| ALICO INC Item 1A Risk Factors The Company’s operations involve varying degrees of risk and each investor should consider the specific risks and speculative features inherent in and affecting the business of the Company before investing in the Company |
| In considering the following risk and speculative factors, an investor should realize that there is a possibility of losing their entire investment |
| The Company’s financial condition and results of operations could be affected by the risk factors discussed below |
| These factors may also cause actual results to differ materially from the results contemplated by the forward looking statements in Management’s Discussion and Analysis |
| However, in contemplating the financial position and results of operations of the Company, investors should carefully consider, among other factors, the following risk factors: General The IRS has proposed significant contested audit tax adjustments which could have a material adverse effect on the Company 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 Companyapstas 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 |
| The Company sought and received an extension of time to submit its rebuttal until October 16, 2006 and timely submitted the rebuttal on October 13, 2006 |
| 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 Companyapstas 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 dlra35dtta4 million dollars to a maximum of dlra86dtta4 million dollars |
| The letter does not quantify the interest on the proposed taxes |
| However, using the IRS promulgated monthly rates the Company estimates that the interest charge on the maximum proposed assessment is dlra25dtta0 million as of August 31, 2006 |
| Interest will continue to accrue at the monthly interest rate published by the IRS The Company does not accept the IRS position and intends to continue to oppose vigorously any attempt by the IRS to impose such assessment in connection with the Agri Insurance matter |
| The Company has accrued a liability of dlra20dtta3 million for the contingency |
| Should the IRS prevail in its primary position, the effect would materially and adversely reduce the liquidity of the Company and would cause the Company to default on several of its loan covenants |
| 12 _________________________________________________________________ The Company has a 50dtta5prca stockholder and a limited public float which could adversely affect the price of its stock and restrict the ability of the minority shareholders to have a voice in corporate governance Atlantic Blue Group, Inc |
| (ABG) (formerly Atlantic Blue Trust, Inc |
| ) is the owner of approximately 50dtta5prca of the Company’s common stock |
| Accordingly, the Company’s common stock is thinly traded and its market price may fluctuate significantly more than stocks with a larger public float |
| Additionally by virtue of its ownership percentage, ABG is able to elect all the directors and, consequently, is deemed to control the Company |
| While ABG has issued a governance letter dated September 29, 2006 reaffirming its commitment to maintaining a majority of independent directors on Alico’s board, this commitment may be terminated at any time upon 30 days prior written notice |
| The Company does not have cumulative voting |
| Accordingly stockholders of the Company other than ABG have no effective control over who the management and directors of the Company are or will be |
| The Company manages its properties in an attempt to capture its highest and best use and customarily does not sell property until it determines that the property is surplus to its agricultural activities by reason of its potential for industrial, commercial or residential use |
| The Company has little control over when this occurs |
| The Company’s goal for its land management program is to manage and selectively improve its lands for their most profitable use |
| To this end, the Company continually evaluates its properties focusing on soil capabilities, subsurface composition, topography, transportation, availability of markets and the climatic characteristics of each of the tracts |
| While the Company is primarily engaged in agricultural activities, when land is determined to be better suited to industrial, commercial or residential use, the Company has classified the property as surplus to its agricultural activities and sold it |
| The Company’s land management strategy is thus a long term strategy to acquire, hold and manage land for its best use, selling surplus land at opportune times and in manner that would maximize the Company’s profits from such surplus tracts |
| The timing for when agricultural lands become best suited for industrial, commercial or residential use depends upon a number of factors which are beyond the control of the Company such as: § population migration § national, regional and local economic conditions § conditions in local real estate markets (eg, supply of land, reduction in demand) § competition from other available property; § availability of roads and utilities; § availability of governmental entitlements; § government regulation and changes in real estate, zoning, land use, environmental or tax laws; § interest rates and the availability of financing; and § potential liability under environmental and other laws |
| The Company is not able to predict when properties will become best suited for non agricultural use and has little ability to influence this process |
| Additionally changes from time to time in any or a combination of these factors could result in delays in sales or the Company’s inability to sell tracts which are determined to be surplus or to its ability to realize optimum pricing from such sales |
| 13 _________________________________________________________________ The Company carries large receivables from seller financed sales of large tracts of surplus land the collectibility of which is subject to credit risk relating to debtors |
| The Company’s sale of surplus lands often involves buyer financing provided by the Company |
| In addition to the cash deposit paid by a buyer of surplus land, the Company at times takes a mortgage for the unpaid balance of the purchase price of the land sales contract |
| The collectibility of the amounts owed and the likelihood that the Company will achieve the profitability promised by any sales contract is dependent on the creditworthiness of the mortgagees which often depends upon the continued financial success of such entity |
| The purchasers of the surplus tracts are often developers, whose success is in turn directly affected by the multiple factors in the national and local real estate market, including but not limited to interest rates, demand for housing, competition from other available land and unanticipated costs of construction |
