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 February 28, 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).

o Yes þ No

There were 7,373,543 shares of common stock, par value $1.00 per share, outstanding at April 2, 2007.

 

 

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

		Three months ended								Six months ended
		February 28,								February 28,
		2007				2006				2007				2006
Operating revenue
Agricultural operations		$	50,074			$	20,852			$	59,842			$	26,836
Non-agricultural operations			666				632				1,289				1,285
Real estate operations			2,447				7				2,447				32
Total operating revenue			53,187				21,491				63,578				28,153
Operating expenses
Agricultural operations			37,604				18,239				46,485				24,036
Non-agricultural operations			161				—				227				—
Real estate operations			385				5				605				16
Net casualty (recovery) loss			—				(2,941	)			—				2,766
Total operating expenses			38,150				15,303				47,317				26,818
Gross profit			15,037				6,188				16,261				1,335
Corporate general and administrative			3,186				2,623				6,577				4,447
Income (loss) from operations			11,851				3,565				9,684				(3,112	)
Other income (expenses):
Profit on sales of bulk real estate:
Sales			1,728				—				1,728				5,555
Cost of sales			679				—				679				1,162
Profit on sales of bulk real estate, net			1,049				—				1,049				4,393
Interest & investment income			1,973				1,499				3,370				6,484
Interest expense			(1,302	)			(793	)			(2,485	)			(1,784	)
Other			73				49				172				138
Total other income, net			1,793				755				2,106				9,231
Income before income taxes			13,644				4,320				11,790				6,119
Provision for income taxes			5,940				1,653				5,057				2,299
Net income		$	7,704			$	2,667			$	6,733			$	3,820
Weighted-average number of shares outstanding			7,372				7,365				7,372				7,367
Weighted-average number of shares outstanding assuming dilution			7,388				7,375				7,390				7,377
Per share amounts:
Basic		$	1.05			$	0.36			$	0.91			$	0.52
Diluted		$	1.04			$	0.36			$	0.91			$	0.52
Dividends		$	0.28			$	0.25			$	0.55			$	0.50

See accompanying Notes to Condensed Consolidated Financial Statements.

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

		February 28,
		2007				August 31,
		(unaudited)				2006
ASSETS
Current assets:
Cash and cash equivalents		$	35,620			$	25,065
Marketable securities available for sale			41,794				50,100
Accounts receivable			22,616				8,679
Mortgages and notes receivable			714				47
Inventories			22,236				24,545
Other current assets			2,079				2,477
Total current assets			125,059				110,913
Mortgages and notes receivable, net of current portion			9,042				10,977
Investments and deposits			3,033				2,919
Cash surrender value of life insurance, designated			6,961				6,593
Property, buildings and equipment			181,137				179,689
Less: accumulated depreciation			(49,006	)			(48,338	)
Total assets		$	276,226			$	262,753

See accompanying Notes to Condensed Consolidated Financial Statements.

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

		February 28,
		2007				August 31,
		(unaudited)				2006
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	4,746			$	1,966
Current portion of notes payable			1,340				3,315
Accrued expenses			2,527				3,720
Comissions payable			613				—
Dividend payable			2,027				2,027
Accrued ad valorem taxes			1,248				2,090
Deferred income taxes			1,131				282
Other current liabilities			4,010				4,678
Total current liabilities			17,642				18,078
Notes payable, net of current portion			69,672				60,687
Deferred income taxes, net of current portion			15,128				14,807
Deferred retirement benefits, net of current portion			4,874				4,952
Commissions and deposits payable			3,820				2,833
Other non-current liability			21,077				20,293
Total liabilities			132,213				121,650
Stockholders’ equity:
Common stock			7,376				7,376
Additional paid in capital			9,882				9,691
Treasury stock			(286	)			(287	)
Accumulated other comprehensive income (loss)			11				(29	)
Retained earnings			127,030				124,352
Total stockholders’ equity			144,013				141,103
Total liabilities and stockholders’ equity		$	276,226			$	262,753

See accompanying Notes to Condensed Consolidated Financial Statements.

