment.

In accordance with guidelines established by the Company’s Board of Directors, the Company restructured its investment portfolio during the first quarter of fiscal 2006, focusing on high quality fixed income securities with original maturities of less than 12 months. As a result of staggered maturity dates, a greater portion of the Company’s portfolio is classified as cash equivalents than under previous investment policies.

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 after a final development order for the property is issued. The first principal and interest installment under the contract will not be due until 12 months after the order is issued. The development order has not yet been issued; however, in any event the first installment is due and payable in July 2008, if not paid before that date.
 
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 agreement is subject to various contingencies and there is no assurance that it will close or that it will close within the time period stated.

The Company, through Agri, supplied catastrophic business interruption coverage for Tri-County Grove, LLC, a subsidiary of Atlantic Blue Trust, Inc., the holder of approximately 48% of the Company’s common stock. Total coverage under the policy was $2.7 million. This represents the only underwriting exposure at February 28, 2006. Citrus canker was discovered in a Tri-County Grove LLC citrus grove 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 of Agri under the policy for this claim of $1.4 million. The claim was paid in full in March of 2006.

In April 2006, the Company entered into a contract for the purchase of a 523 acre mine site for rock and fill. The purchase price for this property is $10.6 million. The contract is currently in the due diligence period. The property was identified in January 2006 as a possible 1031 exchange candidate for the sale of the 280 acre orange grove that closed in November 2005. There is no assurance this contract will close.
21

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 placed in escrow. The Company will retain operating rights to the grove until residential development begins. As noted in the preceding paragraph, the Company is exploring the possibility of a like-kind exchange regarding this transaction.
The Company paid a regular quarterly dividend of $0.25 per share to shareholders of record as of September 30, 2005 on October 15, 2005. Additionally, the Company paid a quarterly dividend of $0.25 per share to stockholders of record as of December 31, 2005 on January 15, 2006. At its Board of Directors meeting immediately following the annual shareholders meeting 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, with payment expected on or about April 15, 2006. At its March Board meeting, the Board declared a regular quarterly dividend of $0.25 per share payable to shareholders of record as of June 30, 2006 with payment expected on or about July 15, 2006.

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 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. Management intends, however, to contest any assertion that additional tax is owed. The Revenue Agent’s report regarding Alico could be issued within the current fiscal year.

RESULTS OF OPERATIONS:
 
The basic business of the Company is agriculture, which is of a seasonal nature and is subject to the influence of natural phenomena and wide price fluctuations. The results of operations for the stated periods are not necessarily indicative of results to be expected for the full year.
 
Net income for the three and six months ended February 28, 2006 was $2.7 million and $3.8 million respectively compared with net income of $0.0 and $1.0 million for the three and six months ended February 28, 2005, respectively. Increased net pretax profit from operations during the second quarter ($3.6 million for the three months ended February 28, 2006 compared with a loss of $0.9 million for the three months ended February 28, 2005) was the primary cause of the increase. For the six months ended February 28, 2006, bulk real estate sales ($4.4 million compared with $0.0 million for the six months ended February 28, 2006 and February 28, 2005, respectively) and interest and investment income ($6.5 million for the six months ended February 28, 2006 compared with $2.6 million for the six months ended February 28, 2005) offset the increased losses from casualties ($2.8 million for the six months ended February 28, 2006 compared with $0.4 million for the six months ended February 28, 2005).

Pretax income from operations was $3.6 million for the quarter ended February 28, 2006 compared with a loss of $0.9 million for the quarter ended February 28, 2005. The increase was primarily due to a favorable change in estimate of $2.9 million resulting from crop recoveries previously recognized as casualty losses. On January 20, 2006, the USDA suspended the rule requiring the destruction of citrus groves testing positive for canker. 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. Prior to January 10, 2006, Florida law required infected and exposed trees within 1900 feet of the canker find to be removed and destroyed.  The Company’s policy was to recognize a loss estimated as the total destruction of all trees within 1900 feet of the canker find as soon as canker was confirmed. This estimate of loss damage preceded the actual destruction of the trees. When the USDA suspended the rule requiring the destruction of citrus groves, those portions of grove that were previously estimated as lost but had not yet been destroyed were reestablished resulting in a reduction of previously recorded casualty losses of $0.2 million for the quarter ended February 28, 2006.
22