| A mortgagor’s default under a material sales contract, or the bankruptcy of any material purchaser of surplus land depending on the magnitude of its debt to the Company, could have a material adverse effect on the Company |
| The Company is subject to environmental liability by virtue of owning significant holdings of real estate assets |
| The Company faces a potential for environmental liability by virtue of its ownership of real property |
| If hazardous substances (including herbicides and pesticides used by the Company or by any persons leasing the Company’s lands) are discovered on or emanating from any of the Company’s lands and the release of such substances presents a threat of harm to the public health or the environment, the Company may be held strictly liable for the cost of remediation of these hazardous substances |
| In addition, environmental laws that apply to a given site can vary greatly according to the site’s location, its present and former uses, and other factors such as the presence of wetlands or endangered species on the site |
| Although the Company purchases insurance when it is available for environmental liability, these insurance contracts may not be adequate to cover such costs or damages or may not continue to be available to the Company at prices and terms that would be satisfactory |
| It is possible that in some cases the cost of compliance with these environmental laws could exceed the value of a particular tract of land or be significant enough that it would have a material adverse effect on the Company |
| The Company has two large customers that account for 34prca of revenues |
| For the fiscal year ended August 31, 2006, the Company’s two largest customers accounted for approximately 34prca of operating revenues, with its largest customer accounting for 22prca of operating revenue |
| The Company’s largest customer is Ben Hill Griffin, Inc |
| (“Griffin”), with whom the Company has a marketing agreement which, by its terms, will expire at the end of the 2006-07 citrus season |
| The balance of the sales concentration is attributable to the Company’s marketing and allotment contracts with US Sugar, for whom the Company grows raw sugarcane |
| These two marketing arrangements involve marketing pools which allow the contracting party to market the Company’s product in conjunction with others in the pool and pay the Company a proportionate share of the resulting revenue from the sale of all of the pooled product, less operating expenses and an agreed upon profit margin |
| While the Company believes that it can replace these arrangements with other marketing alternatives, it may not be able to do so quickly and the results or associated costs may not be as favorable as the current contracts |
| The Company has Material Weaknesses in its internal accounting controls |
| In the 2005 Annual Report on Form 10K, the Company noted that it had identified a Material Weakness in its internal accounting controls because of insufficient staffing in its accounting department |
| The Company took remedial action to correct this weakness, but , as of the date of the 2006 audit, the Company’s Chief Executive Officer and Chief Financial Officer decided that the Material Weakness had not been remediated and therefore has continued |
| The reason for this decision is that during the Company’s annual audit a significant deficiency arose due to adjustments to the Company’s tax provision that were not detected by the Company’s accounting staff |
| See Item 9A By definition a Material Weakness means that there is a significant deficiency that, by itself, or in combination with other significant deficiencies, results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected |
| Additionally, the existence of a Material Weakness precludes management or the Company’s Auditor from concluding that internal control over financial reporting is effective and requires the Companyapstas auditors to issue an adverse attestation opinion on the company’s internal controls |
| Agricultural Risks - General Agricultural operations generate a large portion of the Company’s revenues |
| Agriculture operations are subject to a wide variety of risks including product pricing due to variations in supply and demand, weather, disease, input costs and product liability |
| Agricultural products are subject to supply and demand pricing which is not predictable Because the Company’s agricultural products are commodities, the Company is not able to predict with certainty what price it will receive for its products; however, its costs are relatively fixed |
| Additionally, the growth cycle of such products in many instances dictates when such products must be marketed which may or may not be advantageous to obtaining the best price |
| Excessive supplies tend to cause severe price competition and lower prices throughout the industry affected |
| Conversely, shortages may cause higher prices |
| Shortages often result from adverse growing conditions which can reduce available product of growers in affected growing areas while not affecting others in non affected growing areas |
| Since multiple variables which affect 14 _________________________________________________________________ pricing and costs are incurred before pricing and supply is known, the Company cannot accurately predict or control from year to year what its profits or losses from agricultural operations will be |
| The Company’s agricultural assets are concentrated and the effects of adverse weather conditions such as hurricanes can be exaggerated |
| The Company’s agricultural operations are concentrated in south Florida counties with more than 80prca of its agricultural lands located at Alico Ranch in Hendry County |
| All of these areas are subject to occasional periods of drought, excess rain, flooding, freeze, and hurricane risk |
| Crops require water in different quantities at different times during the growth cycle |
| Accordingly too much or too little water at any given point can adversely impact production |
| While the Company attempts to mitigate controllable weather risks through water management and crop selection, its ability to do so is limited |
| The Company’s operations are in south and central Florida which are areas subject to the risk of hurricanes |
| Hurricanes have the potential to destroy crops and impact citrus production through the loss of fruit and destruction of trees either as a result of high winds or through the spread of wind blown disease |
| The Company was impacted by hurricanes during fiscal years 2006, 2005 and 2004 and sustained losses relating to the storms during all three fiscal years |
| The Company seeks to minimize hurricane risk by the purchase of insurance contracts, but a portion of the Company’s crops remain uninsured |
| Because the Company’s agricultural properties are located in relative close proximity to each other, the impact of adverse weather conditions is magnified in the Company’s results of operations |