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

		Six months ended
		February 28,
		2007				2006
Cash flows from operating activities:
Net cash (used for) provided by operating activities		$	(69	)		$	2,802
Cash flows from investing activities:
Purchases of property and equipment			(5,307	)			(17,515	)
Proceeds from sale of real estate			600				7,239
Proceeds from sales of property and equipment			1,408				2,562
Purchases of marketable securities			(23,372	)			(81,473	)
Proceeds from sales of marketable securities			31,059				94,138
Note receivable collections			3,856				113
Other			(105	)			—
Net cash provided by investing activities			8,139				5,064
Cash flows from financing activities:
Repayment of bank loan			(7,087	)			(41,789	)
Proceeds from bank loan			14,097				48,245
Proceeds used for stock transactions			(468	)			(224	)
Dividends paid			(4,057	)			(3,688	)
Net cash provided by financing activities			2,485				2,544
Net increase in cash and cash equivalents		$	10,555			$	10,410
Cash and cash equivalents:
At beginning of period		$	25,065			$	13,384
At end of period		$	35,620			$	23,794
Supplemental disclosures of cash flow information
Cash paid for interest, net of amount capitalized		$	2,347			$	1,547
Cash paid for income taxes		$	2,225			$	918
Net cash investing activities:
Issuance of mortgage notes		$	13,341			$	29
Fair value adjustments to securities available for sale net of tax effects		$	40			$	(2,268	)
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. In the opinion of Management, the accompanying Financial Statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of its consolidated financial position at February 28, 2007 and the consolidated results of operations for the three and six month periods ended February 28, 2007 and 2006, and the consolidated cash flows for the six month periods ended February 28, 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 $424 thousand for the quarter ended February 28, 2007, ($20 thousand) for the quarter ended November 30, 2006 and $257 thousand for the quarter ended February 28, 2006 and $418 thousand for the quarter ended November 30, 2005.

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 has 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 six months ended February 28, 2007 was $34 and $56, 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. From the option proceeds, $1.9 million was recognized as operating income during the second quarter of fiscal year 2007 which was the amount which 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 as its Senior Vice-President of Real Estate to manage its real estate assets. The renegotiations of the above contracts were conducted under the supervision of the Senior Vice-President of Real Estate. 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 periods ended February 28, 2007.

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 February 28, 2007 and August 31, 2006 were as follows:

		February 28, 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		$	22,629			$	4			$	(3	)		$	22,630			$	21,169			$	19			$	(2	)		$	21,186
Mutual funds			—				—				—				—				370				—				(6	)			364
Fixed maturity funds			13,441				50				(2	)			13,489				19,686				44				(18	)			19,712
Corporate bonds			5,702				—				(27	)			5,675				8,920				—				(82	)			8,838
Marketable securities available for sale		$	41,772			$	54			$	(32	)		$	41,794			$	50,145			$	63			$	(108	)		$	50,100

The aggregate fair value of investments in debt instruments as of February 28, 2007 by contractual maturity date, consisted of the following:

		Aggregate
		Fair Value
Due within 1 year		$	20,446
Due between 1 and 2 years			9,060
Due between 2 and 3 years			149
Due between 3 and 4 years			—
Due between 4 and 5 years			518
Due beyond five years			11,621
Total		$	41,794

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at February 28, 2007.

February 28, 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		$	2,715			$	2			$	—			$	—			$	2,715			$	2
Corporate bonds			—				—				5,675				27				5,675				27
Municipal Bonds			5,652				3				—				—				5,652				3
Total		$	8,367			$	5			$	5,675			$	27			$	14,042			$	32

Net realized (loss) gain on the sale of securities for the six months ended February 28, 2007 and 2006 were ($40 thousand) and $3.3 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 February 28, 2007 the Company held loss positions in 45 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 February 28, 2007.

4. Mortgages and notes receivable:

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

		February 28,
		2007				August 31,
		(unaudited)				2006
Mortgage notes receivable on retail land sales		$	346			$	427
Mortgage notes receivable on bulk land sales			66,176				56,610
Total mortgage and notes receivable			66,522				57,037
Less: Deferred revenue			(53,568	)			(43,230	)
Discount on notes to impute market interest			(3,198	)			(2,783	)
Current portion			(714	)			(47	)
Non-current portion		$	9,042			$	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 where the stated rate of the mortgage note is less than the market rate. The recorded imputed interest discounts are realized as the balances due are collected. In the event of early liquidation, interest is recognized on the simple interest method.

