UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A

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

For the fiscal year ended August 31, 2005

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 incorporation                 IRS Employer
                                                or organization)                                                             identification number

                                             P.O. Box 338, La Belle, Florida                                      33975
                                             (Address of principal executive offices)                           Zip code

                                             Registrant’s telephone number including   (863) 675-2966
                                             area code

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

None

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

COMMON CAPITAL STOCK, $1.00 Par value, Non-cumulative
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.

Yes X     No
Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act)

Yes X     No
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.

Yes      No X

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.

 
 
1



Explanatory note

This Amendment on Form 10-K/A constitutes Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year ended August 31, 2005 which was previously filed with the Securities and Exchange Commission (the "SEC") on November 23, 2005. We are amending the discussion in Item 1, the footnotes to the financial statements and the contractual obligations table set forth in Management's Discussion and Analysis.

This Amendment amends the footnotes to the financial statements, the discussion in Item 1 and the contractual obligations table set forth in the Management's discussion and analysis portions of the Annual Report as specified above and does not reflect events occurring after the original filing date of the Annual Report on November 23, 2005.

                                     
Index
                 
Alico, Inc.
Form 10-K/A
For the year ended August 31, 2005
                 
Part I
               
 
Item 1. Business
             
 
Item 2. Properties
             
 
Item 3. Legal proceedings
           
 
Item 4. Submission of Matters to a Vote of Security Holders
       
                 
Part II
               
 
Item 5. Market for Registrant's Common Stock & Related Stockholder matters
   
 
Item 6. Selected Financial Data
         
 
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
     
 
Operations
           
 
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
     
 
Item 8. Financial Statements and Supplementary Data
       
 
Item 9. Changes in & Disagreements with Accountants on Accounting and Financial
     
 
Disclosure
           
 
Item 9A. Controls and Procedures
           
  Item 9B. Other Information               
                 
Part III
               
 
Item 10. Directors and Executive Officers of the Registrant
       
 
Item 11. Executive Compensation
           
 
Item 12. Security Ownership of Certain Beneficial Owners and Management
   
 
Item 13. Certain Relationships and Related Transactions
       
 
Item 14. Principal Accountant's Fees and Services
       
                 
Part IV
               
 
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
     
                 
 
 
 
 
 
2



PART I

Item 1. Business.
 
Alico, Inc. (the "Company"), which was formed February 29, 1960 as a spinoff of the Atlantic Coast Line Railroad Company, is an agribusiness company operating in Central and Southwest Florida. The Company's primary asset is 136,081 acres of land located in Collier, Hendry, Lee and Polk Counties. (See table on Page 10 for location and acreage by current primary use.) The Company is involved in citrus fruit production, cattle ranching, sugarcane and sod production, wholesale greenhouse operations, vegetable production and forestry. The Company also leases land for farming, cattle grazing, recreation, and oil exploration.
 
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.
 
During the past five years, agricultural operations have produced between 90 and 95 percent of annual operating revenues. Within the Company’s agriculture operations, citrus groves generate the highest gross operating revenue, the sugarcane and sod division ranks second in average operating revenue production during the past five years and the cattle ranching operation, while it utilizes the largest acreage, ranks third. Approximately 5,602 acres of the Company's property are classified as timberlands; however, these lands are not highly rated for timber production. They are also utilized as native range, in the ranching operation and are leased out for recreation and oil exploration.
 
Leasing of lands for rock mining and oil and mineral exploration, rental of land for grazing, farming, recreation and other uses, while not classified as agricultural operations, are important components of the Company's land utilization and operation. Gross revenue from these activities during the past five years has ranged from 5 to 9 percent of annual operating revenue.
 
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.
 
Subsidiary Operations
 
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”).
 

 
3

 
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.)
 
4

Segments

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.

Citrus
 
Approximately 10,144 acres of citrus were harvested during the 2004-05 season. An additional 1,003 acres of citrus grove was not yet mature enough to produce a crop in fiscal year 2005. Since 1983 the Company has maintained a marketing contract covering the majority of the Company's citrus crop with Ben Hill Griffin, Inc., a Florida corporation and the Company’s major shareholder until February 2004. The agreement provides for modifications to meet changing market conditions and provides that either party may terminate the contract by furnishing advance written notice prior to the first day of August before each fruit season. Notice was served in a timely fashion in fiscal year 2005, and accordingly the fruit marketed under the terms of this contract is expected to decrease over the next three years. Under the terms of the contract, the Company's fruit is packed and/or processed and sold along with fruit from other growers, including Ben Hill Griffin, Inc. The proceeds, less costs and a profit margin, are distributed on a pro rata basis as the finished product is sold. In February 2004, Ben Hill Griffin, Inc. transferred all of its stock holdings in the Company pursuant to the "Settlement Agreement" agreed upon with the Four Sisters Protectorate.
 
During the year ended August 31, 2005, approximately 76% of the Company's fruit crop was marketed under this agreement, as compared to 75% for the year ended August 31, 2004 and 73% for the year ended August 31, 2003. In addition, Ben Hill Griffin, Inc. provides harvesting services to the Company for citrus sold to unrelated processors. These sales accounted for the remaining 24% of the total citrus sold by the Company for the year ended August 31, 2005.

