UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended May 31, 2007

or

o		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.

Florida		59-0906081
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
P.O. Box 338, LaBelle, FL		33975
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 863-675-2966

N/A
(Former name, former address and former fiscal year, if changed since last report.)

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

þ Yes o No

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

Large accelerated file o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

oYes þ No

There were 7,364,084 shares of common stock, par value $1.00 per share, outstanding at
July 2, 2007.

 

 

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(in thousands except per share data)

		Three months ended								Nine months ended
		May 31,								May 31,
		2007				2006				2007				2006
Operating revenue
Agricultural operations		$	61,486			$	34,128			$	121,328			$	60,964
Non-agricultural operations			702				472				1,991				1,757
Real estate operations			—				81				2,447				113
Total operating revenue			62,188				34,681				125,766				62,834
Operating expenses
Agricultural operations			49,263				28,585				95,748				52,621
Non-agricultural operations			56				—				283				—
Real estate operations			(23	)			42				582				58
Net casualty loss			—				2				—				2,768
Total operating expenses			49,296				28,629				96,613				55,447
Gross profit			12,892				6,052				29,153				7,387
Corporate general and administrative			3,536				3,109				10,113				7,556
Income (loss) from operations			9,356				2,943				19,040				(169	)
Other income (expenses):
Profit on sales of bulk real estate:
Sales			(15	)			—				1,713				5,555
Cost of sales			—				—				679				1,162
Profit on sales of bulk real estate, net			(15	)			—				1,034				4,393
Interest & investment income			2,120				1,651				5,490				8,135
Interest expense			(1,321	)			(1,055	)			(3,806	)			(2,839	)
Other income (expense)			(4	)			93				168				231
Total other income, net			780				689				2,886				9,920
Income before income taxes			10,136				3,632				21,926				9,751
Provision for income taxes			23,285				1,092				28,342				3,391
Net (loss) income		$	(13,149	)		$	2,540			$	(6,416	)		$	6,360
Weighted-average number of shares outstanding			7,369				7,366				7,371				7,366
Weighted-average number of shares outstanding assuming dilution			7,389				7,378				7,385				7,377
Per share amounts:
Basic		$	(1.78	)		$	0.34			$	(0.87	)		$	0.86
Diluted		$	(1.78	)		$	0.34			$	(0.87	)		$	0.86
Dividends		$	0.28			$	0.25			$	0.83			$	0.75

See accompanying Notes to Condensed Consolidated Financial Statements.

ALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

		May 31,
		2007				August 31,
		(unaudited)				2006
ASSETS
Current assets:
Cash and cash equivalents		$	32,174			$	25,065
Marketable securities available for sale			47,645				50,100
Accounts receivable			29,261				8,679
Mortgage and notes receivable			879				47
Inventories			19,196				24,545
Current deferred tax asset			10,336				—
Other current assets			1,703				2,477
Total current assets			141,194				110,913
Mortgages and notes receivable, net of current portion			9,448				10,977
Investments and deposits			2,793				2,919
Deferred tax benefit			7,214				—
Cash surrender value of life insurance, designated			7,104				6,593
Property, buildings and equipment			182,510				179,689
Less: accumulated depreciation			(50,743	)			(48,338	)
Total assets		$	299,520			$	262,753

See accompanying Notes to Condensed Consolidated Financial Statements.

ALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

		May 31,
		2007				August 31,
		(unaudited)				2006
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	6,348			$	1,966
Income taxes payable			4,720				1,304
Current portion of notes payable			1,347				3,315
Accrued expenses			2,982				3,720
Comissions payable			613				—
Dividend payable			2,025				2,027
Accrued ad valorem taxes			1,096				2,090
Deferred income taxes			—				282
Contingent tax liability			74,396				—
Other current liabilities			1,343				3,374
Total current liabilities			94,870				18,078
Notes payable, net of current portion			67,377				60,687
Deferred income taxes, net of current portion			—				14,807
Deferred retirement benefits, net of current portion			5,049				4,952
Commissions and deposits payable			3,821				2,833
Other non-current liability			—				20,293
Total liabilities			171,117				121,650
Stockholders’ equity:
Common stock			7,376				7,376
Additional paid in capital			9,974				9,691
Treasury stock			(793	)			(287	)
Accumulated other comprehensive (loss)			(7	)			(29	)
Retained earnings			111,853				124,352
Total stockholders’ equity			128,403				141,103
Total liabilities and stockholders’ equity		$	299,520			$	262,753

See accompanying Notes to Condensed Consolidated Financial Statements.

ALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

		Nine months ended
		May 31,
		2007				2006
Cash flows from operating activities:
Net cash provided by operating activities		$	8,590			$	8,679
Cash flows from investing activities:
Purchases of property and equipment			(7,141	)			(31,422	)
Proceeds from sale of real estate			600				5,122
Proceeds from sales of property and equipment			1,485				685
Purchases of marketable securities			(43,588	)			(113,098	)
Proceeds from sales of marketable securities			45,870				130,953
Note receivable collections			3,868				494
Other			(108	)			—
Net cash provided by (used for) investing activities			986				(7,266	)
Cash flows from financing activities:
Repayment of loans			(12,008	)			(45,605	)
Proceeds from loans			16,730				57,414
Proceeds used for stock transactions			(1,106	)			(24	)
Dividends paid			(6,083	)			(5,527	)
Net cash provided by (used for) financing activities			(2,467	)			6,258
Net increase in cash and cash equivalents		$	7,109			$	7,671
Cash and cash equivalents:
At beginning of period		$	25,065			$	13,384
At end of period		$	32,174			$	21,055

		Nine months ended
		May 31,
		2007				2006
Supplemental disclosures of cash flow information
Cash paid for interest, net of amount capitalized		$	3,571			$	2,009
Cash paid for income taxes		$	3,447			$	924
Net non cash investing activities:
Issuance of mortgage notes		$	13,341			$	92
Fair value adjustments to securities available for sale net of tax effects		$	22			$	(2,307	)
Reclassification of breeding herd to property and equipment		$	566			$	516

See accompanying Notes to Condensed Consolidated Financial Statements.

ALICO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except for per share data)

1. Basis of financial statement presentation:

The accompanying condensed consolidated financial statements (“Financial Statements”) include the accounts of Alico, Inc. (“Alico”) and its wholly owned subsidiaries, Saddlebag Lake Resorts, Inc. (“Saddlebag”), Agri-Insurance Company, Ltd. (“Agri”), Alico-Agri, Ltd., Alico Plant World, LLC and Bowen Brothers Fruit, LLC (“Bowen”) (collectively referred to as the “Company”) after elimination of all significant intercompany balances and transactions.

The following Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. The Company believes that the disclosures made are adequate to make the information not misleading.

The accompanying Financial Statements have been prepared on a basis consistent with the accounting principles and policies reflected in the Company’s annual report for the year ended August 31, 2006. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest shareholders’ annual report (Form 10-K). In the opinion of Management, the accompanying Financial Statements contain all adjustments (consisting only of normal recurring accruals and the change in the income tax contingency (see note 8)) necessary for a fair presentation of its consolidated financial position at May 31, 2007 and the consolidated results of operations for the three and nine month periods ended May 31, 2007 and 2006, and the consolidated cash flows for the nine month periods ended May 31, 2007 and 2006.

The Company is involved in agriculture, which is of a seasonal nature and subject to the influence of natural phenomena and wide price fluctuations. Fluctuation in the market prices for citrus fruit has caused the Company to recognize adjustments to revenue from the prior year’s crop totaling $133 thousand for the quarter ended May 31, 2007, $537 thousand for the nine months ended May 31, 2007, and $164 thousand and $839 thousand for the quarter and nine months ended May 31, 2006, respectively.

The results of operations for the stated periods are not necessarily indicative of results to be expected for the full year. Certain items from 2006 have been reclassified to conform to the 2007 presentation.

2. Real Estate:

Real estate sales are recorded under the accrual method of accounting. Under this method, a sale is not recognized until certain criteria are met including whether the profit is determinable, collectibility of the sales price is reasonably assured and the earnings process is complete.

In November 2005, the Company sold approximately 280 acres of citrus grove land located south of LaBelle, Florida in Hendry County for $5.6 million. The Company retained operating rights to the grove until residential development begins. The Company recognized a net profit on the sale of $4.4 million.

In May 2006, the Company purchased a 523 acre riverfront mine site for rock and fill for $10.6 million cash. The Company allocated approximately 54% of the purchase price to the rock and sand reserves with the remaining 46% of the purchase price allocated as residual land value based on the present value of the expected rock royalties over 20 years and the expected residual value of the property after that time. Rock and sand reserves will be depleted and charged to cost of goods sold proportionately as the property is mined. Depletion expense recognized during the three and nine months ended May 31, 2007 was $14 thousand and $70 thousand, respectively; $0 expense was recognized in 2006 for the same periods.

In December 2006, the Company’s subsidiary, Alico-Agri, Ltd. restructured three contracts in connection with the sale of property in Lee County, Florida. The original contracts were entered into in 2001 and 2003, respectively, for approximately 5,609 acres. The Company received $7.5 million upon execution of the restructured agreements.

Under the terms of the first renegotiated contract, $3.8 million of the closing proceeds were subtracted from the existing mortgage receivable principal of $56.6 million and accrued interest of $1.7 million was added back to the mortgage receivable as additional principal. Four variable annual principal plus interest payments of the remaining $54.5 million mortgage will commence with a payment of $13.6 million on September 28, 2007. The interest rate was renegotiated from 2.5% annually up to 4.0% annually.

The second contract, for a gross sales price of $63.5 million, was renegotiated as a series of four annual options with up to four annual extensions. The first option will expire on September 28, 2007. In order to extend the time to exercise the option, the buyer must pay an annual extension fee equal to 6% of the remaining unexercised sales price. The Company received a non refundable option payment of $3.1 million at closing. During the second quarter of fiscal year 2007, $1.9 million was recognized as operating income. This was the amount of the deposit that exceeded the basis of the property. The remaining $1.2 million of the option payment was recorded as a deposit.