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 and was recognized as a reduction of the sales proceeds during the second quarter of fiscal year 2007.

5. Inventories:

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

		February 28,
		2007				August 31,
		(unaudited)				2006
Unharvested fruit crop on trees		$	10,712			$	10,709
Unharvested sugarcane			2,333				5,168
Beef cattle			6,917				7,063
Unharvested sod			1,178				588
Plants and vegetables			1,096				1,017
Total inventories		$	22,236			$	24,545

The Company’s unharvested sugarcane and cattle are partially uninsured.

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

		Three Months ended								Six Months ended
		February 28,								February 28,
		2007				2006				2007				2006
Unharvested citrus		$	—			$	141			$	—			$	3,589
Unharvested sugarcane			—				(2,697	)			—				313
Unharvested vegetables			—				—				—				147
Total inventory (recoveries) losses		$	—			$	(2,556	)		$	—			$	4,049

The Company records its inventory at the lower of cost or net realizable value. Due to changing market conditions, the Company determined that certain of its inventories at February 28, 2007 had accumulated costs in excess of the estimated net realizable value. As a result, the Company recorded losses of $338 thousand and $216 thousand for its sugarcane and vegetables, respectively, during the first quarter of fiscal year 2007 and $383 thousand, $338 thousand and $216 thousand for its beef inventory, sugarcane and vegetables, respectively, during the six months ended February 28, 2007. The Company recorded losses of $834 thousand and $346 thousand for its sugarcane and plants, respectively, during the first quarter of fiscal 2006 and $517 thousand and $463 thousand, respectively, during the six months ended February 28, 2006. The adjustments were included in cost of sales for the appropriate quarter during fiscal year 2007 and 2006.

6. Income taxes:

The provision for income taxes for the three and six months ended February 28, 2007 and 2006 is summarized as follows:

		Three months ended								Six months ended
		February 28,								February 28,
		2007				2006				2007				2006
Current:
Federal income tax		$	3,357			$	391			$	2,589			$	888
State income tax			574				41				443				94
			3,931				432				3,032				982
Deferred:
Federal income tax			1,863				1,103				1,829				1,190
State income tax			146				118				196				127
			2,009				1,221				2,025				1,317
Total provision for income taxes		$	5,940			$	1,653			$	5,057			$	2,299

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 $9.8 million to $30.3 million at February 28, 2007.

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. However, because since 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 accrued a contingent liability related to the issues surrounding the IRS audits. For further information concerning the audits and the contingency accrued, please see footnote 8 to the condensed consolidated financial statements.

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

7. Indebtedness:

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. The Company is currently in compliance with all of the covenants and provisions of the Credit Facility.

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 February 28, 2007 and August 31, 2006:

February 28, 2007

						Additional
		Principal				Credit				Interest
		Balance				Available				Rate (f)				Collateral
a) Revolving Credit Facility		$	61,875			$	113,125			Libor +1.25%				Real estate
c) Mortgage note payable			8,972				—				6.68	%		Real estate
d) Mortgage note payable			100				—				7.00	%		Real estate
e) Vehicle financing			65				—				0.00	%		2 Vehicles
Total		$	71,012			$	113,125

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-year term loan. Monthly principal payment of $2 thousand.
f)		The LIBOR rate was 5.38% at February 28, 2007 and 5.33% at August 31, 2006.