Ranch
 
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.
 
 
5

Sugarcane
 
The Company had 10,580 acres, 11,131 acres, and 11,840 acres of sugarcane in production during the 2005, 2004, and 2003 fiscal years, respectively. The 2005, 2004, and 2003 fiscal year crops yielded approximately 319,000, 346,000 and 413,000 gross tons, respectively. An additional 2,489 acres of planted cane was not yet mature for harvest during fiscal year 2005. Since the inception of its sugarcane program in 1988, the Company has sold 100% of its product through a pooling agreement with United States Sugar Corporation, a local Florida sugar mill. Under the terms of the pooling agreement, the Company’s sugarcane is processed and sold along with sugarcane from other growers. The proceeds, less costs and a profit margin, are distributed on a pro rata basis as the finished product is sold.
 
Sod

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.

Mining Operations: Rock and Sand
 
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.

Plants and Trees

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.
 


6


Land Rental for Grazing, Agricultural 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.
 
Retail Land Sales

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.
 
Competition
 
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%.

Environmental Regulations
 
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.
 
Employees
 
At the end of August 2005, the Company had a total of 155 full-time employees classified as follows: Citrus 75; Ranch 13; Sugarcane 18; Facilities Maintenance Support 29; General and Administrative 20. There is one employee engaged in the development of new products and research. Additionally, Plant World leased 42 employees during fiscal year 2005. The leasing arrangement expired in September 2005, and the employees were hired by Plant World at that time. Management is not aware of any efforts by employees or outside organizers to create any type of labor union. Management believes that the employer/employee relationship environment is such that labor organization activities are unlikely to occur.
 
7

Seasonal Nature of Business
 
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.

Capital resources and raw materials

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.
 
Available Information
 
The Company’s internet address is: http://www.alicoinc.com. The Company files reports with the Securities Exchange Commission ("SEC") as required by SEC rules and regulations on Form 10-Q, Form 10-K and the annual proxy statement. These reports are available to the public to read and copy at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.

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.
 
8

 
Item 2. Properties.
 
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:
 
Alico, Inc. & Subsidiaries
Land Use Summary
August 31, 2005
                                 
                                 
 
   
Total 
   
Hendry
   
Polk
   
Collier
   
Lee
 
Citrus:
                               
Producing acres
   
10,144
   
2,901
   
3,114
   
4,129
   
-
 
Support and nonproductive*
   
6,740
   
2,754
   
789
   
3,197
   
-
 
Total Citrus
   
16,884
   
5,655
   
3,903
   
7,326
   
-
 
                                 
Sugarcane:
                               
Producing acres
   
13,069
   
13,069
   
-
   
-
   
-
 
Support and nonproductive*
   
10,810
   
10,810
   
-
   
-
   
-
 
Total Sugarcane
   
23,879
   
23,879
   
-
   
-
   
-
 
                                 
Ranch:
                               
Improved pasture
   
22,922
   
22,627
   
295
   
-
   
-
 
Semi-improved pasture
   
21,752
   
20,038
   
602
   
1,112
   
-
 
Native pasture
   
19,513
   
11,846
   
5,949
   
1,718
   
-
 
Support and nonproductive*
   
25,516
   
23,296
   
1,540
   
680
   
-
 
Total Ranch
   
89,703
   
77,807
   
8,386
   
3,510
   
-
 
                                 
Farming:
                               
Leased acres
   
2,802
   
2,802
   
-
   
-
   
-
 
Support and nonproductive*
   
1,008
   
1,008
   
-
   
-
   
-
 
Total farming
   
3,810
   
3,810
   
-
   
-
   
-
 
                                 
Sod:
                               
Producing acres
   
500
   
500
   
-
   
-
   
-
 
Support and nonproductive*
   
335
   
335
   
-
   
-
   
-
 
Total sod
   
835
   
835
   
-
   
-
   
-
 
                                 
Rock and Sand Mining
   
-
   
-
   
-
   
-
   
-
 
Commercial & Residential
   
970
   
4
   
66
   
-
   
900
 
                                 
Total
   
136,081
   
111,990
   
12,355
   
10,836
   
900
 
                                 
* Includes buildings, roads, water management systems, fallow lands and wetlands.
                           
 
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.
 
9

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.

Item 3. Legal proceedings

None.
 
Item 4. Submission of Matters to a Vote of Security Holders.
 
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:
 
Director elections
 
For
 
Withheld
 
Abstentions
 
Broker non votes
 
John R. Alexander
   
5,942,148
   
986,373
             
Robert E. Lee Caswell
   
5,922,498
   
1,006,023
             
Evelyn D'An
   
6,003,355
   
925,166
             
Phillip S. Dingle
   
6,005,205
   
923,316
             
Gregory T. Mutz
   
5,709,730
   
1,218,791
           
Charles Palmer
   
6,240,825
   
687,696
           
Baxter Troutman
   
5,941,305
   
987,216
             
Gordon Walker
   
6,003,212
   
925,309
             
 
                         
Director Stock Compensation Plan
   
4,279,033
   
1,015,117
   
455,148
   
1,179,223
 
 


10


PART II
 
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.