Additionally, crop damages estimated during the three months ended November 30, 2006 as a result of hurricane Wilma were replaced by actual results, resulting in a recovery of previously recognized casualty losses of $2.7 million for the quarter ended February 28, 2006.
Operations reported a pretax loss of $3.1 million for the six months ended February 28, 2006, compared with a pretax loss of $0.1 million for the six months ended February 28, 2005. A casualty loss related to citrus canker and Hurricane damages of $2.8 million coupled with a loss from sugarcane and sod operations of $0.3 million were the primary components of the loss for the first six months of fiscal year 2006 compared with a casualty loss of $0.4 million and a profit from sugarcane and sod operations of $0.4 million for the first six months of fiscal year 2005.

Pretax income from rock and sand royalties decreased to $0.3 million and $0.5 million for the three and six month periods ended February 28, 2006, respectively compared with $0.8 million and $1.7 million for the three and six month periods ended February 28, 2005, respectively. The property where a large rock mine was located was sold in July 2005. The Company has begun limited mining operations on a new site and is currently exploring alternative sites for rock mines. Pretax income from agricultural operations (excluding casualty losses) increased by $1.1 million to $2.6 million for the three months ended February 28, 2006 compared with $1.5 million for the three months ended February 28, 2005. Pretax income from agricultural operations (excluding casualty losses) declined by $0.1 million to $2.8 million during the six months ended February 28, 2006 when compared with $2.9 million for the six months ended February 28, 2005. The factors causing the decline in pretax income from agricultural operations are discussed in detail below.

Citrus

The Citrus division recorded profits of $1.8 million and $2.4 million for the quarter and six months ended February 28, 2006, respectively, compared with $0.9 million and $1.7 million for the quarter and six months ended February 28, 2005. Hurricanes, citrus canker finds and increased real estate development in the central and southern portions of Florida where the majority of citrus is produced have combined to reduce the supply of citrus for the past two years, resulting in price increases for citrus products across the industry. During the first six months of fiscal year 2006 the Company has averaged $6.80 per box for its citrus products as compared with $5.43 per box for the same period in the prior fiscal year, causing the current year profit to increase.

The price increase described above has served to more than offset the damages caused by hurricane Wilma. The hurricane caused extensive damage to the Company’s crops and infrastructure in Collier and Hendry Counties. Due primarily to the damages caused by hurricane Wilma, the Company estimates its total citrus harvest for fiscal year 2006 at 3.2 million boxes, compared with 4.0 million for fiscal year 2005 and 4.4 million for fiscal year 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. A portion of the purchase price was allocated to intangible assets and generated an amortization cost of $0.3 million during the period, which was included in the $5.7 million of total expenses reported. Bowen’s operations are seasonal in nature and the results of operations for the stated periods are not necessarily indicative of results to be expected for the full year. Management estimates that Bowen will breakeven during fiscal 2006.

Sugarcane and Sod
 
Sugarcane and sod generated a profit of $0.3 million for the three months ended February 28, 2006 compared with earnings of $0.0 million for the three months ended February 28, 2005. Sugarcane harvests exceeded the post hurricane estimate during the second quarter of fiscal year 2006, resulting in a profit for the period. For the six months ended February 28, 2006
23

and 2005, the sugarcane and sod division generated a loss of $0.3 million and a profit of $0.4 million, respectively. Fertilizer is the largest component of production costs for the
Company’s sugarcane crop. Due to price increases in the cost of fuel used to produce fertilizer beginning in fiscal 2005, fertilizer prices increased 23% over their prior year levels. The increased price of fertilizer caused the Company’s production costs per ton to rise above the expected net realizable value. As a result, the Company adjusted its inventoried sugarcane crop by $517 thousand for the six months ended February 28, 2006, charging it to cost of sales. This adjustment, caused by the price increase in fertilizer described above, was the primary cause of the loss for the six months ended February 28, 2006.

Cattle
 
Cattle profits were $0.1 million and $0.6 million for the three and six months ended February 28, 2006, respectively, compared with $0.5 million and $0.7 million for the three and six months ended February 28, 2005. The number of cattle sold was less during the first six months of fiscal year 2006 than for the same period in the prior fiscal year (3,285 for the first six months of fiscal year 2006 compared with 5,206 for the first six months of fiscal year 2005). During fiscal year 2005, in order to take advantage of record high prices for calves, the Company sold a portion of its calf crop that would have normally been delivered to western feedlots. Calves delivered to western feedlots require an additional nine months of preparation before they are ready for sale. Due to the sale of the calves in the prior fiscal year as described above, fewer animals were available for sale in the current fiscal year.