Maturities of the Company’s debt at February 28, 2007 were as follows:

Due within 1 year		$	1,340
Due between 1 and 2 years			1,343
Due between 2 and 3 years			1,282
Due between 3 and 4 years			63,141
Due between 4 and 5 years			1,267
Due beyond five years			2,639
Total		$	71,012

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

		Three months ended								Six months ended
		February 28,								February 28,
		2007				2006				2007				2006
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Interest expense		$	1,302			$	793			$	2,485			$	1,784
Interest capitalized			15				31				25				48
Total interest cost		$	1,317			$	824			$	2,510			$	1,832

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 insurance availability, both in the traditional commercial insurance markets and governmental sponsored insurance programs, suitable to provide coverage for the increasing number and potential severity of agricultural events. Such events include citrus canker, crop diseases, and weather. Alico’s goal included not only pre-funding its potential exposures related to the aforementioned events, but also to attempt to attract new underwriting capital if it 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 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. 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 has been transferred to IRS appeals. A preliminary meeting date of May 9-10, 2007 has been scheduled for IRS Appeals to review the facts with IRS Exam and Alico’s tax counsel and advisors.

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 $9.8 million to $30.3 million at February 28, 2007.

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. 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. The Company has accrued a liability of $21.1 million and $20.3 million as of February 28, 2007 and August 31, 2006, respectively, for the contingency.

9. Dividends:

At its meeting on January 19, 2007 the Board of Directors declared a quarterly dividend of $0.275 per share payable to stockholders of record as of March 30, 2007 with payment expected on or around April 16, 2007. 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.

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								Six months ended
		February 28,								February 28,
		2007				2006				2007				2006
Revenues (from external customers except as noted)
Bowen		$	19,943			$	5,722			$	20,747			$	5,722
Intersegment fruit sales through Bowen			2,173				—				2,224				—
Citrus groves			20,265				7,044				21,902				8,252
Sugarcane			5,478				4,992				7,174				6,420
Cattle			909				426				4,983				2,650
Real Estate			2,447				7				2,447				32
Alico Plant World			1,006				1,557				1,594				2,078
Vegetables			1,844				958				2,255				958
Sod			531				152				930				710
Revenue from segments			54,596				20,858				64,256				26,822
Other operations			764				633				1,546				1,331
Less: intersegment revenues eliminated			(2,173	)			—				(2,224	)			—
Total operating revenue		$	53,187			$	21,491			$	63,578			$	28,153
Operating expenses
Bowen		$	18,695			$	5,720			$	19,744			$	5,720
Intersegment fruit sold through Bowen			2,173				—				2,224				—
Citrus groves			10,772				5,241				11,470				5,829
Sugarcane			4,921				4,763				7,061				6,937
Cattle			850				318				4,446				2,029
Real Estate			385				5				605				16
Alico Plant World			967				1,479				1,402				2,354
Vegetables			1,153				643				1,874				643
Sod			246				75				488				524
Segment operating expenses			40,162				18,244				49,314				24,052
Other operations			161				—				227				—
Less: intersegment expenses eliminated			(2,173	)			—				(2,224	)			—
Net casualty (gain) loss			—				(2,941	)			—				2,766
Total operating expenses		$	38,150			$	15,303			$	47,317			$	26,818
Gross profit (loss):
Bowen Brothers Fruit			1,248				2				1,003				2
Citrus groves			9,493				1,803				10,432				2,423
Sugarcane			557				229				113				(517	)
Cattle			59				108				537				621
Real Estate			2,062				2				1,842				16
Alico Plant World			39				78				192				(276	)
Vegetables			691				315				381				315
Sod			285				77				442				186
Gross profit from segments			14,434				2,614				14,942				2,770
Other			603				3,574				1,319				(1,435	)
Gross profit		$	15,037			$	6,188			$	16,261			$	1,335

		Three months ended								Six months ended
		February 28,								February 28,
		2007				2006				2007				2006
Depreciation, depletion and amortization:
Bowen Brothers Fruit		$	103			$	298			$	153			$	298
Citrus Groves			601				647				1,210				1,274
Sugarcane			475				403				1,014				876
Cattle			480				411				970				824
Alico Plant World			162				133				325				269
Vegetables			15				12				27				12
Sod			50				48				96				72
Total segment depreciation and amortization			1,886				1,952				3,795				3,625
Other depreciation, depletion and amortization			256				254				450				286
Total depreciation, depletion and amortization		$	2,142			$	2,206			$	4,245			$	3,911