| Water use regulation restricts the Company’s access to water for agricultural use The Company’s agricultural operations are dependent upon the availability of adequate surface and underground water needed to produce its crops |
| The availability of water for use in irrigation is regulated by the State of Florida through water management districts which have jurisdiction over various geographic regions in which the Company’s lands are located |
| Currently the Company has permits for the use of underground and surface water which are adequate for its agricultural needs |
| Surface water in Hendry County, where much of the Company’s agricultural land is located, comes from Lake Okeechobee via the Caloosahatchee River and the system of canals used to irrigate such land |
| Since the Army Corps of Engineers controls the level of Lake Okeechobee, this organization ultimately determines the availability of surface water even though the use of water has been permitted by the State of Florida through the water management district |
| Recently the Army Corps of Engineers decided to lower the permissible level of Lake Okeechobee in response to concerns about the ability of the levees surrounding the lake to restrain rising waters which could result from hurricanes |
| Changes in permitting for underground or surface water use during times of drought because of lower lake levels may result in shortages of water for agricultural use by the Company and could have a material adverse effect upon the Company’s agricultural operations and financial results |
| The Company’s citrus groves are subject to damage and loss from disease including but not limited to citrus canker and citrus greening diseases The Company’s citrus groves are subject to damage and loss from diseases such as Citrus Canker and Citrus Greening |
| Each of these diseases is widespread in Florida and the Company has found instances of Citrus Canker and/or Citrus Greening in several of its groves |
| There is no known cure for Citrus Canker at the present time although some pesticides inhibit the development of the disease |
| The disease is spread by contact with infected fruit or trees or by wind blown transmission |
| The Company’s policy is to destroy trees which become infected with this disease or with Citrus Greening disease and the Company maintains an inspection program to discover infestations early |
| Citrus Greening destroys infected trees |
| The disease is spread by psyllids and the Company carries on a pesticide program to eliminate these hosts |
| There is no known pesticide or other treatment for Citrus Greening at the present time |
| Both of these diseases pose a significant threat to the Florida Citrus industry and to the Company’s citrus groves |
| Wide spread dissemination of these diseases in the Company’s groves could cause a material adverse effect to the Company’s operating results and citrus grove assets |
| 15 _________________________________________________________________ Pesticide and herbicide use by the Company or its lessees could create liability for the Company The Company and some of the parties to whom the Company leases land for agricultural purposes, use herbicides, pesticides and other hazardous substances in the operation of their business |
| All pesticides and herbicides used by the Company have been approved for use by the proper governmental agencies with the hazards attributable to each substance appropriately labeled and described |
| The Company applies such chemicals strictly in accordance with the labeling |
| However, the Company does not have any knowledge or control over the chemicals used by third parties who lease the Company’s lands for cultivation |
| It is possible that some of these herbicides and pesticides could be harmful to humans if used improperly, or that there may be unknown hazards associated with such chemicals despite any contrary government or manufacturer labels |
| The Company might have to pay the costs or damages associated with the improper application, accidental release or the use or misuse of such substances |
| Changes in immigration laws or enforcement of such laws could impact the ability of the Company to harvest its crops The Company engages third parties to provide personnel for its harvesting operations |
| The personnel engaged by such companies typically come from pools composed of immigrant labor |
| The availability and number of such workers is subject to decrease if there are changes in the US immigration laws or stricter enforcement of such laws |
| The scarcity of available personnel to harvest the Company’s agricultural products could cause the Company’s harvesting costs to increase or could lead to the loss of product that is not timely harvested which could have a material adverse effect upon the Company |
| Changing public perceptions regarding the quality, safety or health risks of our agricultural products can affect demand and pricing of such products |
| The general public’s perception regarding the quality, safety or health risks associated with particular food crops the Company grows and sells could reduce demand and prices for some of the Company’s products |
| To the extent that consumer preferences evolve away from products the Company produces for health or other reasons, and the Company is unable to modify its products or to develop products that satisfy new customer preferences, there could be decreased demand for the Companyapstas products |
| Even if market prices are unfavorable, produce items which are ready to be or have been harvested must be brought to market |
| Additionally, the Company has significant investments in its citrus groves and cannot easily shift to alternative products for this land |
| A decrease in the selling price received for the Company’s products due to the factors described above could have a material adverse effect on the Company |
| The Company faces significant competition in its agricultural operations |
| The Company faces significant competition in its agricultural operations both from domestic and foreign producers and does not have any branded products |
| Foreign growers generally have lower cost of production, less environmental regulation and in some instances greater resources and market flexibility than the Company |
| Because foreign growers have great flexibility as to when they enter the U S market, the Company cannot always predict the impact these competitors will have on its business and results of operations |
| The competition the Company faces from foreign suppliers of sugar and orange juice is mitigated by quota restriction on sugar imports imposed by the U S government and by a governmentally imposed tariff on U S orange imports |
| A change in the government’s sugar policy allowing more imports or a reduction in the US orange juice tariff would adversely impact the Company and negatively impact the Company’s results of operations |