Prices for beef cattle have improved during the current year compared with the prior year ($0.82 per pound average received on all cattle sold for the first six months of fiscal year 2006, compared with $0.77 per pound average for the first six months of fiscal 2005). The price increase has served to offset the reduced number of cattle sold.

Other Agricultural Operations

The Company also sells vegetable transplants through its subsidiary, Alico Plant World, LLC, as well as native plants from its ranch location, and produces and sells corn and beans. Income from these operations totaled $0.4 million and $0.1 million for the three and six months ended February 28, 2006, respectively. Income from plants, vegetables and trees was $0.1 million and $0.2 million for the three and six month periods ended February 28, 2005, respectively.

General Corporate
 
In April 2006, the Company has entered into a contract for the purchase of a 523 acre mine site for rock and fill. The purchase price for this property is $10.6 million. The contract is currently in the due diligence period. The property was identified in January 2006 as a possible 1031 exchange candidate for the sale of the 280 acre orange grove that closed in November 2005. There is no assurance this contract will close.

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 placed in escrow. The Company will retain operating rights to the grove until residential development begins. As noted in the preceding paragraph, the Company is exploring the possibility of a like-kind exchange regarding this transaction.

The Company through Alico-Agri Ltd., purchased approximately 291 acres in Polk County, Florida on October 11, 2005 for $9.2 million. The property contains 2,100 feet of road frontage on U.S. 27 and 2,600 feet of road frontage on County road 640. The property also includes approximately 2,640 feet of lakefront along Crooked Lake, a 6,000 acre lake. The Company identified the property as an exchange property under section 1031 of the Internal Revenue Code and intends to defer tax on $9.2 million of proceeds from the sale of a Lee County parcel that closed in escrow in July 2005 and is described below.

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 after a final development order for
24

the property is issued. The first principal and interest installment under the contract will not be due until 12 months after the order is issued. The development order has not yet been issued; however, in any event the first installment is due and payable in July 2008, if not paid before that date.
 
An agreement to sell the remaining property 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 or that it will close within the time period stated.

Agri-Insurance, Co. Ltd., a wholly owned subsidiary of Alico, Inc., wrote an insurance policy for Tri-County Grove, LLC, a subsidiary of Atlantic Blue Trust, Inc., the holder of approximately 48% of the Company’s common stock in 2004. The coverage term was from August 2004 to July 2005. Total coverage under the policy was $2.7 million and the Company charged a premium of $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. The claim was paid in full in March of 2006.
 
Premiums for coverages quoted are set by independent actuaries and underwriters hired by Agri 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.
 
In September 2004, the Company, through Alico-Agri Ltd., 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. Alico Plant World, LLC ("Plant World") was set up as a wholly owned subsidiary of Alico-Agri, Ltd to operate these assets.

Off Balance Sheet Arrangements
______________________________
 
The Company through its wholly owned subsidiary Bowen Brothers Fruit, LLC enters into forward purchase contracts for the purchase of citrus products during the normal course of its business. Typically, these purchases are covered by forward sales contracts. The total forward purchase contracts under these agreements totaled $8.9 million at February 28, 2006. All of these purchases were covered by forward sales agreements. None of these agreements were in a net loss position as of February 28, 2006. All of these contracts will be fulfilled by the end of the fiscal year 2006. Additionally, the Company hedges its fuel requirements through the purchase of fuel stocks at fixed prices for future deliveries. The net obligations under these arrangement totaled $79 thousand at February 28, 2006. Deliveries under these contracts will occur before May 31, 2006.
 
In April 2006, the Company entered into a contract for the purchase of a 523 acre mine site for rock and fill. The purchase price for this property is $10.6 million. The contract is currently in the due diligence period. The property was identified in January 2006 as a possible 1031 exchange candidate for the sale of the 280 acre orange grove that closed in November 2005.
25

Disclosure of Contractual Obligations
_____________________________________

The contractual obligations of the Company at February 28, 2006 are set forth in the table below:
 
February 28, 2006
                     
(in thousands)