		February 28,				August 31,
		2007				2006
Total Assets:		(unaudited)
Bowen Brothers Fruit		$	6,957			$	3,096
Citrus groves			59,145				59,464
Sugarcane			44,266				47,894
Cattle			22,977				23,919
Alico Plant World			7,053				6,515
Vegetables			3,016				1,981
Sod			4,662				4,191
Segment assets			148,076				147,060
Other Corporate assets			128,150				115,693
Total assets		$	276,226			$	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 six months ended February 28, 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, February 28, 2007			8,158			$	17.90				7

At February 28, 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 February 28, 2007 and the 9,158 options outstanding as of August 31, 2006 had a fair value of $388 thousand and $382 thousand, respectively. There was no unrecognized compensation expense related to outstanding stock option grants at February 28, 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 February 28, 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				six months ended				Fair value
Grant Date		Shares Granted				on Date of Grant				February 28, 2007				Per share
April 2006			20,000			$	908			$	86
July 2006			13,000				694				66
October 2006			20,000				1,239				258
Total			53,000			$	2,841			$	410			$	53.63

The shares granted in April 2006 vest 25% in April 2010 and 25% annually thereafter until fully vested. The shares granted in July 2006 vest 25% in July 2010 and 25% annually thereafter until fully vested. The shares granted and valued in October 2006 vested 20% effective August 31, 2006 and 20% annually thereafter until fully vested. The Company is recognizing 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 was $2.6 million at February 28, 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 six months ended
		February 28,								February 28,
		2007				2006				2007				2006
Accumulated Other Comprehensive Income (loss) at beginning of period		$	11			$	(214	)		$	(29	)		$	2,195
Change resulting from market fluctuations, net of tax, and realized gains and losses			—				141				40				(2,268	)
Accumulated Other Comprehensive Income		$	11			$	(73	)		$	11			$	(73	)

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 that 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 has 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 105,073 shares. The Company purchased 9,927 shares in the open market at an average price of $48.76 per share during the second quarter of fiscal year 2007.

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 February 28, 2007:

										Total Shares
										Purchased as Part of				Total Dollar value of
		Total Number of				Average price				Publicly Announced				shares purchased
Date		Shares Purchased				paid per share				Plans or Programs(1)				(thousands)
1/16/2007			2,106			$	47.93				2,106			$	101
1/17/2007			5,628			$	48.30				5,628			$	272
1/19/2007			2,193			$	50.54				2,193			$	111
			9,927			$	48.76				9,927				484

15. Casualty Losses:

Hurricane Wilma caused extensive damage to the Company’s crops and infrastructure in Collier and Hendry Counties during the first quarter of fiscal year 2006. Also, citrus canker was confirmed in several groves in 2005 and 2006. Citrus canker is a highly contagious bacterial disease of citrus that causes premature leaf and fruit drop. Citrus canker causes no threat to humans, animals or plant life other than citrus. Prior to January 10, 2006, Florida law required infected and exposed trees within 1,900 feet of the canker find to be removed and destroyed. This law was repealed as of January 10, 2006. The Company’s current policy is to remove only trees infected by citrus canker and trees immediately surrounding the infected trees. The Company charges the cost of removal of such trees to citrus cost of sales. When such removals exceed 5% of the total trees in each grove for any given year, the remaining basis of the trees removed is recognized in citrus cost of sales.

The Company recognized (recoveries) losses resulting from the hurricanes and canker as follows:

		Three months ended								Six months ended
		February 28,								February 28,
		2007				2006				2007				2006
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Inventoried costs			—			$	(2,556	)			—			$	4,049
Basis of property and equipment			—				(1,094	)			—			$	875
Insurance proceeds received			—				—				—			$	(2,158	)
Insurance proceeds receivable			—				709				—				—
Net casualty (recovery) loss		$	—			$	(2,941	)		$	—			$	2,766

Crop damages estimated during the three months ended November 30, 2005 as a result of hurricane Wilma were replaced by actual results as harvests were completed. The Company originally estimated damages to its sugarcane crop at 50% due to water and wind damage. As actual harvests have been completed, the damage was discovered to total 14% of the original crop estimate and $2.6 million of the casualty loss was recovered and recognized for the three months ended February 28, 2006.