Common Stock Prices
 
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:
 

     
2005
   
2004
     
Bid Price
   
Bid Price
     
High
Low
   
High
Low
                 
First Quarter
   
$55.59
$41.25
   
$35.99
$26.18
                 
Second Quarter
   
$62.05
$51.25
   
$39.75
$32.79
                 
Third Quarter
   
$58.01
$46.63
   
$38.99
$30.50
                 
Fourth Quarter
   
$56.20
$47.14
   
$46.20
$34.02
 
Approximate Number of Holders of Common Stock
 
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.
 
Dividend Information
 
During the last three fiscal years the dividends were as follows:
 

Record Date
 
Payment Date
 
Amount Paid Per Share
 
             
October 11, 2002
 
October 25, 2002
   
$ 0.35
 
October 17, 2003
 
October 31, 2003
   
$ 0.60
 
June 30, 2005
 
July 15, 2005
   
$ 1.00
 
September 30, 2005
 
October 15, 2005
   
$ 0.25
 


11


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.
 

Equity Compensation Plan Information
   
 
   
 
         
 
       
Plan category
   
Num ber of securities to be issued upon exercise of outstanding options, warrants and rights
   
Weighted avreage exerecised price of outstanding options, warrants and rights
   
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
 
   
(a) 
   
(b)
   
(c)
 
Equity compensation
                                     
plans approved by
                                     
security holders
         
16,371
       
$
18.05
         
292,844
 
                                       
Equity compensation
                                     
plans not approved
                                     
by security holders
         
-
         
-
         
-
 
                                       
Total
         
16,371
       
$
18.05
         
292,844
 


12




Item 6. Selected Financial Data
                     
   
Years Ended August 31,
Description
 
2005
 
2004
 
2003
 
2002
 
2001
 
 
(In Thousands, Except Per Share Amounts)
                     
Operating revenue
 
$ 55,525
 
$ 52,057
 
$ 48,285
 
$ 49,185
 
$ 51,533
Operating expenses
 
53,204
 
45,390
 
43,582
 
50,313
 
45,083
Income (loss) from operations
 
2,321
 
6,667
 
4,703
 
(1,128)
 
6,450
Income (loss) from operations
                   
per weighted average common share
 
$ 0.32
 
$ 0.92
 
$ 0.66
 
$ (0.16)
 
$ 0.92
Total Revenue
 
75,384
 
87,779
 
66,532
 
63,545
 
69,710
Total Costs and Expenses
 
66,146
 
59,979
 
47,448
 
53,752
 
49,598
Income Taxes
 
3,148
 
9,987
 
6,425
 
2,258
 
4,046
Net Income
 
$  6,090
 
$  17,813
 
$   12,659
 
$   7,535
 
$   16,066
Weighted Average Number of Shares Outstanding
 
7,331
 
7,219
 
7,106
 
7,070
 
7,033
Net Income Per Share
 
$    0.83
 
$   2.47
 
$   1.78
 
$   1.07
 
$   2.29
Cash Dividend Declared Per Share
 
1.25
 
0.60
 
0.35
 
1.00
 
1.00
Current Assets
 
128,977
 
125,925
 
90,204
 
66,267
 
61,345
Total Assets
 
247,694
 
238,242
 
216,545
 
191,910
 
179,134
Current Liabilities
 
17,819
 
10,136
 
10,124
 
9,543
 
7,691
Ratio-Current Assets to Current Liabilities
 
7.24:1
 
12.42:1
 
8.91:1
 
6.94:1
 
7.98:1
Working Capital
 
111,158
 
115,789
 
80,080
 
56,724
 
53,654
Long-Term Obligations
 
85,689
 
82,908
 
80,239
 
69,149
 
58,818
Total Liabilities
 
103,508
 
93,044
 
90,363
 
78,692
 
66,509
Stockholder's Equity
 
$  144,186
 
$  145,198
 
$   126,182
 
$   113,218
 
$   112,625

 
13


Item 7. 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 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.
 
Liquidity and Capital Resources
 
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.
14


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.

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. Preliminary estimates indicate a loss of approximately 28% of the Company’s 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 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 losses related to hurricane Wilma will be recognized in the first quarter of fiscal year 2006. The Company is still working to quantify the loss at the time of this filing. Management expects continued profitability from the Company’s agricultural operations in fiscal 2006, but at significantly reduced levels from fiscal year 2005 due to the hurricane.


15


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.

At its meeting on June 10, 2005 the Board of Directors authorized the payment of regular quarterly dividends beginning with the end of the Company’s fourth quarter on August 31, 2005. The first such dividend in the amount of $0.25 was paid to shareholders of record as of September 30, 2005 with a payment date of October 15, 2005. Additionally, at its Board of Directors meeting held on 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.
 
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).


16

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.
 