A third contract, for a gross sales price of $12.0 million, was renegotiated as a sales contract with a purchase money mortgage. The mortgage consists of four annual payments of principal and interest. The annual interest rate under the note is 6%. In order to obtain an extension on the option contract, the sales contract must also be extended. There are up to four annual extensions. The first option will expire on September 28, 2007. In order to extend the time to exercise the option, the buyer must pay an annual extension fee equal to 6% of the remaining unexercised sales price. The proportionate gain on the down payment of $600 thousand under this contract was recognized under the installment method as operating income during the second quarter of fiscal year 2007.

In order to reflect the prevailing market rate of interest based on the Company’s incremental borrowing rate of 6.625%, the notes associated with the first and third contracts were discounted by $1.9 million which was recognized in the second quarter of fiscal year 2007 as a reduction of real estate sales proceeds.

During the fourth quarter of fiscal year 2006, the Company hired an experienced real estate professional to manage its real estate assets. The renegotiations of the above contracts were conducted under his supervision. The renegotiation of the first contract was not deemed a substantial contract revision under GAAP guidelines. As such, proceeds recognized under the first contract were treated consistently with its initial classification; that is, it was not considered an operating activity and was recorded as a non-operating item. Due to the substantial changes to the original contracts in addition to the time and effort on the part of the Company’s Real Estate department, the revenue and expenses involved in the negotiations of the second and third contracts were treated as operating items for the nine months ended May 31, 2007.

Real estate project costs incurred for the acquisition, development and construction of real estate projects are capitalized. Additionally, costs to market real estate are capitalized if they are reasonably expected to be recovered from the sale of the project and have been performed to obtain regulatory approval for the sale. An allowance is provided to reduce capitalized project costs to estimated realizable value.

3. Marketable Securities Available for Sale:

The Company has classified 100% of investments in marketable securities as available for sale and, as such, the securities are carried at estimated fair value. Unrealized gains and losses determined to be temporary are recorded as other comprehensive income, net of related deferred taxes, until realized. Unrealized losses determined to be other than temporary are recognized in the period the determination is made.

The cost and estimated fair value of marketable securities available for sale at May 31, 2007 and August 31, 2006 were as follows:

		May 31, 2007																August 31, 2006
		(Unaudited)
						Gross								Estimated								Gross								Estimated
						Unrealized								Fair								Unrealized								Fair
		Cost				Gains				Losses				Value				Cost				Gains				Losses				Value
Debt securities
Municipal bonds		$	28,160			$	1			$	(35	)		$	28,126			$	21,169			$	19			$	(2	)		$	21,186
Mutual funds			2,000				—				—				2,000				370				—				(6	)			364
Fixed maturity funds			13,811				41				(4	)			13,848				19,686				44				(18	)			19,712
Corporate bonds			3,686				3				(18	)			3,671				8,920				—				(82	)			8,838
Marketable securities available for sale		$	47,657			$	45			$	(57	)		$	47,645			$	50,145			$	63			$	(108	)		$	50,100

The aggregate fair value of investments in debt instruments (net of mutual funds of $2,000) as of May 31, 2007 by contractual maturity date consisted of the following:

		Aggregate
		Fair Value
Due within 1 year		$	30,918
Due between 1 and 2 years			5,794
Due between 2 and 3 years			368
Due between 3 and 4 years			—
Due between 4 and 5 years			1,515
Due beyond five years			7,050
Total		$	45,645

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at May 31, 2007.

		May 31, 2007
		Less than 12 months								12 months or greater								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
Fixed maturity funds		$	4,943			$	4			$	—			$	—			$	4,943			$	4
Corporate bonds			—				—				3,519				18				3,519				18
Municipal Bonds			19,695				35				—				—				19,695				35
Total		$	24,638			$	39			$	3,519			$	18			$	28,157			$	57

Net realized gain on the sale of securities for the nine months ended May 31, 2007 and 2006 were $21 thousand and $3.7 million, respectively.

Debt instruments and funds. The unrealized losses on fixed maturity funds, corporate bonds and municipal bonds were primarily due to changes in interest rates. At May 31, 2007 the Company held loss positions in 91 debt instruments. Because the decline in market values of these securities is attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not believe any of the unrealized losses represent other than temporary impairment based on the evaluation of available evidence as of May 31, 2007.

4. Mortgages and notes receivable:

The balances of the Company’s mortgages and notes receivable were as follows:

		May 31,
		2007				August 31,
		(unaudited)				2006
Mortgage notes receivable on retail land sales		$	334			$	427
Mortgage notes receivable on bulk land sales			66,453				56,610
Total mortgage and notes receivable			66,787				57,037
Less: Deferred revenue			(53,568	)			(43,230	)
Discount on notes to impute market interest			(2,892	)			(2,783	)
Current portion			(879	)			(47	)
Non-current portion		$	9,448			$	10,977

Real estate sales are recorded under the accrual method of accounting. Gains from commercial or bulk land sales are not recognized until payments received for property to be developed within two years after the sale equal 20% or property to be developed after two years equal 25% of the contract sales price according to the installment sales method.