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement

Some of the statements in this document include statements about future expectations. Statements that are not historical facts are “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Exchange Act and Section 27A of the Securities Act. These forward-looking statements, which include references to one or more potential transactions, and strategic alternatives under consideration, are predictive in nature or depend upon or refer to future events or conditions, are subject to known, as well as, unknown risks and uncertainties that may cause actual results to differ materially from Company expectations. There can be no assurance that any future transactions will occur or be structured in the manner suggested or that any such transaction will be completed. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise.

When used in this document, or in the documents incorporated by reference herein, the words “anticipate”, “believe”, “estimate”, “may”, “intend”, “expect”, “should”, “could” and other words of similar meaning, are likely to address the Company’s growth strategy, financial results and/or product development programs. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. The considerations listed herein represent certain important factors the Company believes could cause such results to differ. These considerations are not intended to represent a complete list of the general or specific risks that may affect the Company. It should be recognized that other risks, including general economic factors and expansion strategies, may be significant, presently or in the future, and the risks set forth herein may affect the Company to a greater or lesser extent than indicated.

LIQUIDITY AND CAPITAL RESOURCES:

Liquidity and Capital Resources

Working capital increased to $107.4 million at February 28, 2007 from $92.8 million at August 31, 2006. As of February 28, 2007, the Company had cash and cash equivalents of $35.6 million compared to $25.1 million at August 31, 2006. Marketable securities decreased to $41.8 million from $50.1 million during the same period. The ratio of current assets to current liabilities increased to 7.09 to 1 at February 28, 2007 from 6.14 to 1 at August 31, 2006. Total assets increased by $13.4 million to $276.2 million at February 28, 2007, compared to $262.8 million at August 31, 2006.

Management believes that the Company will be able to meet its working capital requirements for the foreseeable future with internally generated funds. In addition, the Company has credit commitments to provide for revolving credit of up to $175.0 million. Of the $175.0 million credit commitment, $113.1 million was available for the Company’s general use at February 28, 2007 (see Note 7 to condensed consolidated financial statements).

Management expects continued profitability from the Company’s agricultural operations. Citrus operations are expected to remain profitable in fiscal year 2007. A smaller crop resulting from hurricanes, citrus canker and land development has caused the unit price of citrus products to increase and thus profits from the citrus division are expected to exceed those of the prior year.

The Company has implemented cost cutting measures in addition to improved crop rotation measures in its sugarcane division; however, a large sugar beet crop is expected to result in lower prices for finished sugar in fiscal year 2007, causing expectations for current year operations to be below those of the prior fiscal year. The Company’s cattle operations in fiscal year 2007 are expected to remain profitable but at lower levels than in fiscal year 2006. Rains generated by Hurricane Wilma kept many of the pastures overly wet and the conception rate of the cattle has been affected. This will result in fewer calves for the Company to sell in fiscal year 2007 compared to fiscal year 2006.

Plant World has expanded into several ornamental varieties with higher profit margins per unit. As a result, Plant World’s results are expected to improve in fiscal year 2007 and beyond as it begins to fully scale up production of the new varieties.

Cash outlays for land, equipment, buildings, and other improvements totaled $5.3 million during the six months ended February 28, 2007, compared with $17.5 million during the six months ended February 28, 2006. In October 2005, the Company through Alico-Agri, purchased 291 acres of lake-front property in Polk County, Florida, for $9.2 million. In February 2006, the Company through its wholly owned subsidiary Bowen Brothers Fruit, LLC purchased the assets of Bowen Brothers Fruit Co., Inc. for $1.9 million.

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 annual principal plus interest payments of the remaining $54.5 million mortgage will commence with a scheduled payment of $13.6 million on September 28, 2007. The interest rate was renegotiated from 2.5% annually to 4.0% annually.

The second contract, for a gross sales price of $63.5 million, was renegotiated to 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.

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 provides for interest payments only for a period of four years followed by four equal annual payments of principal together with accrued interest thereon. The annual interest rate under the note is 6%. In order to obtain an extension on the second contract, the third 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.

During January 2007, Alico announced that its Board of Directors has authorized the repurchase of up to 100,000 Shares of the Company’s common stock through August 31, 2010, in addition to its previously announced repurchase of 31,000 shares, 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 105,073 shares. The Company purchased 9,927 shares in the open market at an average price of $48.76 per share during the second quarter of fiscal year 2007.