17



Results of Operations
             
                     
Summary of results (in thousands):
   
Years Ended August 31,
 
     
2005
   
2004
   
2003
 
                     
Operating revenue
   
$    55,525
   
$   52,057
   
$    48,285
 
Gross profit
   
12,985
   
13,138
   
11,022
 
General & administrative expenses
   
10,664
   
6,471
   
6,319
 
Income from operations
   
2,321
   
6,667
   
4,703
 
Profit on sale of real estate
   
5,465
   
20,311
   
14,994
 
Interest and investment income
   
4,443
   
2,519
   
1,201
 
Interest expense
   
2,295
   
1,825
   
2,081
 
Other income (expense)
   
(696
)
 
128
   
267
 
Provision for income taxes
   
$     3,148
   
$    9,987
   
$    6,425
 
Effective income tax rate
   
34.1
%
 
35.9
%
 
33.7
%
Net income
   
$     6,090
   
$  17,813
   
$       659
 

Operating Revenue
 
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 (loss) from Operations
 
Income from operations was lower in fiscal year 2005 than fiscal year 2004 ($2.3 million in fiscal year 2005 as compared with $6.7 million in fiscal year 2004). The decreased income was due to several factors, most notably an increase in general and administrative costs related to the evaluation of a merger possibility ($1.5 million), costs incurred for compliance with Sarbanes Oxley Section 404 ($0.7 million), consulting ($0.5 million), Director fees ($0.5 million) and continuing costs related to the IRS audits ($0.5 million) contributed to the increase in general and administrative expenses.

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
 
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.
 
18

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
 
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.
 
19


Individual Operating Divisions
                
                  
Gross profits for the individual operating divisions, for fiscal 2005, 2004 and 2003, are
 
presented in the following schedule and are discussed in subsequent sections:
                
                  
                                                                                                                                                                  Years Ended August 31,
 
                                                                                                                                                                (in thousands)
 
   
 2005
 
 2004
 
 2003
 
                  
CITRUS
                
Revenue
 
 $                26,231
 
 $               24,549
 
 $                 24,107
 
Expenses
 
 19,984
 
 20,407
 
 20,106
 
Gross profit, citrus
 
 6,247
 
 4,142
 
 4,001
 
                  
SUGARCANE & SOD
                
Revenues
 
 9,725
 
 12,398
 
 13,373
 
Expenses
 
 9,304
 
 9,673
 
 10,188
 
Gross profit, sugarcane
   
421
   
2,725
   
3,185
 
                     
RANCH
                   
Revenue
   
11,017
   
9,678
   
7,175
 
Expenses
   
8,908
   
8,178
   
6,790
 
Gross profit, ranch
   
2,109
   
1,500
   
385
 
                     
PLANTS & TREES
                   
Revenue
   
2,818
   
407
   
292
 
Expenses
   
2,128
   
-
   
-
 
Gross profit, plants & trees
   
690
   
407
   
292
 
                     
Total gross profit, agriculture
 
 
$          9,467
 
 
$          8,774
 
 
$          7,863
 

 
20

 

OTHER
 
 Years Ended August 31,
 
Revenue:
 
 (in thousands)
 
               
   
 2005
 
 2004
 
 2003
 
Rock products and sand
 
$                      2,991
 
$                     3,448
 
$                     2,154
 
Land rentals
 
1,933
 
1,171
 
973
 
Other revenue
   
-
   
128
   
267
 
Total
   
4,924
   
4,747
   
3,394
 
                     
Costs and expenses:
                   
General & administrative, all operations
   
10,664
   
6,471
   
6,319
 
Other costs and expenses
   
696
   
-
   
-
 
Casualty loss
   
1,888
   
408 
   
-
 
Total
   
13,248
   
6,879
   
6,319
 
                     
Gross, other operations
   
(8,324
)
 
(2,132
)
 
(2,925
)



   
 
   
                     
INTEREST & DIVIDENDS
                   
Revenue
   
4,443
   
2,519
   
1,201
 
Expense
   
2,295
   
1,825
   
2,081
 
                     
Interest & Dividends, net
   
2,148
   
694
   
(880
)
                     
REAL ESTATE
                   
Sale of real estate
   
16,226
   
33,481
   
16,990
 
Expenses
   
10,279
   
13,017
   
1,964
 
                     
Gain on sale of real estate
   
5,947
   
20,464
   
15,026
 
                     
Income before income taxes
   
$                 9,238
   
$               27,800
   
$               19,084
 



21


Citrus
 
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.

22


Sugarcane and Sod
 
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).
 
Ranching
 
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.
 
23

Plants and Trees

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.

Other Operations
 
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.
 
Direct and allocated expenses charged to the "Other" operations category included general and administrative and other costs not charged directly to the citrus, ranching or sugarcane divisions. These expenses totaled $10.7 million during fiscal year 2005, compared with $6.5 million during fiscal year 2004 and $6.3 million during fiscal year 2003. The increase in general and administrative costs largely related to the evaluation of a merger possibility ($1.5 million), costs incurred for compliance with Sarbanes Oxley section 404 ($0.7 million), consulting ($0.5 million), Director fees ($0.5 million) and continuing costs related to the IRS audits ($0.5 million).

Casualty Loss

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.

24

Profit on Sale of Real Estate
 
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.
 