Profits from commercial real estate sales are discounted to reflect the market rate of interest when the stated rate of the mortgage note is less than the market rate. The recorded imputed interest discounts are realized as the balances due are collected. In the event of early liquidation, interest is recognized on the simple interest method.

In December 2006, the Company’s subsidiary, Alico-Agri, Ltd. restructured a contract in connection with the sale of property in Lee County, Florida. The original contract was entered into in 2001. The Company received $3.8 million upon execution of the restructured agreement.

Under the terms of the renegotiated contract, $3.8 million of the closing proceeds were subtracted from the existing mortgage receivable principal of $56.6 million and accrued interest of $1.7 million was added back to the mortgage receivable as additional principal. Four annual principal plus interest payments of the remaining $54.5 million mortgage will commence with a payment of $13.6 million on September 28, 2007. The interest rate was renegotiated from 2.5% annually up to 4.0% annually. The note was further discounted by $1.9 million to reflect the market rate of interest based on the Company’s incremental borrowing rate of 6.625% annually. This was recognized as a reduction of the sales proceeds during the second quarter of fiscal year 2007.

In December 2006, the Company sold property in Lee County, Florida for $12.0 million. The Company recognized revenue of $0.6 million and recorded a mortgage note receivable for $11.4 million and deferred revenue of $10.2 million. The mortgage note receivable, which accrues interest at the rate of 6% annually, was discounted by $0.3 million to adjust for the current market rate of interest. Interest only will be collected annually for the first four years, followed by four equal annual payments of principal and interest.

5. Inventories:

A summary of the Company’s inventories is shown below:

		May 31,
		2007				August 31,
		(unaudited)				2006
Unharvested fruit crop on trees		$	9,131			$	10,709
Unharvested sugarcane			2,975				5,168
Beef cattle			5,035				7,063
Unharvested sod			1,467				588
Plants and vegetables			452				1,017
Rock, fill and other			136				—
Total inventories		$	19,196			$	24,545

Hurricane Wilma, a category three hurricane, swept through southwest Florida in October 2005. The hurricane caused extensive damage to the Company’s crops and infrastructure in Collier and Hendry Counties. The Company recognized casualty losses resulting from damages to inventory from the hurricane as follows: (see also note 15)

		Three Months ended								Nine Months ended
		May 31,								May 31,
		2007				2006				2007				2006
		$	—			$	40			$	—			$	3,629
Unharvested citrus			—				—				—				313
Unharvested sugarcane			—				—				—				147
Unharvested vegetables
Total inventory loss		$	—			$	40			$	—			$	4,089

The Company records its inventory at the lower of cost or net realizable value. At May 31, 2007 and May 31, 2006, the cost basis for all inventories were below estimated net realizable value.

6. Income taxes:

The provision for income taxes for the three and nine months ended May 31, 2007 and 2006 is summarized as follows:

		Three months ended								Nine months ended
		May 31,								May 31,
		2007				2006				2007				2006
Current:
Federal income tax		$	2,591			$	529			$	5,180			$	1,417
State income tax			479				57				922				151
			3,070				586				6,102				1,568
Deferred:
Federal income tax			11,196				457				13,025				1,647
State income tax			9,019				49				9,215				176
			20,215				506				22,240				1,823
Total provision for income taxes		$	23,285			$	1,092			$	28,342			$	3,391

The Internal Revenue Service (IRS) has audited the Company’s tax returns for the tax years 2000 through 2004 and issued a thirty day letter dated August 14, 2006 pertaining to those audits.

In the thirty day letter, the IRS proposed several alternative theories as a basis for its argument that Alico should have reported additional taxable income in the years under audit. These theories principally relate to the formation and capitalization of the Company’s Agri Insurance subsidiary and its tax exempt status during the years under audit. Under the theories proposed, the IRS has calculated additional taxes and penalties due ranging from a minimum of $35.4 million dollars to a maximum of $86.4 million dollars. The letter does not quantify the interest on the proposed taxes, but the Company estimates the interest on the IRS proposals to range from $11.0 million to $33.0 million at May 31, 2007.

The Company does not fully accept the IRS position and intends to continue to negotiate with IRS appeals to resolve the matter. However, because a challenge has been made and management believes that it is probable that the challenge may be successful as to some of the assertions, management has provided for the contingency. In accordance with SFAS No. 5 “Accounting for Contingencies,” the Company has established a reserve for this income tax contingency, interest and penalties, which represents the Company’s best estimate of the probable amount of this liability and takes into consideration the advice of the Company’s expert counsel and tax advisors. The actual liability could differ significantly from the amount of the reserve, which could have a material effect on the Company’s results of operations, financial position and cash flows. For the quarter ended May 31, 2007, the Company increased its reserve for income tax contingency by $53.3 million for a total of $74.4 million as compared to $20.3 million at August 31, 2006. There was a $19.5 million increase in income tax expense for the quarter ended May 31, 2007 and a $33.8 million increase in deferred income tax assets related to the $53.3 million increase in the income tax contingency liability.