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 paid regular quarterly dividends of $0.275 per share on October 15, 2006 and January 15, 2007. At its January Board meeting, the Board declared a quarterly dividend of $0.275 per share payable to shareholders of record as of March 30, 2007 with payment expected on or about April 16, 2007. At its Board meeting on March 30, 2007, the Board declared a quarterly dividend of $0.275 per share payable to shareholders of record as of June 29, 2007 with payment expected on or about July 16, 2007.

As discussed in note 8 to the condensed consolidated financial statements, the Internal Revenue Service is examining the Company’s tax returns for the years ended August 31, 2004, 2003, 2002, 2001 and 2000, and Agri tax returns for calendar years 2003, 2002, 2001 and 2000. The examinations began in October 2003. Any assessments resulting from the examinations will be currently due and payable.

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. 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 has been transferred to IRS appeals. A preliminary meeting date of May 9-10, 2007 has been scheduled for IRS Appeals to review the facts with IRS Exam and Alico’s tax counsel and advisors.

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 $9.8 million to $30.3 million at February 28, 2007.

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. 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. The Company has accrued a liability of $21.1 million and $20.3 million as of February 28, 2007 and August 31, 2006, respectively, for the contingency. Should the IRS prevail in its primary position, the effect would be to significantly reduce the liquidity of the Company, and could cause the Company to default on several of its loan covenants.

Results of Operations

		Three months ended February 28,								Six months ended February 28,
Summary of results (in thousands):		2007				2006				2007				2006
Operating revenue		$	53,187			$	21,491			$	63,578			$	28,153
Gross profit			15,037				6,188				16,261				1,335
General & administrative expenses			3,186				2,623				6,577				4,447
Income (loss) from operations			11,851				3,565				9,684				(3,112	)
Profit on sale of bulk real estate			1,049				—				1,049				4,393
Interest and investment income			1,973				1,499				3,370				6,484
Interest expense			(1,302	)			(793	)			(2,485	)			(1,784	)
Other income (expense)			73				49				172				138
Provision for income taxes		$	5,940			$	1,653			$	5,057			$	2,299
Effective income tax rate			43.5	%			38.3	%			42.9	%			37.6	%
Net income		$	7,704			$	2,667			$	6,733			$	3,820

Overall, income from operations improved in the second quarter of fiscal year 2007 compared with the second quarter of fiscal year 2006. Likewise, income from operations improved for the first six months of fiscal year 2007 when compared with the first six months of fiscal year 2006. These improvements were a result of improved results from agricultural operations for the respective periods. Overall, net income increased both for the second quarter of fiscal year 2007 and for the six months ended February 28, 2007 when compared with the respective periods in the prior fiscal year, primarily due to the aforementioned increase in earnings from operations. Operations by segment are discussed separately below.

General and Administrative

General and administrative expenses increased by $0.6 and $2.1 million during the quarter and six months ended February 28, 2007 respectively, when compared with the same periods in the prior fiscal year. The increase was primarily due to salary related expenses which represented approximately $1.7 million of the six month increase in general and administrative expenses. Subsequent to the second quarter of fiscal 2006, the Company has added several key personnel, including a Chief Operating Officer, a Senior Vice President of Real Estate, a Senior Vice President of Human Resources, and several accounting personnel.

Profit from the Sale of Real Estate

The Company restructured several contracts for the sale of real estate during the second quarter of fiscal year 2007. In connection with the restructuring, the Company recognized gains of $1.0 million of installment proceeds on one of the prior sales that was recorded as non-operating income. Additionally, the Company recorded income in connection with a restructuring of a second contract of $1.9 million that was classified as operating revenue in the second quarter of fiscal year 2007. A third restructuring resulted in an installment gain of approximately $0.4 million that was recognized as operating revenue in the second quarter of fiscal 2007. Also in connection with the restructuring of the contracts, the Company discounted an existing note receivable by an additional $1.9 million and recognized the cost of the restructuring in the second quarter of fiscal year 2007. For further details regarding the restructuring of the contracts, see note 2 to the condensed consolidated financial statements and the discussion under liquidity and capital resources.