General Corporate
 
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.
 

25

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.
 
26

 
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.

The Company has issued press releases and filed periodic reports on Form 8-K relating to the foregoing events. 

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
 
27

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.

Recent events

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.

28

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.
 
Off Balance Sheet Arrangements
______________________________
 
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 47.4% of the Company’s common stock. The coverage term was from August 2004 to July 2005. Total coverage under the policy is $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 of $1.4 million in fiscal year 2005, equal to the total potential exposure under the policy for this claim.
 
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.
 
29



Disclosure of Contractual Obligations
_____________________________________

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

       
Less than
 
1 - 3
 
3 - 5
 
5 +
   
Total
 
one year
 
years
 
years
 
years
                     
Long-term debt
 
$              51,348
 
$           3,309
 
$           40,957
 
$        2,585
 
$             4,497
Tax contingency (a)  
16,954
 
-
 
 16,954
 
-
 
-
Pension plans
 
4,808
 
432
 
688
 
688
 
3,000
Commissions
 
2,834
 
709
 
2,125
 
-
 
-
Donations
 
1,547
 
776
 
771
 
-
 
-
Insurance claims
 
1,404
 
1,404
 
-
 
-
 
-
Purchase obligations
 
50
 
           50
 
-
 
-
 
-
                     
Total
 
$              78,945
 
$            6,680
 
$           61,495
 
$     3,273
 
$            7,497
 
(a) This obligation represents a contingency accrual related to income taxes.  See Note 8 to the consolidated financial statements.
 
Critical Accounting Policies and Estimates
 
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.
 

30


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. Because Management believes it is probable that a challenge will be made and probable that the challenge may be successful as to some of the possible assertions, Management has provided for the 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
 
31

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.
 
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
 
Alico’s exposure to market rate risk and changes in interest rates relate primarily to its investment portfolio and revolving credit lines. Investments are placed with high quality issuers and, by policy, limit the amount of credit exposure to any one issuer. Alico is adverse to principal loss and provides for the safety and preservation of invested funds by limiting default, market and reinvestment risk. The Company classifies cash equivalents and short-term investments as fixed-rate if the rate of return on such instruments remains fixed over their term. These fixed-rate investments include fixed-rate U.S. government securities, municipal bonds, time deposits and certificates of deposit. Cash equivalents and short-term investments are classified as variable-rate if the rate of return on such investments varies based on the change in a predetermined index or set of indices during their term. These variable-rate investments primarily include money market accounts, mutual funds and equities held at various securities brokers and investment banks.  

The table below presents the costs and estimated fair value of the investment portfolio at August 31, 2005:
 
             
Estimated
Marketable Securities and
 
Cost
 
Fair Value
Short-term Investments (1)
           
                 
 
Fixed Rate
 
$42,588
 
$42,277
 
Variable Rate
 
$24,875
 
$28,547
                 
 (1) See definition in Notes 1 and 2 in Notes to Consolidated Financial Statements. 
 
32

 
The aggregate fair value of investments in debt instruments (net of mutual funds of $4,423)
       
as of August 31, 2005, by contractual maturity date, consisted of the following:
       
         
 
   
Aggregate 
 
 
   
Fair 
 
 
   
Values 
 
         
Due in one year or less
 
$
6,843
 
Due between one and five years
   
8,812
 
Due between five and ten years
   
4,490
 
Due thereafter
   
17,709
 
         
Total
 
$
37,854
 
 
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.
33



Item 8.
Financial Statements and Supplementary Data.
 
Independent Auditors' Reports
 
 
 
 
 
Report of Independent Registered Certified Public Accounting Firm
 
To the Stockholders and Board of Directors of
Alico, Inc. and Subsidiaries 


We have audited the accompanying consolidated balance sheets of Alico, Inc. and Subsidiaries as of August 31, 2005 and 2004, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alico, Inc. and Subsidiaries as of August 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Alico, Inc. and Subsidiaries internal control over financial reporting as of August 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated November 17, 2005, expressed an unqualified opinion on management's assessment of the effectiveness of Alico, Inc.'s internal control over financial reporting and an opinion that Alico, Inc. had not maintained effective internal control over financial reporting as of August 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/ TEDDER JAMES WORDEN & ASSOCIATES, P.A.
Orlando, Florida
November 17, 2005

34

 
Report of Independent Registered Certified Public Accounting Firm
 
To the Stockholders and Board of
Directors of Alico, Inc.
 
We have audited the consolidated statements of operations, stockholders' equity and comprehensive income (loss) and cash flows of Alico, Inc. and subsidiaries for the year ended August 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Alico, Inc. and subsidiaries for the year ended August 31, 2003 in conformity with U.S. generally accepted accounting principles.