In order to mitigate the possible interest related to this matter, the Company deposited $60 million with the IRS in July 2007. The Company expects negotiations with the IRS to be completed within the next 12 months; however, the Company has executed statute extensions for the tax returns affected to December 31, 2008.

Since January 1, 2004 Agri has been filing as a taxable entity. This change in tax status is a direct result of changes in the Internal Revenue Code, increasing premium and other annual income levels. Due to these changes, Agri no longer qualifies as a tax-exempt entity.

7. Indebtedness:

Alico, Inc. has a Credit Facility with a commercial lender that provides a $175.0 million revolving line of credit which matures on August 1, 2010. Funds from the Credit Facility may be used for general corporate purposes including: (i) the normal operating needs of the Company and its operating divisions, (ii) the purchase of capital assets and (iii) the payment of dividends. The Credit Facility also allows for an annual extension at the lender’s option.

Under the Credit Facility, revolving borrowings require quarterly interest payments at LIBOR plus a variable rate between 0.8% and 1.5% depending on the Company’s debt ratio. The Amended Credit Facility is partially collateralized by mortgages on two parcels of agricultural property located in Hendry County, Florida consisting of 7,672 acres and 33,700 acres.

The Credit Facility 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 sets limitations on the extension of loans or additional borrowings by the Company or any subsidiary.

Under the Credit Facility an event of default occurs if the Company fails to make the payments required of it or otherwise fails to fulfill the provisions and covenants applicable to it. In the event of default, the Credit Facility shall bear an increased interest rate of 2% in addition to the then-current rate specified in the Credit Facility; the lender may alternatively at its option, terminate its revolving credit commitment and require immediate payment of the entire unpaid principal amount of the Credit Facility, accrued interest and declare all other obligations immediately due and payable. As a result of the increase in the income tax contingency accrual (see note 8), at May 31, 2007, the Company was not in compliance with the current ratio and the net worth financial covenants of the Credit Facility. The Company has obtained a waiver from the lender regarding the non-compliance at May 31, 2007 with these financial covenants and is in discussions with the lender regarding an amendment to the Credit Facility which would adjust the financial covenants on a prospective basis.

In July 2007, with the consent of the Company’s lender, the Company borrowed $60 million from its revolving line of credit. These funds were deposited with the U S Treasury in order to mitigate the potential interest on the income tax contingency.

The Company’s Chief Executive Officer, John R. Alexander, is a member of the Board of Directors of the Company’s primary lender, Farm Credit of Southwest Florida. Mr. Alexander abstains from voting on matters that directly affect the Company. The credit line was negotiated with the lender in good faith at current market terms.

The following tables reflect outstanding debts under the Company’s various loan agreements at May 31, 2007 and August 31, 2006:

May 31, 2007

						Additional
		Principal				Credit				Interest
		Balance				Available				Rate (f)				Collateral
a) Revolving Credit Facility		$	59,875			$	115,125			Libor +1.50%				Real estate
c) Mortgage note payable			8,655				—				6.68	%		Real estate
d) Mortgage note payable			100				—				7.00	%		Real estate
e) Vehicle financing			94				—				0%-2.90	%		3 Vehicles
Total		$	68,724			$	115,125

August 31, 2006

						Additional
		Principal				Credit				Interest
		Balance				Available				Rate (f)				Collateral
a) Revolving Credit Facility		$	52,296				122,704			Libor +1%				Real estate
b) Term loan			2,000				—				5.80	%		Unsecured
c) Mortgage note payable			9,606				—				6.68	%		Real estate
d) Mortgage note payable			100				—				7.00	%		Real estate
Total		$	64,002			$	122,704

a)		Terms described above.
b)		5-year fixed rate term loan with commercial lender. $2 million principal due annually. Interest due quarterly. The note was paid in full during the second quarter of fiscal year 2007.
c)		First mortgage on 7,680 acres of cane, citrus, pasture and improvements in Hendry County, Florida with commercial lender. Monthly principal payments of $106 thousand plus accrued interest.
d)		First mortgage on a parcel of land in Polk County, Florida with private seller. Annual equal payments of $55 thousand.
e)		3-5 year term loans. Monthly principal payments plus interest.
f)		The LIBOR rate was 5.38% at May 31, 2007 and 5.33% at August 31, 2006.

Maturities of the Company’s debt at May 31, 2007 were as follows:

Due within 1 year		$	1,347
Due between 1 and 2 years			1,351
Due between 2 and 3 years			1,284
Due between 3 and 4 years			61,149
Due between 4 and 5 years			1,273
Due beyond five years			2,320
Total		$	68,724

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

		Three months ended								Nine months ended
		May 31,								May 31,
		2007				2006				2007				2006
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Interest expense		$	1,321			$	1,055			$	3,806			$	2,839
Interest capitalized			7				9				32				57
Total interest cost		$	1,328			$	1,064			$	3,838			$	2,896

8. Other non-current liability:

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 available insurance, both in the traditional commercial insurance markets and governmental sponsored insurance programs, to provide coverage for the increasing number and potential severity of agricultural events (including citrus canker, crop diseases, and weather). In forming Agri, Alico’s goals included (a) pre-funding its potential exposures related to the aforementioned events, and (b) attracting new underwriting capital to the extent it was successful in profitably underwriting its own potential risks.