In the first quarter of fiscal year 2006, the Company sold a 280 acre citrus grove located near LaBelle, Florida in Hendry County for $5.6 million cash for a net gain of $4.4 million. The Company has retained operating rights to the grove until residential development begins.

Provision for Income taxes

The effective tax rate was 43.5% and 42.9% for the quarter and six months ended February 28, 2007, respectively compared with 38.3% and 37.6% for the second quarter and six months ended February 28, 2006, respectively. The rate for fiscal year 2007 was impacted by adjustments to the accrued tax contingency previously accrued (see Notes 6 and 8 to the condensed consolidated financial statements).

Interest and Investment Income

Interest and investment income is generated principally from investments in corporate and municipal bonds, mutual funds, U.S. Treasury securities, and mortgages held on real estate sold on the installment basis.

Interest and investment income was $2.0 million and $3.4 million for the three and six month periods ended February 28, 2007, respectively compared with $1.5 million and $6.5 million for the three and six month periods ended February 28, 2006. In accordance with guidelines established by the Company’s Board of Directors, the Company restructured its investment portfolio during the first quarter of fiscal year 2006, focusing on high quality fixed income securities with original maturities of less than 12 months. These sales resulted in net realized gains of $3.3 million in the first quarter of fiscal year 2006.

Interest Expense

Interest expense increased for the three and six months ended February 28, 2007 when compared with the three and six month periods ended February 28, 2006 due to higher interest rates and debt levels. The majority of the Company’s borrowings are based on the London interbank offered rate (LIBOR). The LIBOR increased by approximately .75% from February 28, 2006 to February 28, 2007 to 5.38%.

Operating Revenues

		Three months ended February 28,								Six months ended February 28,
		2007				2006				2007				2006
Revenues
Agriculture:
Bowen Brothers Fruit		$	19,943			$	5,722			$	20,747			$	5,722
Citrus groves			20,265				7,044				21,902				8,252
Sugarcane			5,478				4,992				7,174				6,420
Cattle			909				426				4,983				2,650
Alico Plant World			1,006				1,557				1,594				2,078
Vegetables			1,844				958				2,255				958
Sod			531				152				930				710
Native trees and shrubs			98				1				257				46
Agriculture operations revenue			50,074				20,852				59,842				26,836
Real estate operations			2,447				7				2,447				32
Land leasing and rentals			333				376				576				793
Mining royalties			333				256				713				492
Total operating revenue		$	53,187			$	21,491			$	63,578			$	28,153

Operating revenues increased by 147% and 126% to $53.2 million and $63.6 million for the three and six months ended February 28, 2007, respectively when compared with operating revenues of $21.5 million and $28.2 million for the three and six months ended February 28, 2006. The increase was primarily due to revenues generated by the Company’s Bowen subsidiary, which was purchased during the second quarter of fiscal 2006. Revenues also increased for citrus, cattle and real estate operations.

Gross Profit

		Three months ended February 28,								Six months ended February 28,
		2007				2006				2007				2006
Gross profit (loss):
Agriculture:
Bowen Brothers Fruit		$	1,248			$	2			$	1,003			$	2
Citrus groves			9,493				1,803				10,432				2,423
Sugarcane			557				229				113				(517	)
Cattle			59				108				537				621
Alico Plant World			39				78				192				(276	)
Vegetables			691				315				381				315
Sod			285				77				442				186
Native trees and shrubs			98				1				257				46
Gross profit from agricultural operations			12,470				2,613				13,357				2,800
Real estate operations			2,062				2				1,842				16
Land leasing and rentals			175				376				418				793
Mining royalties			330				256				644				492
Net casualty (gain) loss			—				2,941				—				(2,766	)
Gross profit			15,037				6,188				16,261				1,335
Profits from the sale of bulk real estate			1,049				—				1,049				4,393
Net interest and investment income			671				706				885				4,700
Corporate general and administrative and other			(3,113	)			(2,574	)			(6,405	)			(4,309	)
Income before income taxes		$	13,644			$	4,320			$	11,790			$	6,119