/s/ KPMG LLP
 
Orlando, Florida
October 10, 2003
 
 
 
35

 
CONSOLIDATED BALANCE SHEETS
(in thousands)
               
 
   
August 31 
 
     
2005
   
2004
 
ASSETS
             
               
Current assets:
             
Cash and cash equivalents
 
$
13,384
 
$
24,299
 
Marketable securities available for sale
   
70,824
   
55,570
 
Accounts receivable
   
11,216
   
9,118
 
Mortgages and notes receivable, current portion
   
2,370
   
9,983
 
Land inventories
   
1,809
   
5,501
 
Inventories
   
20,902
   
20,772
 
Deposits in escrow
   
6,812
   
-
 
Other current assets
   
1,660
   
682
 
               
Total current assets
   
128,977
   
125,925
 
               
Other assets:
             
               
Mortgages and notes receivable, net of current portion
   
6,395
   
662
 
Investments
   
692
   
1,069
 
Cash surrender value of life insurance, designated
   
5,676
   
4,900
 
               
Total other assets
   
12,763
   
6,631
 
               
Property, buildings and equipment
   
150,997
   
147,756
 
Less accumulated depreciation
   
(45,043
)
 
(42,070
)
               
Net property, buildings and equipment
   
105,954
   
105,686
 
               
Total assets
 
$
247,694
 
$
238,242
 
               
See accompanying Notes to Consolidated Financial Statements.
             

 
 
36

 
 

       
August 31,
 
       
2005
 
2004
 
                             LIABILITIES & STOCKHOLDERS' EQUITY          
               
Current liabilities:
             
Accounts payable
     
$              2,180
 
$                    1,743
 
Due to profit sharing plan
         
432
   
434
 
Accrued ad valorem taxes
         
2,008
   
1,678
 
Current portion of notes payable
         
3,309
   
3,319
 
Dividends payable
         
1,842
   
-
 
Accrued expenses
         
2,100
   
1,068
 
Commissions payable
         
709
   
-
 
Insurance claims payable
         
1,404
   
-
 
Income taxes payable
         
-
   
753
 
Deposits
         
779
   
-
 
Deferred income taxes
         
2,280
   
376
 
Donation payable
         
776
   
765
 
                     
Total current liabilities
         
17,819
   
10,136
 
                     
Deferred revenue
         
-
   
266
 
Commissions payable, net of current portion
         
2,125
   
-
 
Notes payable, net of current portion
         
48,039
   
48,266
 
Deferred income taxes
         
13,424
   
11,445
 
Deferred retirement benefits
         
4,376
   
4,464
 
Other non-current liability
         
16,954
   
16,954
 
Donation payable, net of current portion
         
771
   
1,513
 
                     
Total liabilities
         
103,508
   
93,044
 
                     
Stockholders' equity:
                   
Preferred stock, no par value. Authorized 1,000 shares;
                   
issued, none
         
-
   
-
 
Common stock, $1 par value. Authorized 15,000 shares;
                   
issued and outstanding 7,369 in 2005 and 7,309 in 2004
         
7,369
   
7,309
 
Additional paid in capital
         
9,183
   
7,800
 
Accumulated other comprehensive income
         
2,195
   
1,529
 
Retained earnings
         
125,439
   
128,560
 
                     
Total stockholders' equity
         
144,186
   
145,198
 
                     
Total liabilities and stockholders' equity
       
$
247,694
 
$
238,242
 
                     
See accompanying Notes to Consolidated Financial Statements.
                   



37

 
 

CONSOLIDATED STATEMENTS OF OPERATIONS
 
(in thousands except per share data)
 
                     
 
   
Years Ended August 31, 
 
     
2005
   
2004
   
2003
 
                     
Revenue:
                   
Citrus
 
$
26,231
 
$
24,549
 
$
24,107
 
Sugarcane & sod
   
9,725
   
12,398
   
13,373
 
Ranch
   
11,017
   
9,678
   
7,175
 
Rock & sand royalties
   
2,991
   
3,448
   
2,154
 
Land rentals
   
1,933
   
1,171
   
973
 
Plants & forest products
   
2,818
   
407
   
292
 
Retail land sales
   
810
   
406
   
211
 
                     
Operating revenue
   
55,525
   
52,057
   
48,285
 
                     
Cost of sales:
                   
Citrus production, harvesting & marketing
   
19,984
   
20,407
   
20,106
 
Sugarcane & sod production, harvesting & hauling
   
9,304
   
9,673
   
10,188
 
Ranch
   
8,908
   
8,178
   
6,790
 
Plants & trees
   
2,128
   
-
   
-
 
Retail land sales
   
328
   
253
   
179
 
Casualty losses
   
1,888
   
408
   
-
 
                     
Total costs of sales
   
42,540
   
38,919
   
37,263
 
                     
Gross profit
   
12,985
   
13,138
   
11,022
 
                     
General & administrative expenses
   
10,664
   
6,471
   
6,319
 
                     
Income from operations
   
2,321
   
6,667
   
4,703
 

38



   
Years Ended August 31,
 
   
2005
 
2004
 
2003
 
                     
Other income (expenses):
                   
                     
Profit on sales of real estate:
                   
Sales
   
15,416
   
33,075
   
16,779
 
Cost of sales
   
9,951
   
12,764
   
1,785
 
Profit on sales of real estate, net
   
5,465
   
20,311
   
14,994
 
Interest & investment income
   
4,443
   
2,519
   
1,201
 
Interest expense
   
(2,295
)
 