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, remained below an annual stated level ($350 thousand). Third party premiums have remained below the stated annual level. As the Lee County real estate was sold, substantial gains were generated in Agri, creating permanent book/tax differences.

The Internal Revenue Service (IRS) issued a thirty day letter dated August 14, 2006 pertaining to ongoing audits of Alico for the tax years 2000 through 2004. The letter proposes changes to the Company’s tax liabilities for each of these tax years and required the Company either a) to agree with the changes and remit the specified taxes and penalties, or b) to submit a rebuttal within 30 days.

In the thirty day letter, the IRS proposed several alternative theories as a basis for its argument that Alico should have reported additional taxable income in the years under audit. These theories principally relate to the formation and capitalization Agri and its tax exempt status during the years under audit. Under the theories proposed, the IRS has calculated additional taxes and penalties due ranging from a minimum of $35.4 million dollars to a maximum of $86.4 million dollars. The letter does not quantify the interest on the proposed taxes, but the Company estimates the interest on the IRS proposals to range from $11.0 million to $33.0 million at May 31, 2007.

The Company sought and received an extension of time to submit its protest and timely submitted the protest on October 13, 2006. The Company was notified in an IRS letter dated February 27, 2007 that the case was transferred to IRS Appeals. The first meetings with IRS Appeals were held on May 9 and 10, 2007. At this first meeting the IRS exam team and Alico representatives each presented their case before the IRS Appeals officers. Another meeting with IRS Appeals was held on June 28, 2007 via teleconference. The next meeting with the IRS Appeals is scheduled for the week of August 6, 2007. Based on advice from the Company’s expert counsel and tax advisors, the Company has adjusted the estimated range of potential exposure, consisting of state and federal components from a minimum of $71.4 million dollars to a maximum of $77.4 million dollars.

The Company does not fully accept the IRS position and intends to continue to negotiate with IRS appeals to resolve the matter. However, because a challenge has been made and management believes that it is probable that the challenge may be successful as to some of the assertions, management has provided for the contingency. In accordance with SFAS No. 5 “Accounting for Contingencies,” the Company has established a reserve for this income tax contingency, interest and penalties, which represents the Company’s best estimate of the probable amount of this liability and takes into consideration the advice of the Company’s expert counsel and tax advisors. The actual liability could differ significantly from the amount of the reserve, which could have a material effect on the Company’s results of operations, financial position and cash flows. For the quarter ended May 31, 2007, the Company increased its reserve for income tax contingency by $53.3 million for a total of $74.4 million as compared to $20.3 million at August 31, 2006. The increase in the reserve for this income tax contingency was offset by a $19.5 million increase in the income tax expense ($2.65 per share) for the quarter ended May 31, 2007 and a $33.8 million increase in deferred income tax assets.

In order to mitigate the possible interest related to this matter, the Company deposited $60 million with the IRS in July 2007. The Company expects negotiations with the IRS to be completed within the next 12 months; however, the Company has executed statute extensions for the tax returns affected to December 31, 2008.

9. Dividends:

At its meeting on March 30, 2007 the Board of Directors declared a quarterly dividend of $0.275 per share payable to stockholders of record as of June 29, 2007 with payment expected on or around July 16, 2007. At its meeting on June 29, 2007 the Board of Directors declared a quarterly dividend of $0.275 per share payable to stockholders of record as of September 28, 2007 with payment expected on or around October 15, 2007.

10. Disclosures about reportable segments:

The Company has four reportable segments: Bowen, Citrus Groves, Sugarcane and Cattle. Bowen provides harvesting and marketing services for citrus producers including Alico’s Citrus Grove division. Additionally, Bowen purchases citrus fruit and resells the fruit to citrus processors and fresh packing facilities. The Citrus Groves segment produces citrus fruit for sale to citrus processors and fresh packing facilities. The Sugarcane segment produces sugarcane for delivery to the sugar mill and refinery. The Cattle division raises beef cattle for sale to western feedlots and meat packing facilities. The goods and services produced by these segments are sold to wholesalers and processors in the United States who prepare the products for consumption. The Company’s operations are located in Florida.

Although the Company’s Real Estate, Plant World, Vegetable and Sod segments do not meet the quantitative thresholds to be considered as reportable segments, information about these segments has been included in the schedules below. For a description of the business activities of the Plant World, Vegetables and Sod segments please refer to Item 1 of the Company’s annual report on Form 10-K for the year ended August 31, 2006.