(1,825
)
 
(2,081
)
Other income (expense)
   
(696
)
 
128
   
267
 
                     
Total other income, net
   
6,917
   
21,133
   
14,381
 
                     
Income before income taxes
   
9,238
   
27,800
   
19,084
 
Provision for income taxes
   
3,148
   
9,987
   
6,425
 
                     
Net income
 
$
6,090
 
$
17,813
 
$
12,659
 
                     
Weighted-average number of shares outstanding
   
7,331
   
7,219
   
7,106
 
                     
Weighted-average number of shares outstanding
                   
assuming dilution
   
7,347
   
7,295
   
7,256
 
                     
Per share amounts:
                   
Basic
 
$
0.83
 
$
2.47
 
$
1.78
 
Diluted
   
0.83
   
2.44
   
1.74
 
Dividends
 
$
1.25
 
$
0.60
 
$
0.35
 
                     
See accompanying Notes to Consolidated Financial Statements.
                   


 
39



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
                       
             
Accumulated
       
 
Common Stock
     
Additional
 
Other
       
 
Shares
     
Paid in
 
Comprehensive
 
Retained
   
 
Issued
 
Amount
 
Capital
 
Income (loss)
 
Earnings
 
Total
                       
Balances, August 31, 2002
7,080
 
$7,080
 
$1,716
 
($432)
 
$104,854
 
$113,218
                       
Comprehensive income:
                     
Net income for the year ended
                     
August 31, 2003
-
 
-
 
-
 
-
 
12,659
 
12,659
                       
Unrealized gains on securities,
                     
net of taxes of $552 and
                     
reclassification adjustment
-
 
-
 
-
 
1,393
 
-
 
1,393
Total comprehensive income
                   
14,052
                       
Dividends paid
-
 
-
 
-
 
-
 
(2,482)
 
(2,482)
Stock options exercised
36
 
36
 
519
 
-
 
-
 
555
Stock based compensation
-
 
-
 
839
 
-
 
-
 
839
Balances, August 31, 2003
7,116
 
7,116
 
3,074
 
961
 
115,031
 
126,182
                       
Comprehensive income:
                     
Net income for the year ended
                     
August 31, 2004
-
 
-
 
-
 
-
 
17,813
 
17,813
                       
Unrealized gains on securities,
                     
net of taxes of $ 234 and
                     
reclassification adjustment
-
 
-
 
-
 
568
 
-
 
568
Total comprehensive income
                   
18,381
                       
Dividends paid
-
 
-
 
-
 
-
 
(4,284)
 
(4,284)
Stock options exercised
193
 
193
 
2,963
 
-
 
-
 
3,156
Stock based compensation
-
 
-
 
1,763
 
-
 
-
 
1,763
Balances, August 31, 2004
7,309
 
7,309
 
7,800
 
1,529
 
128,560
 
145,198
                       
Comprehensive income:
                     
Net income for the year ended
                     
August 31, 2005
-
 
-
 
-
 
-
 
6,090
 
6,090
                       
Unrealized gains on securities,
                     
net of taxes of $408 and
                     
reclassification adjustment
-
 
-
 
-
 
666
 
-
 
666
Total comprehensive income
                   
6,756
                       
Dividends paid and accrued
-
 
-
 
-
 
-
 
(9,211)
 
(9,211)
Stock options exercised
60
 
60
 
964
 
-
 
-
 
1,024
Stock based compensation
-
 
-
 
419
 
-
 
-
 
419
Balances, August 31, 2005
7,369
 
$7,369
 
$9,183
 
$2,195
 
$125,439
 
$144,186


40

 

                   
Disclosure of reclassification amount:
       
2005
 
2004
 
2003
                   
Unrealized holding gains
                 
arising during the period
       
$ 1,064
 
$ 787
 
$ 2,651
                   
Less: reclassification adjustment for
                 
realized gains included in net income
       
398
 
219
 
1,258
                   
Net unrealized gains on securities
       
$ 666
 
$ 568
 
$ 1,393
                   
See accompanying Notes to Consolidated Financial Statements.
                 
 


 
41

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(in thousands)
 
               
   
Years Ended August 31,
 
   
2005
 
2004
 
2003
 
               
               
Cash flows from operating activities:
             
Net income
 
$ 6,090
 
$ 17,813
 
$ 12,659
 
Adjustments to reconcile net income to cash provided by
             
operating activities:
             
Depreciation
 
6,957
 
6,509
 
6,723
 
Gain on breeding herd sales
 
(209)
 
(108)
 
(16)
 
Deferred income tax expense, net
 
3,209
 
472
 
582
 
Deferred retirement benefits
 
(88)
 
(1,154)
 
1
 
Net gain on sale of marketable securities
 
(2,083)
 
(723)
 
(691)
 
Loss on disposals of property & equipment
 
5,539
 
-
 
606
 
Gain on real estate sales
 
(5,465)
 
(20,311)
 
(15,026)
 
Stock options granted below fair market value
 
419
 
1,763
 
839
 
Cash provided by (used for) changes in:
     
 
     
Accounts receivable
 
(2,098)
 
561
 
(218)
 
Inventories
 
(692)
 
474
 
(173)
 
Other assets
 
(765)
 
291
 
111
 
Accounts payable & accrued expenses
 
3,247
 
7,194
 
5,840
 
Income taxes payable
 
(1,741)
 
753
 
42
 
Deferred revenues
 
(266)
 
176
 
(23)
 
       
 
     
Net cash provided by operating activities
 
12,054
 
13,710
 
11,256
 
                     
Cash flows from investing activities:
                   
Increase in land inventories
   
(498
)
 
(423
)
 
(684
)
Real Estate deposits and accrued commissions    
(11,106
)
 
-
   
-
 
Purchases of property & equipment
   
(12,877
)
 
(7,280
)
 
(7,325
)
Proceeds from disposals of property & equipment
   
1,762
   
738
   
431
 
Proceeds from sale of real estate
   
7,507
   
21,356
   
15,911
 
Purchases of marketable securities & investments
   
(28,351
)
 
(21,392
)
 
(20,257
)
Proceeds from sales of marketable securities
   
16,897
   
5,643
   
4,958
 
Collection of mortgages & notes receivable
   
10,279
   
2,586
   
2,377
 
                     
Net cash (used for) provided by investing activities
   
(16,387
)
 
1,228
   
(4,589
)
 
 
42

 
     
Years Ended August 31,
     
2005
 
2004
 
2003
               
Cash flows from financing activities:
             
Proceeds from exercising stock options
   
$ 1,024
 
$ 3,156
 
$ 555
Proceeds from notes payable
   
26,933
 
23,922
 
33,169
Repayment of notes payable
   
(27,170)
 
(29,785)
 
(31,697)
Dividends paid
   
(7,369)
 
(4,284)
 
(2,482)
 
             
Net cash used for financing activities
   
(6,582)
 
(6,991)
 
(455)
               
Net (decrease) increase in cash and cash equivalents
   
(10,915)
 
7,947
 
6,212
               
Cash and cash equivalents:
             
At beginning of year
   
24,299
 
16,352
 
10,140
               
At end of year
   
$ 13,384
 
$ 24,299
 
$ 16,352
               
Supplemental disclosures of cash flow information:
             
               
Cash paid for interest, net of amount capitalized
   
$ 2,074
 
$ 1,518
 
$ 1,767
               
               
Cash paid for income taxes
   
$ 1,600
 
$ 1,370
 
$ 1,060
               
Non-cash investing activities:
             
               
Fair value adjustments to securities available for sale
   
$ 1,074
 
$ 802
 
$ 1,945
               
Income tax effect related to fair value adjustments
   
$ 408
 
$ 234
 
$ 552
               
               
Reclassification of breeding herd to Property & Equipment
   
$ 562
 
$ 599
 
$ 700
               
See accompanying Notes to Consolidated Financial Statements.
             
 
 
43

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended August 31, 2005, 2004 and 2003
(in thousands except for unit data)
 
(1) Summary of Significant Accounting Policies
 
 
(a) Basis of Consolidated Financial Statement Presentation
 
The consolidated financial statements include the accounts of Alico, Inc. (the Company) and its wholly owned subsidiaries, Saddlebag Lake Resorts, Inc. (Saddlebag), Agri-Insurance Company, Ltd. (Agri), Alico-Agri, Ltd. and Alico Plant World, LLC, after elimination of all significant intercompany balances and transactions.
 
(b) Revenue Recognition

Income from the sale of citrus is recognized at the time the crop is harvested. 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 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 the prior years’ crops 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 years’ crops by ($198 thousand), $325 thousand, and $356 thousand during the fiscal year’s 2005, 2004, and 2003, respectively.
 
The Company recognizes revenue from cattle sales at the time the cattle are sold at auction.

(c) Real Estate
 
Real estate sales are recorded under the accrual method of accounting. Residential retail land sales made through Saddlebag are not recognized until the buyer’s initial investment or cumulative payments of principal and interest equal or exceed 10 percent of the contract sales price.
 
Gains from commercial or bulk land sales, made mostly through Alico-Agri, Ltd. 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.


44


At August 31, 2005, the Company had deferred revenue of $46.2 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 is less than the market rate. The recorded valuation discounts are realized as the balances due are collected. In the event of early liquidation, interest is recognized on the simple interest method. At August 31, 2005, the Company had a valuation discount of $2.6 million recorded in mortgages and notes receivable in the accompanying consolidated balance sheet.
 
Tangible assets that are purchased during the period to aid in the sale of the project as well as costs for services performed to obtain regulatory approval of the sales are capitalized as land and land improvements to the extent they are estimated to be recoverable from the sale of the property. Land and land improvement costs are allocated to individual parcels on a per lot basis using the relative sales value method.
 
The Company entered into an agreement with a real estate consultant to assist in obtaining the necessary regulatory approvals for the development and marketing of a tract of raw land. The marketing costs under this agreement are being expensed as incurred. The costs incurred to obtain the necessary regulatory approvals are capitalized into land costs when paid. These costs will be expensed as cost of sales when the underlying real estate is sold.