The accounting policies of all of the segments are the same as those described in the summary of significant accounting policies in the Company’s annual report on Form 10-K for the year ended August 31, 2006. The Company evaluates performance based on profit or loss from operations before indirect corporate overhead allocations and income taxes not including nonrecurring gains and losses.

The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties; that is, at the then current market prices.

The Company’s reportable segments are strategic business units that offer different products. They are managed separately because each business requires different knowledge, skills and marketing strategies.

Information concerning the various segments of the Company is summarized below:

		Three months ended								Nine months ended
		May 31,								May 31,
		2007				2006				2007				2006
Revenues (from external customers except as noted)
Bowen		$	31,017			$	16,290			$	51,764			$	22,012
Intersegment fruit sales through Bowen			2,653				3,327				4,877				3,327
Citrus groves			21,772				11,986				43,674				20,238
Sugarcane			2,040				2,507				9,214				8,927
Cattle			3,842				758				8,825				3,408
Real Estate			—				81				2,447				113
Alico Plant World			628				831				2,222				2,909
Vegetables			1,548				1,431				3,803				2,389
Sod			647				285				1,577				995
Revenue from segments			64,147				37,496				128,403				64,318
Other operations			694				512				2,240				1,843
Less: intersegment revenues eliminated			(2,653	)			(3,327	)			(4,877	)			(3,327	)
Total operating revenue		$	62,188			$	34,681			$	125,766			$	62,834
Operating expenses
Bowen		$	30,922			$	16,479			$	50,666			$	22,199
Intersegment fruit sold through Bowen			2,653				3,327				4,877				3,327
Citrus groves			10,489				7,407				21,959				13,236
Sugarcane			1,747				1,738				8,808				8,675
Cattle			3,672				671				8,118				2,700
Real Estate			(23	)			42				582				58
Alico Plant World			851				1,401				2,253				3,755
Vegetables			1,381				761				3,255				1,404
Sod			201				128				689				652
Segment operating expenses			51,893				31,954				101,207				56,006
Other operations			56				—				283				—
Less: intersegment expenses eliminated			(2,653	)			(3,327	)			(4,877	)			(3,327	)
Net casualty (gain)			—				2				—				2,768
Total operating expenses		$	49,296			$	28,629			$	96,613			$	55,447
Gross profit (loss):
Bowen Brothers Fruit			95				(189	)			1,098				(187	)
Citrus groves			11,283				4,579				21,715				7,002
Sugarcane			293				769				406				252
Cattle			170				87				707				708
Real Estate			23				39				1,865				55
Alico Plant World			(223	)			(570	)			(31	)			(846	)
Vegetables			167				670				548				985
Sod			446				157				888				343
Gross profit from segments			12,254				5,542				27,196				8,312
Other			638				510				1,957				(925	)
Gross profit		$	12,892			$	6,052			$	29,153			$	7,387

		Three months ended								Nine months ended
		May 31,								May 31,
		2007				2006				2007				2006
Depreciation, depletion and amortization:
Bowen Brothers Fruit		$	105			$	340			$	258			$	638
Citrus Groves			588				632				1,798				1,906
Sugarcane			547				499				1,561				1,375
Cattle			467				422				1,437				1,246
Alico Plant World			159				148				484				417
Vegetables			17				—				44				12
Sod			52				27				148				99
Total segment depreciation and amortization			1,935				2,068				5,730				5,693
Other depreciation, depletion and amortization			246				181				696				467
Total depreciation, depletion and amortization		$	2,181			$	2,249			$	6,426			$	6,160

		May 31,				August 31,
		2007				2006
Total Assets:		(unaudited)
Bowen Brothers Fruit		$	5,612			$	3,096
Citrus groves			63,094				59,464
Sugarcane			44,631				47,894
Cattle			20,125				23,919
Alico Plant World			6,316				6,515
Vegetables			2,219				1,981
Sod			5,919				4,191
Segment assets			147,916				147,060
Other Corporate assets			151,604				115,693
Total assets		$	299,520			$	262,753

11. Stock Compensation Plans:

On November 3, 1998, the Company adopted the Alico, Inc., Incentive Equity Plan (“the Plan”) pursuant to which the Board of Directors of the Company may grant options, stock appreciation rights, and/or restricted stock to certain directors and employees. The Plan authorized grants of shares or options to purchase up to 650,000 shares of authorized but unissued common stock. Stock options granted have a strike price and vesting schedules that are at the discretion of the Board of Directors and are determined on the effective date of the grant. The strike price cannot be less than 55% of the market price. No stock options were granted during fiscal year 2006 or the nine months ended May 31, 2007.

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost is recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The grant date fair value of employee share options and similar instruments are estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.

A summary of option activity under the Plan is as follows:

										Weighted average
		Shares Under				Weighted average				remaining contractual
		Option				exercise price				life (in years)
Options outstanding, August 31,2005			16,371			$	18.05				8
Granted			—
Exercised			7,213				18.55
Options outstanding, August 31,2006			9,158			$	17.66				7
Granted			—
Exercised			1,000				—
Options outstanding, May 31, 2007			8,158			$	17.90				7

At May 31, 2007 and August 31, 2006, there were 8,158 and 9,158 options, respectively, fully vested and exercisable and 292,844 shares available for grant. The 8,158 options outstanding as of May 31, 2007 and the 9,158 options outstanding as of August 31, 2006 had a fair value of $343 thousand and $382 thousand, respectively. There was no unrecognized compensation expense related to outstanding stock option grants at May 31, 2007 or August 31, 2006. During fiscal year 2007, 1,000 options were exercised having a total fair value of $49 thousand. In fiscal year 2006, 7,213 options were exercised having a total fair value of $259 thousand.

In fiscal year 2006, the Company began granting restricted shares to certain key employees as long term incentives. The vesting of each installment is subject to continued employment with the Company. At May 31, 2007 and August 31, 2006, there were 4,000 restricted shares vested in accordance with these grants.

The table below summarizes the Company’s restricted share awards granted to date:

										Compensation				Weighted
										Expense				Average
										Recognized for the				Grant date
						Fair Market Value				nine months ended				Fair value
Grant Date		Shares Granted				on Date of Grant				May 31, 2007				Per share
April 2006			20,000			$	908			$	129
July 2006			13,000	(1)			694				(16	)
(Cancelled April, 2007)
October 2006			20,000				1,239				388
Total			53,000			$	2,841			$	501			$	53.63

(1) Granted, but under the terms, has been forfeited. The shares granted in July 2006 were scheduled to vest 25% in July 2010 and 25% annually thereafter until fully vested, however, the employee to receive the shares resigned during the third quarter of fiscal year 2007. Since none of the shares granted to the employee who resigned had vested, the previously recognized compensation cost of $93 thousand was reversed during the third quarter.

The shares granted in April 2006 vest 25% in April 2010 and 25% annually thereafter until fully vested. The shares granted in July 2006 were scheduled to vest 25% in July 2010 and 25% annually thereafter until fully vested. The Company recognizes compensation cost equal to the fair market value of the stock at the grant dates prorated over the vesting period of each award.

The fair value of the unvested restricted stock awards outstanding was $1.9 million at May 31, 2007 and $2.9 million at August 31, 2006, respectively and will be recognized over a weighted average period of 6 years.

12. Other Comprehensive Income:

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

		For the three months ended								For the nine months ended
		May 31,								May 31,
		2007				2006				2007				2006
Accumulated Other Comprehensive Income (loss) at beginning of period		$	11			$	(73	)		$	(29	)		$	2,195
Change resulting from market fluctuations, net of tax, and realized gains and losses			(18	)			(39	)			22				(2,307	)
Accumulated Other Comprehensive Income		$	(7	)		$	(112	)		$	(7	)		$	(112	)

13. New Accounting Pronouncements:

In June 2006, the FASB issued FASB Interpretation Number 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” The interpretation contains a two step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely to be realized upon ultimate settlement. The Company is required to adopt FIN 48 at the beginning of fiscal year 2008. The Company is evaluating the impact this statement will have on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. The Company is required to adopt SFAS No. 157 effective at the beginning of fiscal year 2009. The Company is evaluating the impact this statement will have on its consolidated financial statements.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS No. 158 will be effective for the fourth quarter of the Company’s fiscal year 2007. The Company is evaluating the impact this statement will have on its consolidated financial statements.

14. Treasury Stock

During January 2007, Alico announced that its Board of Directors had authorized the repurchase of up to 100,000 shares of the Company’s common stock through August 31, 2010, in addition to previously announced repurchases, for the purpose of funding restricted stock grants under its 1998 Incentive Equity Plan in order to provide restricted stock to eligible Senior Managers to align their interests with those of the Company’s shareholders.

The stock repurchases will be made on a quarterly basis between January 2007 and August 31, 2010 through open market transactions, at times and in such amounts as the Company’s broker determines subject to the provisions of a 10b5-1 Plan which the Company has adopted for such purchases. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. All purchases will be made subject to restrictions of Rule 10b-18 relating to volume, price and timing so as to minimize the impact of the purchases upon the market for the Company’s shares. The Company does not anticipate that any purchases under the Plan will be made from any officer, director or control person. There are currently no arrangements with any person for the purchase of the shares. The Company will use internally generated funds to make the purchases. The Company had previously announced the repurchase of 31,000 shares in order to fund its Director Compensation plan. In accordance with the approved plans, the Company may purchase an additional 94,230 shares. The Company purchased 10,843 and 9,927 shares in the open market during the third and second quarter of fiscal year 2007, respectively, at an average price of $53.95 per share.

The following table provides information relating to purchases of the Company’s common shares by the Company on the open market pursuant to the aforementioned plans for the quarter ended May 31, 2007:

										Purchased as Part of
		Total Number of				Average price				Publicly Announced				Total Dollar value of shares
Date		Shares Purchased				paid per share				Plans or Programs(1)				purchased (thousands)
3/9/2007			843			$	47.69				843			$	40
5/11/2007			10,000			$	59.67				10,000			$	597
			10,843			$	58.73				10,843			$	637